item 14 exhibits financial statement schedules reports form 8k page number 1 financial statements report independent accountants 29 consolidated balance sheets july 31 1994 1993 3031 consolidated statements income years ended july 31 1994 1993 1992 32 consolidated statements stockholders equity years ended july 31 1994 1993 1992 3335 consolidated statements cash flows years ended july 31 1994 1993 1992 3637 notes consolidated financial statements 3851 2 financial statement schedules marketable securities 52 v property plant equipment 53 vi accumulated depreciation amortization property plant equipment 5455 viii valuation qualifying accounts 56 x supplementary income statement information 57 schedules listed omitted required applicable required information furnished consolidated statements notes thereto 3 exhibits see index exhibits 5862 b reports form 8k reports form 8k filed registrant quarter ended july 31 1994 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation bernard gordon bernard gordon chairman board president chief executive officer date october 12 1994 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date october 12 1994 bernard gordon chairman board president chief executive officer director date october 12 1994 john tarello senior vice president treasurer director date october 12 1994 ross brown vice president director date october 12 1994 bruce r rusch vice president director date october 12 1994 gerald l wilson director report independent accountants board directors analogic corporation peabody massachusetts audited accompanying consolidated balance sheets analogic corporation subsidiaries july 31 1994 1993 related consolidated statements income stockholders equity cash flows financial statement schedules listed item 14a form 10k three years period ended july 31 1994 financial statements financial statement schedules responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statement free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position analogic corporation subsidiaries july 31 1994 1993 results operations cash flows three years period ended july 31 1994 conformity generally accepted accounting principles addition opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein coopers lybrand llp boston massachusetts september 8 1994 analogic corporation subsidiaries consolidated balance sheets 000 omitted july 31 1994 1993 assets current assets cash equivalent 23571 20482 marketable securities cost approximates market 70825 67340 accounts notes receivable net allowance doubtful accounts 1994 1339 1993 1518 34678 32275 accounts receivable affiliate 961 841 inventories 41169 39940 prepaid expenses current assets 5536 4330 total current assets 176740 165208 property plant equipment cost land improvements 4252 3739 buildings 36529 35095 property capital leases 6841 leasehold capital lease improvements 2158 1914 manufacturing equipment 55904 53909 furniture fixtures 17438 16340 motor vehicles 897 651 124019 118489 less accumulated depreciation amortization 76088 71202 47931 47287 investments advances affiliated companies 7977 5289 excess cost acquired net assets net accumulated amortization 1347 1640 assets including unamortized software costs 1994 5244 1993 3541 5625 3999 239620 223423 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated balance sheets 000 omitted july 31 1994 1993 liabilities stockholders equity current liabilities mortgage notes payable 1975 365 obligations capital leases 357 386 accounts payable trade 7568 8496 accrued employee compensation benefits 8639 7941 accrued expenses 6298 6339 accrued income taxes 1332 2094 total current liabilities 26169 25621 longterm debt mortgage notes payable 7381 9227 obligations capital leases 3612 3978 10993 13205 deferred income taxes 4128 3066 minority interest subsidiaries 12120 10611 excess acquired net assets cost net 1819 2013 commitments stockholders equity common stock 05 par authorized 30000000 shares issued 1994 13602325 shares issued 1993 13517599 shares 680 676 capital excess par value 19911 18807 retained earnings 180222 165565 cumulative translation adjustments 558 614 201371 184434 less treasury stock cost 1994 1253268 shares 1993 1157761 shares 14233 12822 unearned compensation 2747 2705 total stockholders equity 184391 168907 239620 223423 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income 000 omitted except share data years ended july 31 1994 1993 1992 revenues product service net 177175 160764 133973 engineering licensing 2776 4237 3017 operating revenue 9166 8556 8088 interest dividend income 4628 4319 4166 total revenues 193745 177876 149244 cost sales expenses cost sales product service 95506 87439 81486 engineering licensing 2929 2850 2440 operating expenses 5258 5095 5165 general administrative 15492 14918 15625 selling 29278 22570 12837 research product development 26100 25634 21986 interest expense 1167 1019 1430 amortization excess cost acquired net assets 387 361 221 amortization excess acquired net assets cost 577 266 total cost sales expenses 175540 159620 141190 income operations 18205 18256 8054 gain sale real estate 1864 equity net income losses unconsolidated affiliates 1405 300 3414 income taxes 19610 18566 13332 provision income taxes 3038 5549 2463 minority interest net income consolidated subsidiaries 1915 562 959 net income 14657 12445 9910 earnings per common equivalent share 118 101 78 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1994 1993 1992 000 omitted except share data common stock capital excess retained shares amount par value earnings balance july 31 1991 14088207 704 22994 143210 retirement treasury shares 1020352 51 9141 shares issued pursuant stock grants net cancellation 18500 1 201 shares issued pursuant stock options 60403 3 386 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 14 income tax reduction relating stock options 90 net income year 9910 balance july 31 1992 13146758 657 14516 153120 shares issued pursuant stock grants net cancellations 188750 10 2669 shares issued pursuant stock options 182091 9 1182 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 5 income tax reduction relating stock options 445 translation adjustments year net income year 12445 balance july 31 1993 13517599 676 18807 165565 shares issued pursuant stock grants net cancellations 48750 2 696 shares issued pursuant stock options 35976 2 290 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 19 income tax reduction relating stock options 99 translation adjustments year net income year 14657 balance july 31 1994 13602325 680 19911 180222 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1994 1993 1992 000 omitted except share data cumulative treasury stock translation adjustments shares amount balance july 31 1991 1020352 9192 retirement treasury shares 1020352 9192 shares issued pursuant stock grants net cancellation shares issued pursuant stock options 15981 165 purchases treasury stock 1103300 12279 amortization unearned compensation amounts related employee stock purchase plan 8568 94 income tax reduction relating stock options net income year balance july 31 1992 1078751 12020 shares issued pursuant stock grants net cancellations 9375 shares issued pursuant stock options 43721 475 purchases treasury stock 121200 1363 amortization unearned compensation amounts related employee stock purchase plan 7844 86 income tax reduction relating stock options translation adjustments year 614 net income year balance july 31 1993 614 1157761 12822 shares issued pursuant stock grants net cancellations 10000 shares issued pursuant stock options 5000 54 purchases treasury stock 97800 1543 amortization unearned compensation amounts related employee stock purchase plan 7293 78 income tax reduction relating stock options translation adjustments 1172 year net income year balance july 31 1994 558 1253268 14233 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1994 1993 1992 000 omitted except share data total unearned stockholders compensation equity balance july 31 1991 400 157316 retirement treasury shares issued pursuant stock grants net cancellations 202 shares issued pursuant stock options 554 purchases treasury stock 12279 amortization unearned compensation 188 amounts related employee stock purchase plan 80 income tax reduction relating stock options 90 net income year 9910 balance july 31 1992 414 155859 shares issued pursuant stock grants net cancellations 2679 shares issued pursuant stock options 1666 purchases treasury stock 1363 amortization unearned compensation 388 amounts related employee stock purchase plan 81 income tax reduction relating stock options 445 translation adjustments year 614 net income year 12445 balance july 31 1993 2705 168907 shares issued pursuant stock grants net cancellations 698 shares issued pursuant stock options 346 purchases treasury stock 1543 amortization unearned compensation 656 amounts related employee stock purchase plan 97 income tax reduction relating stock options 99 translation adjustments year 1172 net income year 14657 balance july 31 1994 2747 184391 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows 000 omitted years ended july 31 1994 1993 1992 cash flows operating activities net income 14657 12445 9910 adjustments reconcile net income net cash provided operating activities deferred income taxes 920 53 811 depreciation 6598 7725 8531 amortization capitalized software 1602 1218 1022 amortization excess cost net acquired assets 387 361 221 amortization excess acquired net assets cost 577 266 amortization assets deferred charges 3 48 688 minority interest net income consolidated subsidiaries 1915 562 959 provision losses accounts receivable 179 120 301 gain sale building 1864 loss gain sale equipment 30 140 2 excess equity losses income unconsolidated affiliates dividend received 1105 200 1991 compensation stock grants 656 388 188 changes operating assets liabilities decrease increase assets accounts notes receivable 3543 6733 1048 inventories 1229 1876 1532 prepaid expenses current assets 75 886 43 assets 74 138 278 increase decrease liabilities accounts payable trade 928 232 1594 accrued expenses current liabilities 801 5723 780 accrued income taxes 762 1205 974 total adjustments 4678 15050 9421 net cash provided operating activities 19335 27495 19331 cash flows investing activities investments advances affiliated companies 1583 2239 additions property plant equipment 7326 4425 4547 capitalized software 3305 2127 1715 proceeds sale building 3638 proceeds sale property plant equipment 114 64 47 proceeds maturities purchases marketable securities net 3485 6725 1555 acquisition businesses net cash acquired 3239 18413 net cash used investing activities 15585 12213 22545 cash flows financing activities increase debt 6000 analogic corporation subsidiaries consolidated statements cash flows 000 omitted years ended july 31 1994 1993 1992 payments debt capital lease obligations 631 6946 2200 purchase common stock treasury 1543 1363 12279 purchase common stock majority owned subsidiary 201 513 332 issuance common stock pursuant stock options employee stock purchase plan 542 2191 724 net cash used financing activities 1833 6631 8087 effect exchange rate changes cash 1172 net increase decrease cash equivalents 3089 8651 11301 cash equivalents beginning year 20482 11831 23132 cash equivalents end year 23571 20482 11831 accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies business operations companys operations consist design manufacture sale hightechnology highprecision analogdigital signal processing instruments systems product service engineering licensing export revenue primarily customers europe asia amounted approximately 60800000 34 66900000 41 65900000 48 total product service engineering licensing revenue years ended july 31 1994 1993 1992 respectively significant accounting policies follows principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method significant intercompany accounts transactions eliminated b inventories stated lower cost market cost determined firstin firstout basis c property plant equipment financial reporting purposes depreciation amortization provided utilizing straightline method estimated useful lives assets lease terms whichever shorter computed principally utilizing accelerated methods income tax purposes property capital leases amortized lease terms revenue recognition revenues recognized product shipped service performed e software costs company capitalizes certain computer software costs amortized utilizing straightline method economic lives related products exceed three years accumulated amortization approximated 5321000 3719000 july 31 1994 1993 respectively analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies continued business operations continued f warranty costs company provides estimated warranty costs products shipped g income taxes company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended permanently reinvested operations h earnings per share earnings per common equivalent share based upon weighted average common equivalent shares outstanding year primary fully diluted earnings per share number common equivalent shares utilized per share computations 12433821 12301007 12715043 fiscal 1994 1993 1992 respectively cash equivalents company considers shortterm deposits maturity three months less cash equivalents cash equivalents amounted approximately 21135000 15978000 july 31 1994 1993 respectively j concentration credit risk company grants credit domestic foreign original equipment manufacturers distributors end users company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution k newly issued accounting standards may 1993 statement financial accounting standards 115 accounting certain investments debt equity securities sfas 115 issued company adopt sfas 115 first quarter fiscal 1995 companys marketable securities expected categorized available sale securities defined sfas 115 reflected balance sheet fair value unrealized holding gains losses reflected net amount separate component stockholders equity realized impact companys financial position results operations expected material l basis presentation certain financial statement items reclassified conform current years format analogic corporation subsidiaries notes consolidated financial statements 2 business combinations companys subsidiary camtronics entered agreement three founding stockholders founders also active employees camtronics agreement requires camtronics purchase 5 shares common stock originally issued founders option fiscal year 1992 1995 pursuant predetermined formula commencing 1996 percentage originally issued shares founder may require camtronics purchase shall negotiated agreed upon company absent agreement higher amount percentage shall less 5 per year furthermore founder exercise right cause camtronics purchase outstanding shares rights shall lapse shall cumulative may exercised thereafter companys ownership camtronics increased approximately 65 fiscal 1992 approximately 68 fiscal 1994 result founders exercising conversion rights sell 5 shares amount 202000 513000 332000 fiscal 1994 1993 1992 respectively carrying value companys total investment adjusted camtronics exceeded portion underlying equity net assets approximately 1940000 excess amortized 10 year period accumulated amortization amounted 678000 470000 july 31 1994 1993 respectively august 8 1991 whollyowned subsidiary company purchased sum 16000000 whollyowned subsidiary federal deposit insurance corporation entire interest marriott hotel complex purchase price consisted 10000000 cash 6000000 promissory note terms note annual principal payments 2000000 commencing august 8 1992 due august 8 1994 interest prime interest free period august 8 1991 august 7 1992 discounted present value 6000000 promissory note approximately 5500000 august 7 1992 company paid note full transaction accounted purchase results hotels operations august 8 1991 included consolidated financial statements april 1 1992 company acquired common stock sky computers inc sky 3161000 cash sky leading supplier boardlevel desktop supercomputer application accelerators acquisition accounted purchase skys results operations april 1 1992 included companys consolidated financial statements carrying value companys investment sky exceeded equity net assets approximately 895000 excess amortized 5 year period accumulated amortization 418000 239000 july 31 1994 1993 respectively assumption sky entire interest marriott hotel complex acquired august 1 1990 unaudited pro forma consolidated revenues would approximately 156000000 net income would approximately 10000000 earnings per share would 80 year ended july 31 1992 managements opinion pro forma financial information indicative results operations future results operations combined companies ownership operation analogic corporation analogic corporation subsidiaries notes consolidated financial statements 2 business combinations continued fiscal 1993 company invested 500000 51 interest newly formed sales marketing organization formed promote sell affiliated companys products united states certain countries september 1993 company invested additional 125000 resulting change companys equity interest company ceased operations sales marketing organization third quarter fiscal 1994 significant financial impact anticipated companys future financial results january 1 1993 company acquired interest approximately 57 newlyformed company bk medical bk 3607000 cash subordinated interest free shortterm loan 3500000 converted equity july 31 1993 companys ownership interest adjusted upward 59 fiscal 1994 accordance shareholders agreement bk danish corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques acquisition accounted purchase bks results operations included companys consolidated financial statements beginning january 1 1993 companys equity net assets bk exceeded purchase price approximately 2662000 excess acquired net assets cost amortized 5 year period beginning january 1993 accumulated amortization amounted 843000 266000 july 31 1994 1993 respectively unaudited pro forma financial information based assumption bk acquired august 1 1992 pro forma basis twelve months ended july 31 1993 consolidated revenues would approximately 192869000 net income would approximately 12649000 earnings per share would approximately 103 pro forma financial information fiscal 1992 exist due fact bk newlyformed company august 1 1992 managements opinion pro forma financial information indicative results operations future results operations combined companies ownership operation analogic corporation 3 inventories components inventory follows july 31 1994 1993 raw materials 16711000 15555000 workinprocess 14982000 15643000 finished goods 9476000 8742000 41169000 39940000 analogic corporation subsidiaries notes consolidated financial statements continued 4 investments advances affiliated companies company owns 50 analogic scientific inc joint venture corporation kejian corporation peoples republic china companys original investment 1500000 accounted using equity method accounting companys share analogic scientifics income amounted 2000000 3423000 fiscal years 1994 1993 1992 respectively dividends received analogic scientific inc amounted 300000 500000 1423000 fiscal 1994 1993 1992 respectively carrying value investment 5700000 4000000 july 31 1994 1993 respectively transactions analogic scientific inc fiscal years 1994 1993 1992 consisted revenues approximately 2990000 2542000 5188000 respectively july 31 1994 1993 accounts receivable affiliate 1660000 841000 respectively august 14 1992 analogic invested 1052000 34 interest privatelyheld company located canada company business designing manufacturing distributing medical electronic equipment subsequent august 14 1992 company invested additional 1187000 increasing equity interest 415 july 31 1993 first quarter fiscal 1994 company invested additional 760000 increasing equity interest 44 connection investment charge 595000 1700000 resulting companys share losses recorded fiscal 1994 1993 respectively january 1994 company agreed transfer 44 interest privatelyheld company park meditech inc park located toronto canada exchange 6000000 shares park common stock plus 1000000 common stock warrants warrant exercisable price 500 canadian one share park common stock may exercised april 1996 park shares currently traded montreal exchange pkm well nasdaq small cap exchange pmdtf july 31 1994 closing nasdaq bid price park common stock 1188 per share april 1994 company purchased 300000 units park 824000 unit consists one common share park stock one half share warrant share warrant convertible one common share park price 400 canadian december 15 1995 company owns approximately 26 outstanding shares park currently exercise influence financial operational policies company therefore investment accounted cost method analogic corporation subsidiaries notes consolidated financial statements continued 4 investments advances affiliated companies continued fiscal 1991 company invested 750000 25 interest limited partnership owns 70 interest company designs manufactures distributes electronic instruments equipment investment limited partnership accounted using cost method company limited partner accordingly influence partnership 5 mortgage notes payable mortgage notes payable consists following july 31 1994 1993 3 mortgage note payable due 2017 payable quarterly collateralized land office manufacturing facilities 5877000 6050000 business development revenue bonds interest approximately 7 payable quarterly annual principal payments 150000 september 1 2005 collateralized land office manufacturing facilities 1800000 1950000 11 unsecured term loan principal interest payments due december 31 1994 1605000 1476000 term loan prime rate 725 july 31 1994 due april 1996 payable monthly installments collateralized computer equipment software 74000 116000 9356000 9592000 less current portion 1975000 365000 7381000 9227000 principal maturities next five fiscal years notes follows 1995 1975000 1996 365000 1997 339000 1998 344000 1999 350000 analogic corporation subsidiaries notes consolidated financial statements continued 6 lease commitments related party transactions company leases three operating facilities partnership chairman former vice chairman partners leases accounted capital leases certain leases contain contingent rentals based upon cost living adjustments contingent rentals significant 1994 1993 1992 one companys whollyowned subsidiaries leases certain machinery equipment capital lease agreements expire 1995 property capital leases included property plant equipment follows july 31 1994 1993 land buildings 6251000 machinery equipment 590000 6841000 less accumulated amortization 4692000 4349000 net capital lease assets 2149000 2492000 certain companys subsidiaries lease manufacturing office space noncancelable operating leases expire 1998 contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 814000 329000 282000 net sublease income 1199000 1103000 1056000 fiscal 1994 1993 1992 respectively following schedule year future minimum lease payments july 31 1994 capital operating fiscal year leases 1995 820000 1005000 1996 812000 826000 1997 812000 566000 1998 812000 468000 1999 812000 172000 later years 2003 2202000 6270000 3037000 less amount representing interest 95 176 2301000 present value minimum lease payments includes current portion 357000 3969000 analogic corporation subsidiaries notes consolidated financial statements continued 6 lease commitments related party transactions continued future minimum lease payments capital leases reduced sublease rental income approximately 1199000 included accounts notes receivable 200000 convertible debentures ultraanalog inc manufacturer analogtodigital digitaltoanalog converters bernard gordon companys president chairman owns 72 outstanding common stock ultraanalog inc company solely option right acquire cost 7 stock option stock bonus plans july 31 1994 company four key employee stock option plans two lapsed granting options addition company one key employee stock bonus plan one nonemployee director stock option plan one employee stock purchase plan options granted five stock option plans become exercisable installments commencing earlier one year date grant later five years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value companys key employee stock bonus plan common stock may granted key employees terms conditions determined board directors participants stock bonus plan may dispose otherwise transfer stock granted three years date grant upon issuance stock plan unearned compensation equivalent market value date grant charged stockholders equity subsequently amortized periods restrictions lapse six years amortization 655000 388000 188000 recorded fiscal 1994 1993 1992 respectively employee stock purchase plan participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions six month period number options granted employee plan combined options issued plans limited maximum outstanding fair market value 25000 calendar year number shares issued pursuant plan totaled 7293 1994 7844 1993 8568 1992 july 31 1994 1315796 shares reserved grant stock option bonus purchase plans analogic corporation subsidiaries notes consolidated financial statements continued 7 stock option stock bonus plans continued following table sets forth stock option transactions years ended july 31 1994 1993 1992 1994 1993 1992 option number option number option number price per price per price per share shares share shares share shares options standing beginning year 712516125 325955 71251400 519130 71251400 601255 options granted 147501800 109125 1087516125 82950 103751175 68200 options exercised 71251400 40976 71251400 225812 71259125 76384 options cancelled 34375 50313 73941 options standing end year 71251800 359729 712516125 325955 71251400 519130 options exercisable end year 71251175 113791 712514875 113458 71251400 280714 8 profit sharing retirement plan company qualified profit sharing retirement plan benefit eligible employees plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing expense amounted 660000 1994 600000 1993 1992 respectively company 401k plans employees contribute 15 annual base income exceed maximum amount allowable internal revenue code one calendar year analogic corporation subsidiaries notes consolidated financial statements continued 9 interest total interest incurred amounted 1261000 1089000 1560000 1994 1993 1992 respectively 94000 1994 70000 1993 130000 1992 capitalized 10 income taxes components provision income taxes follows july 31 1994 1993 1992 current income taxes federal 1746500 4491000 2656000 state foreign 371000 1111000 460000 2117500 5602000 3116000 deferred income taxes benefit federal 915000 39000 593000 state foreign 5000 14000 60000 920000 53000 653000 3037500 5549000 2463000 tax effects principal temporary differences resulting deferred tax expense benefit follows july 31 1994 1993 1992 unrealized equity gainloss 424000 78000 300000 capitalized software 325000 99000 297000 depreciation 370000 6000 510000 bad debts 6000 12000 24000 inventory valuation 11000 56000 31000 items net 194000 147000 920000 53000 653000 income loss income taxes domestic foreign operations follows years ended july 31 1994 1993 1992 domestic 17356000 19686000 11996000 foreign 2254000 1130000 1336000 19610000 18556000 13332000 analogic corporation subsidiaries notes consolidated financial statements continued 10 income taxes continued components deferred tax assets liabilities follows deferred tax deferred tax july 31 1994 assets liabilities depreciation 2308000 bad debt allowance 162000 capitalized interest costs 289000 440000 inventory 403000 warranty 518000 benefit plans 684000 lease transactions 737000 unrealized equity gainloss 890000 1628000 capitalized software 1701000 business credit carryforwards 483000 alternative minimum tax credit carryforwards 1086000 miscellaneous 210000 5462000 6077000 valuation allowance 1384000 4078000 6077000 july 31 1993 depreciation 1938000 bad debt allowance 170000 capitalized interest costs 316000 462000 inventory 404000 warranty 599000 benefit plans 702000 lease transactions 748000 unrealized equity gainloss 667000 981000 capitalized software 1390000 net operating loss general business credit carryforwards 1350000 miscellaneous 145000 5101000 4771000 valuation allowance 1350000 3751000 4771000 included prepaid expenses current assets 2129000 2047000 current deferred tax assets july 31 1994 1993 respectively analogic corporation subsidiaries notes consolidated financial statements continued 10 income taxes continued reconciliation income taxes united states statutory rate effective tax rate follows years ended july 31 1994 1993 1992 us federal statutory tax rate 35 34 tax loss dissolution foreign subsidiary 9 foreign sales corporation tax benefit 2 state income taxes net federal tax benefit 1 2 tax exempt interest 6 9 net losses profits subsidiaries affiliates taxed 1 3 6 alternative minimum tax 3 2 items net 5 1 2 effective tax rate 16 30 19 internal revenue service examined companys federal consolidated income tax returns fiscal 1988 two companys subsidiaries elected taxed foreign sales corporations fsc company federal state research experimental tax credits carryforwards approximately 483000 expiring various years 2009 analogic corporation subsidiaries notes consolidated financial statements continued 11 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 1994 1993 total net earnings revenues income per share quarters first 46105000 3201000 26 second 49587000 3762000 30 third 47125000 3572000 29 fourth 50928000 4122000 33 total 193745000 14657000 118 quarters first 41020000 2770000 23 second 42979000 2930000 24 third 46837000 3231000 26 fourth 47040000 3514000 28 total 177876000 12445000 101 12 transactions major customers one export customer accounted approximately 25700000 14 22000000 13 28000000 20 total product service engineering licensing revenue 1994 1993 1992 respectively total product service engineering licensing revenue one domestic customer accounted approximately 23700000 13 23000000 14 18800000 14 1994 1993 1992 respectively analogic corporation subsidiaries notes consolidated financial statements continued 13 supplemental disclosure cash flow information fiscal years 1994 1993 1992 interest paid net amounts capitalized amounted 945000 1022000 1458000 respectively income taxes paid fiscal years 1994 1993 1992 amounted 3763000 4262000 3128000 respectively 14 fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair value marketable securities estimated based quoted market prices securities july 31 1994 estimated fair values companys financial instruments follows carrying fair amount value cash equivalents 23571000 marketable securities 70825000 70821000 mortgage notes payable 9356000 practicable estimate fair value investment representing 25 outstanding stock untraded company investment carried original cost 15 foreign operations financial information relating companys foreign domestic operations fiscal 1994 follows foreign domestic total revenue 42231000 151514000 193745000 income operations 2254000 15951000 18205000 identifiable assets 32917000 206703000 239620000 analogic corporation subsidiaries schedule marketable securities july 31 1994 analogic corporation subsidiaries schedule v property plant equipment 000 omitted analogic corporation subsidiaries schedule vi accumulated depreciation amortization property plant equipment 000 omitted 1 accumulated depreciation acquired upon business purchase 2 annual provision depreciation amortization computed accordance following ranges estimated useful lives building 35 years property capital leases 14 23 years manufacturing equipment 4 7 years furniture fixtures 4 8 years leasehold capital lease improvements 3 10 years motor vehicles 3 years analogic corporation schedule viii valuation qualifying accountsitem 14 exhibits financial statement schedules report form 8k page number 1 financial statements report independent accountants 32 consolidated balance sheets july 31 1995 1994 33 34 consolidated statements income years ended july 31 1995 1994 1993 35 consolidated statements stockholders equity years ended july 31 1995 1994 1993 36 39 consolidated statements cash flows years ended july 31 1995 1994 1993 40 41 notes consolidated financial statements 42 58 2 financial statement schedule ii valuation qualifying accounts 59 schedules omitted required applicable required information furnished consolidated statements notes thereto 3 exhibits see index exhibits 60 64 b report form 8k reports form 8k filed registrant quarter ended july 31 1995 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation bernard gordon bernard gordon chairman board chief executive officer date october 5 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date october 5 1995 bernard gordon chairman board chief executive officer director date october 5 1995 bruce r rusch president chief operating officer director date october 5 1995 john tarello senior vice president treasurer director date october 5 1995 ross brown vice president director date october 5 1995 gerald l wilson director report independent accountants board directors analogic corporation peabody massachusetts audited accompanying consolidated balance sheets analogic corporation subsidiaries july 31 1995 1994 related consolidated statements income stockholders equity cash flows financial statement schedule listed item 14a form 10k three years period ended july 31 1995 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statement free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position analogic corporation subsidiaries july 31 1995 1994 results operations cash flows three years period ended july 31 1995 conformity generally accepted accounting principles addition opinion financial statement schedule referred considered relation basic financial statements taken whole present fairly material respects information required included therein coopers lybrand llp boston massachusetts september 8 1995 analogic corporation subsidiaries consolidated balance sheets 000 omitted july 31 1995 1994 assets current assets cash equivalents 12404 23571 marketable securities market 87398 70825 accounts notes receivable net allowance doubtful accounts 1995 1361 1994 1339 43980 34678 accounts receivable affiliate 1232 961 inventories 46287 41169 prepaid expenses current assets 5108 5536 total current assets 196409 176740 property plant equipment cost land improvements 4252 buildings 36768 36529 property capital leases 6841 leasehold capital lease improvements 2158 manufacturing equipment 60850 55904 furniture fixtures 18642 17438 motor vehicles 1206 897 130717 124019 less accumulated depreciation amortization 80955 76088 49762 47931 investments advances affiliated companies 6574 7977 excess cost acquired net assets net accumulated amortization 681 1347 assets including unamortized software costs 1995 6413 1994 5244 6772 5625 260198 239620 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated balance sheets 000 omitted july 31 1995 1994 liabilities stockholders equity current liabilities mortgage notes payable 365 1975 obligations capital leases 393 357 accounts payable trade 12467 7568 accrued employee compensation benefits 9008 8639 accrued expenses 6545 6298 accrued income taxes 1832 1332 total current liabilities 30610 26169 longterm debt mortgage notes payable 7016 7381 obligations capital leases 3220 3612 10236 10993 deferred income taxes 4683 4128 minority interest subsidiaries 12489 12120 excess acquired net assets cost net 1287 1819 commitments stockholders equity common stock 05 par authorized 30000000 shares issued 1995 13691925 shares issued 1994 13602325 shares 685 680 capital excess par value 20517 19911 retained earnings 191938 180222 unrealized holding gains losses 2004 cumulative translation adjustments 2846 558 217990 201371 less treasury stock cost 1995 1269280 shares 1994 1253268 shares 14470 14233 unearned compensation 2627 2747 total stockholders equity 200893 184391 260198 239620 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income 000 omitted except share data years ended july 31 1995 1994 1993 revenues product service net 187964 177175 160764 engineering licensing 6070 2776 4237 operating revenue 9720 9166 8556 interest dividend income 5073 4628 4319 total revenues 208827 193745 177876 cost sales expenses cost sales product service 108203 95506 87439 engineering licensing 2769 2929 2850 operating expenses 5294 5258 5095 general administrative 17188 15492 14918 selling 29066 29278 22570 research product development 29890 26100 25634 interest expense 812 1167 1019 loss foreign exchange 666 amortization excess cost acquired net assets 317 387 361 amortization excess acquired net assets cost 533 577 266 total cost sales expenses 193672 175540 159620 income operations 15155 18205 18256 gain sale marketable securities 1736 equity net income losses unconsolidated affiliates 1405 300 income taxes 16891 19610 18556 provision income taxes 3667 3038 5549 minority interest net income consolidated subsidiaries 518 1915 562 net income 12706 14657 12445 earnings per common equivalent share 102 118 101 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1995 1994 1993 000 omitted except share data common stock capital excess shares amount par value balance july 31 1992 13146758 657 14516 shares issued pursuant stock grants net cancellations 188750 10 2669 shares issued pursuant stock options 182091 9 1182 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 5 income tax reduction relating stock options 445 translation adjustments year net income year balance july 31 1993 13517599 676 18807 shares issued pursuant stock grants net cancellations 48750 2 696 shares issued pursuant stock options 35976 2 290 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 19 income tax reduction relating stock options 99 translation adjustments year net income year balance july 31 1994 13602325 680 19911 shares issued pursuant stock grants net cancellations 39500 2 608 shares issued pursuant stock options 50081 3 429 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 25 income tax reduction relating stock options 126 translation adjustments year net income year dividends paid unrealized holding gains losses period 19 582 balance july 31 1995 13691925 685 20517 analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1995 1994 1993 000 omitted except share data continued unrealized cumulative retained holding translation earnings gains losses adjustments balance july 31 1992 153120 shares issued pursuant stock grants net cancellations shares issued pursuant stock options purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan income tax reduction relating stock options translation adjustments year 614 net income year 12445 balance july 31 1993 165565 614 shares issued pursuant stock grants net cancellations shares issued pursuant stock options purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan income tax reduction relating stock options translation adjustments year 1172 net income year 14657 balance july 31 1994 180222 558 shares issued pursuant stock grants net cancellations shares issued pursuant stock options purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan income tax reduction relating stock options translation adjustments year 2288 net income year 12707 dividends paid 991 unrealized holding gains losses period 2004 balance july 31 1995 191938 2004 2846 analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1995 1994 1993 000 omitted except share data continued treasury stock shares amount balance july 31 1992 1078751 12020 shares issued pursuant stock grants net cancellations 9375 shares issued pursuant stock options 43721 475 purchases treasury stock 121200 1363 amortization unearned compensation amounts related employee stock purchase plan 7844 86 income tax reduction relating stock options translation adjustments year net income year balance july 31 1993 1157761 12822 shares issued pursuant stock grants net cancellations 10000 shares issued pursuant stock options 5000 54 purchases treasury stock 97800 1543 amortization unearned compensation amounts related employee stock purchase plan 7293 78 income tax reduction relating stock options translation adjustments year net income year balance july 31 1994 1253268 14233 shares issued pursuant stock grants net cancellations 5000 shares issued pursuant stock options purchases treasury stock 19200 326 amortization unearned compensation amounts related employee stock purchase plan 8188 89 income tax reduction relating stock options translation adjustments year net income year dividends paid unrealized holding gains losses period balance july 31 1995 1269280 14470 analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1995 1994 1993 000 omitted except share data continued total unearned stockholders compensation equity balance july 31 1992 414 155859 shares issued pursuant stock grants net cancellations 2679 shares issued pursuant stock options 1666 purchases treasury stock 1363 amortization unearned compensation 388 amounts related employee stock purchase plan 81 income tax reduction relating stock options 445 translation adjustments year 614 net income year 12445 balance july 31 1993 2705 168907 shares issued pursuant stock grants net cancellations 698 shares issued pursuant stock options 346 purchases treasury stock 1543 amortization unearned compensation 656 amounts related employee stock purchase plan 97 income tax reduction relating stock options 99 translation adjustments year 1172 net income year 14657 balance july 31 1994 2747 184391 shares issued pursuant stock grants net cancellations 610 shares issued pursuant stock options 432 purchases treasury stock 326 amortization unearned compensation 730 amounts related employee stock purchase plan 114 income tax reduction relating stock options 126 translation adjustments year 2288 net income year 12707 dividends paid 991 unrealized holding gains losses period 2004 582 balance july 31 1995 2627 200893 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows 000 omitted years ended july 31 1995 1994 1993 cash flows operating activities net income 12706 14657 12445 adjustments reconcile net income net cash provided operating activities deferred income taxes 255 920 53 depreciation 6365 6598 7725 amortization capitalized software 2355 1602 1218 amortization excess cost net acquired assets 317 387 361 amortization excess acquired net assets cost 533 577 266 amortization assets deferred charges 39 3 48 minority interest net income consolidated subsidiaries 518 1915 562 provision losses accounts receivable 21 179 120 gain sale marketable securities 1736 loss gain sale equipment 34 30 140 excess equity losses income unconsolidated affiliates dividend received 1105 200 compensation stock grants 731 656 388 changes operating assets liabilities decrease increase assets accounts notes receivable 8561 3543 6733 inventories 5118 1229 1876 prepaid expenses current assets 305 75 886 assets 17 74 138 increase decrease liabilities accounts payable trade 4899 928 232 accrued expenses current liabilities 816 801 5723 accrued income taxes 501 762 1205 total adjustments 513 4678 15050 net cash provided operating activities 13219 19335 27495 cash flows investing activities investments advances affiliated companies 143 1583 2239 additions property plant equipment 8217 7326 4425 capitalized software 3524 3305 2127 proceeds sale property plant equipment 55 114 64 purchases marketable securities 24062 12600 70350 maturities marketable securities 10475 9115 63625 analogic corporation subsidiaries consolidated statements cash flows 000 omitted continued years ended july 31 1995 1994 1993 acquisition businesses net cash acquired 3239 proceeds sale marketable securities 2300 net cash used investing activities 23116 15585 12213 cash flows financing activities payments debt capital lease obligations 2331 631 6946 purchase common stock treasury 325 1543 1363 purchase common stock majority owned subsidiary 582 201 513 issuance common stock pursuant stock options employee stock purchase plan 672 542 2191 dividends paid shareholders 992 net cash used financing activities 3558 1833 6631 effect exchange rate changes cash 2288 1172 net increase decrease cash equivalents 11167 3089 8651 cash equivalents beginning year 23571 20482 11831 cash equivalents end year 12404 23571 20482 accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies business operations companys operations consist design manufacture sale hightechnology highprecision analogdigital signal processing instruments systems product service engineering licensing export revenue primarily customers europe asia amounted approximately 65200000 34 60800000 34 66900000 41 total product service engineering licensing revenue years ended july 31 1995 1994 1993 respectively significant accounting policies follows principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method significant intercompany accounts transactions eliminated b inventories stated lower cost market cost determined firstin firstout basis c property plant equipment financial reporting purposes depreciation amortization provided utilizing straightline method estimated useful lives assets lease terms whichever shorter computed principally utilizing accelerated methods income tax purposes property capital leases amortized lease terms revenue recognition revenues recognized product shipped service performed analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued e capitalized software costs company capitalizes certain computer software costs amortized utilizing straightline method economic lives related products exceed three years accumulated amortization approximated 7676000 5321000 july 31 1995 1994 respectively f warranty costs company provides estimated warranty costs products shipped g income taxes company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended permanently reinvested operations h earnings per share earnings per common equivalent share based upon weighted average common equivalent shares outstanding year primary fully diluted earnings per share number common equivalent shares utilized per share computations 12475035 12433821 12301007 fiscal 1995 1994 1993 respectively cash equivalents company considers shortterm deposits maturity three months less cash equivalents cash equivalents amounted approximately 9004000 21135000 july 31 1995 1994 respectively j concentration credit risk company grants credit domestic foreign original equipment manufacturers distributors end users company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued k marketable securities companys marketable securities categorized availablefor sale securities defined statement financial accounting standards 115 accounting certain investments debt equity securities unrealized holding gains losses reflected net amount separate component stockholders equity realized l basis presentation certain financial statement items reclassified conform current years format 2 business combinations companys subsidiary camtronics entered agreement three founding stockholders founders also active employees camtronics agreement requires camtronics purchase 5 shares common stock originally issued founders option fiscal year 1992 1995 pursuant predetermined formula commencing 1996 percentage originally issued shares founder may require camtronics purchase shall negotiated agreed upon company absent agreement higher amount percentage shall less 5 per year furthermore founder exercise right cause camtronics purchase outstanding shares rights shall lapse shall cumulative may exercised thereafter companys ownership camtronics increased approximately 65 fiscal 1992 approximately 68 fiscal 1995 result founders exercising conversion rights sell 5 shares amount 244000 202000 513000 fiscal 1995 1994 1993 respectively carrying value companys total investment camtronics exceeded portion underlying equity net assets approximately 1453000 excess amortized 10 year period january 1 1993 company acquired interest approximately 57 newlyformed company bk medical bk 3607000 cash subordinated interest free shortterm loan 3500000 converted equity july 31 1993 companys ownership interest adjusted upward 59 fiscal 1994 accordance shareholders agreement bk danish analogic corporation subsidiaries notes consolidated financial statements continued 2 business combinations continued corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques acquisition accounted purchase bks results operations included companys consolidated financial statements beginning january 1 1993 companys equity net assets bk exceeded purchase price approximately 2662000 excess acquired net assets cost amortized 5 year period beginning january 1993 accumulated amortization amounted 1376000 843000 july 31 1995 1994 respectively april 1 1992 company acquired common stock sky computers inc sky 3161000 cash carrying value companys investment sky exceeded equity net assets approximately 895000 excess amortized 5 year period accumulated amortization 597000 418000 july 31 1995 1994 respectively 3 inventories components inventory follows july 31 1995 1994 raw materials 18883000 16711000 workinprocess 16037000 14982000 finished goods 11367000 9476000 46287000 41169000 4 investments advances affiliated companies company owns 50 analogic scientific inc scientific joint venture corporation kejian corporation peoples republic china companys original investment 1500000 accounted using equity method accounting companys share scientifics income amounted 2000000 fiscal years 1994 1993 company report income fiscal 1995 related investment dividends received scientific analogic corporation subsidiaries notes consolidated financial statements continued 4 investments advances affiliated companies continued amounted 300000 fiscal 1994 500000 fiscal 1993 dividends received fiscal 1995 carrying value investment 5700000 july 31 1995 1994 transactions scientific fiscal years 1995 1994 1993 consisted revenues approximately 1076000 2990000 2542000 respectively july 31 1995 1994 accounts receivable affiliate 1232000 961000 respectively august 14 1992 analogic invested 1052000 34 interest privatelyheld company located canada company business designing manufacturing distributing medical electronic equipment subsequent august 14 1992 company invested additional 1187000 increasing equity interest 415 july 31 1993 first quarter fiscal 1994 company invested additional 760000 increasing equity interest 44 connection investment charge 595000 1700000 resulting companys share losses recorded fiscal 1994 1993 respectively january 1994 company transferred 44 interest privatelyheld company park meditech inc park located toronto canada exchange 6000000 shares park common stock plus 1000000 common stock warrants warrant exercisable price 500 canadian one share park common stock may exercised april 1996 april 1994 company purchased 300000 units park 824000 unit consists one common share park stock onehalf share warrant share warrant convertible one common share park price 400 canadian december 15 1995 june 1995 company loaned park 1500000 structured convertible subordinated promissory note interest 8 payable quarterly principal due june 1 1996 note convertible option company 600000 common shares park stock june 1 1996 addition company warrants convertible 200000 common shares park stock price 250 us june 1 1997 july 1995 company sold 2300000 common shares park common stock net price 100 per share resulting gain 1736000 company currently owns 4000000 shares approximately 15 outstanding shares park analogic corporation subsidiaries notes consolidated financial statements continued 4 investments advances affiliated companies continued park shares currently traded montreal exchange pkm well nasdaq small cap exchange pmdtf investment park included marketable securities july 31 1995 fiscal 1991 company invested 750000 25 interest limited partnership owns approximately 41 interest company designs manufactures distributes electronic medical imaging equipment investment limited partnership accounted using cost method company limited partner accordingly influence partnership analogic corporation subsidiaries notes consolidated financial statements continued 5 mortgage notes payable mortgage notes payable consists following july 31 1995 1994 3 mortgage note payable due 2017 payable quarterly collateralized land office manufacturing facilities 5699000 5877000 business development revenue bonds interest approximately 7 payable quarterly annual principal payments 150000 september 1 2005 collateralized land office manufacturing facilities callable companys option face value without penalty september 1 1996 august 31 1997 1650000 1800000 11 unsecured term loan principal interest payments due december 31 1994 1605000 term loan prime rate 875 july 31 1995 due april 1996 payable monthly installments collateralized computer equipment software 32000 74000 7381000 9356000 less current portion 365000 1975000 7016000 7381000 principal maturities next five fiscal years notes follows 1996 365000 1997 339000 1998 344000 1999 350000 2000 356000 analogic corporation subsidiaries notes consolidated financial statements continued 6 lease commitments related party transactions company leases three operating facilities partnership chairman former vice chairman partners leases accounted capital leases certain leases contain contingent rentals based upon cost living adjustments contingent rentals significant 1995 1994 1993 one companys whollyowned subsidiaries leases certain machinery equipment capital lease agreements expire 1996 property capital leases included property plant equipment follows july 31 1995 1994 land buildings 6251000 machinery equipment 590000 6841000 less accumulated amortization 5017000 4692000 net capital lease assets 1824000 2149000 certain companys subsidiaries lease manufacturing office space noncancelable operating leases expire 1998 contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 610000 814000 329000 net sublease income 1179000 1199000 1103000 fiscal 1995 1994 1993 respectively analogic corporation subsidiaries notes consolidated financial statements continued 6 lease commitments related party transactions continued following schedule year future minimum lease payments july 31 1995 capital operating fiscal year leases 1996 812000 910000 1997 812000 652000 1998 812000 621000 1999 812000 289000 2000 812000 40000 last years 2003 1390000 5450000 2512000 less amount representing interest 95 176 1837000 present value minimum lease payments includes current portion 393000 3613000 future minimum lease payments capital leases reduced sublease rental income approximately 1179000 included accounts notes receivable 200000 convertible debentures ultraanalog inc manufacturer analogtodigital digitaltoanalog converters bernard gordon companys chairman owns 72 outstanding common stock ultraanalog inc company solely option right acquire cost 7 stock option stock bonus plans july 31 1995 company three key employee stock option plans two lapsed granting options addition company one key employee stock bonus plan one non employee director stock option plan one employee stock purchase plan options granted four stock option plans become exercisable installments commencing earlier one year date grant later five years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value analogic corporation subsidiaries notes consolidated financial statements continued 7 stock option stock bonus plans continued companys key employee stock bonus plan common stock may granted key employees terms conditions determined board directors generally participants stock bonus plan may dispose otherwise transfer stock granted three years date grant upon issuance stock plan unearned compensation equivalent market value date grant charged stockholders equity subsequently amortized periods restrictions lapse six years amortization 730000 656000 388000 recorded fiscal 1995 1994 1993 respectively employee stock purchase plan participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions six month period number options granted employee plan combined options issued plans limited maximum outstanding fair market value 25000 calendar year number shares issued pursuant plan totaled 8188 1995 7293 1994 7844 1993 july 31 1995 1108162 shares reserved grant stock option bonus purchase plans analogic corporation subsidiaries notes consolidated financial statements continued 7 stock option stock bonus plans continued following table sets forth stock option transactions years ended july 31 1995 1994 1993 1995 1994 1993 option number option number option number price per price per price per share shares share shares share shares options outstanding beginning year 71251800 359729 712516125 325955 71251400 519130 options granted 16501825 164850 147501800 109125 1087516125 82950 options exercised 71251175 50081 71251400 40976 71251400 225812 options cancelled 27996 34375 50313 options outstanding end year 71251825 446502 71251800 359729 712516125 325955 options exercisable end year 71251650 140406 71251175 113791 712514875 113458 8 profit sharing retirement plan company qualified profit sharing retirement plan benefit eligible employees plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing expense amounted 700000 1995 660000 1994 600000 1993 company 401k plans employees contribute 15 annual base income exceed maximum amount allowable internal revenue code one calendar year analogic corporation subsidiaries notes consolidated financial statements continued 9 interest total interest incurred amounted 988000 1261000 1089000 1995 1994 1993 respectively 176000 1995 94000 1994 70000 1993 capitalized 10 income taxes components provision income taxes follows july 31 1995 1994 1993 current income taxes federal 2795000 1746500 4491000 state foreign 617000 371000 1111000 3412000 2117500 5602000 deferred income taxes benefit federal 291000 915000 39000 state foreign 36000 5000 14000 255000 920000 53000 3667000 3037500 5549000 tax effects principal temporary differences resulting deferred tax expense benefit follows july 31 1995 1994 1993 unrealized equity gainloss 493000 424000 78000 capitalized software 151000 325000 99000 depreciation 306000 370000 6000 bad debts 17000 6000 12000 inventory valuation 42000 11000 56000 benefit plans 486000 18000 79000 items net 184000 176000 79000 255000 920000 53000 income loss income taxes domestic foreign operations follows july 31 1995 1994 1993 domestic 17942000 17356000 19686000 foreign 1051000 2254000 1130000 16891000 19610000 18556000 analogic corporation subsidiaries notes consolidated financial statements continued 10 income taxes continued components deferred tax assets liabilities follows deferred tax deferred tax assets liabilities july 31 1995 depreciation 2614000 bad debt allowance 145000 capitalized interest costs 305000 452000 inventory 445000 warranty 589000 benefit plans 1165000 lease transactions 720000 unrealized equity gainloss 400000 1630000 capitalized software 1852000 business credit carryforwards 742000 alternative minimum tax credit carryforwards 997000 miscellaneous 277000 5785000 6548000 valuation allowance 1491000 4294000 6548000 july 31 1994 depreciation 2308000 bad debt allowance 162000 capitalized interest costs 289000 440000 inventory 403000 warranty 518000 benefit plans 684000 lease transactions 737000 unrealized equity gainloss 890000 1628000 capitalized software 1701000 business credit carry forwards 483000 alternative minimum tax credit carryforwards 1086000 miscellaneous 210000 5462000 6077000 valuation allowance 1384000 4078000 6077000 included prepaid expenses current assets 2429000 2129000 current deferred tax assets july 31 1995 1994 respectively analogic corporation subsidiaries notes consolidated financial statements continued 10 income taxes continued reconciliation income taxes united states statutory rate effective tax rate follows year ended july 31 1995 1994 1993 us federal statutory tax rate 35 tax loss dissolution foreign subsidiary 9 foreign sales corporation tax benefit 3 2 state income taxes net federal tax benefit 1 tax exempt interest 8 6 net losses profits subsidiaries affiliates taxed 1 3 alternative minimum tax 3 items net 3 5 1 effective tax rate 22 16 30 internal revenue service examined companys federal consolidated income tax returns fiscal 1992 following routine audit company notified internal revenue service proposes adjust companys tax returns years 1990 1992 increasing tax liability years 2837473 2151574 1762849 respectively major claims relate alleged forgiveness debt arising acquisition property subsidiary fdic alleged excess accumulation earnings transaction concerning forgiveness debt conducted accordance guidelines established companys independent auditors advised compliance irs regulations accordingly company believes claim without merit analogic corporation subsidiaries notes consolidated financial statements continued 10 income taxes continued similarly companys counsel believes claims concerning excess accumulation earnings without foundation erroneously based upon lack understanding nature companys business company filed protest irs vigorously contests ill founded claims believes prevail two companys subsidiaries elected taxed foreign sales corporations fsc company research experimental tax credits carryforwards approximately 742000 expiring various years 2010 analogic corporation subsidiaries notes consolidated financial statements continued 11 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 1995 1994 total net earnings revenues income per share quarters first 50931000 3474000 28 second 52537000 3132000 25 third 49104000 1866000 15 fourth 56255000 4234000 34 total 208827000 12706000 102 quarters first 46105000 3201000 26 second 49587000 3762000 30 third 47125000 3572000 29 fourth 50928000 4122000 33 total 193745000 14657000 118 12 transactions major customers one export customer accounted approximately 27700000 14 25700000 14 22000000 13 total product service engineering licensing revenue 1995 1994 1993 respectively total product service engineering licensing revenue one domestic customer accounted approximately 21100000 11 23700000 13 23000000 14 1995 1994 1993 respectively analogic corporation subsidiaries notes consolidated financial statements continued 13 supplemental disclosure cash flow information fiscal years 1995 1994 1993 interest paid amounted 1371000 1039000 1092000 respectively income taxes paid fiscal years 1995 1994 1993 amounted 2802000 3763000 4262000 respectively 14 fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair value marketable securities estimated based quoted market prices securities july 31 1995 estimated fair values companys financial instruments follows carrying fair amount value cash equivalents 12404000 marketable securities 87398000 mortgage notes payable 7381000 15 foreign operations financial information relating companys foreign domestic operations fiscal 1995 follows foreign domestic total revenue 31522000 177305000 208827000 income loss operations 1051000 16206000 15155000 identifiable assets 29313000 230885000 260198000 analogic corporation subsidiaries schedule ii valuation qualifying accounts index exhibits title incorporated reference 31 restated articles exhibit 31 companys organization amended annual report form 10k march 15 1988 fiscal year ended july 31 32 bylaws amended january exhibit 32 companys 27 1988 annual report form 10k fiscal year ended july 31 101 lease dated march 5 1976 exhibit 6e companys bernard gordon registration statement form analogic s14 file 261959 102 amendment lease dated exhibit companys report may 1 1977 bernard form 8k dated may 1 1977 gordon analogic 103 lease dated january 16 1976 exhibit companys annual bernard gordon data report form 10k fiscal precision corporation year ended july 31 1977 related assignment lease dated october 31 1979 data precision corporation analogic 104a lease dated october 31 1977 exhibit 6d companys audubon realty ltd registration statement form data precision corporation s14 file 261959 related letter agreement dated january 18 1978 b amendment lease dated exhibit companys annual june 19 1979 audubon report form 10k fiscal realty ltd analogic year ended july 31 1982 c third amendment lease exhibit companys annual dated august 2 1982 report form 10k fiscal year ended july 31 1982 fourth amendment lease exhibit 191 quarterly report dated december 31 1982 form 10q three months ended january 31 1983 105a lease dated march 16 1981 exhibit ii companys audubon realty ltd quarterly report form 10q analogic three months ended april 30 1981 b amendment lease dated exhibit companys annual october 31 1984 report form 10k fiscal year ended july 31 1985 106 land disposition agreement exhibit companys annual city report form 10k fiscal peabody community development year ended july 31 1981 authority analogic corporation 107 loan agreement among city exhibit companys annual peabody community report form 10k fiscal development authority year ended july 31 1981 analogic corporation 108 amendments urban development exhibit 1013 companys action grant agreement dated annual report form 10k august 28 1986 september fiscal year ended july 31 1986 30 1986 109 promissory note analogic exhibit companys annual payable peabody community report form 10k fiscal development authority year ended july 31 1981 1010astockholder agreement exhibits companys report july 9 1986 among form 8k dated july 31 1986 siemens ag scc analogic including following exhibits thereto b development agreement dated july 28 1986 siemens ag medical electronics laboratories inc c manufacturing agreement dated july 28 1986 analogic medical electronics laboratories inc license agreement dated july 28 1986 analogic medical electronics laboratories inc e license agreement dated exhibits companys report july 28 1986 form 8k dated july 31 1986 siemens ag medical electronics laboratories inc f license agreement ii dated july 28 1986 siemens ag medical electronics laboratories inc g sublease dated july 28 1986 analogic sublessor medical electronics laboratories inc sublessee 1011 stock purchase agreement exhibit 1011 companys march 11 1988 annual report form 10k among siemens ag scc sms fiscal year ended july 31 1988 mel analogic 1012aanamass partnership agree exhibit 1012a companys ment dated july 5 annual report form 10k 1988 anadventure fiscal year ended july 31 1988 corporation massapea inc b ground lease agreement dated exhibit 1012b companys july 5 1988 analogic annual report form 10k anamass partnership fiscal year ended july 31 1988 c equity infusion agreement exhibit 1012c quarterly report form 10q three months ended january 31 1991 resolution agreement dated exhibit 1012d companys july 31 1991 ratified annual report form 10k august 8 1991 fiscal year ended july 31 1991 1013 key employee stock option exhibit 107 companys plan dated april 21 1978 annual report form 10k amended restated fiscal year ended july 31 1987 december 4 1981 amended october 9 1984 january 28 1987 1014 key employee stock option exhibit 108 companys plan dated august 8 1980 annual report form 10k amended restated fiscal year ended july 31 1987 december 4 1981 amended october 9 1984 january 28 1987 1015aanalogic corporation profit exhibit 6c companys sharing plan dated july 26 registration statement form 1977 s14 file 261959 b amendments 234 5 exhibit 1010b companys said profit sharing plan annual report form 10k fiscal year ended july 31 1980 c restated analogic corporation exhibit 109c companys profit sharing plan dated annual report form 10k july 31 1985 amendment fiscal year ended july 31 1985 1 thereto dated august 20 1016 key employee stock bonus plan exhibit definitive proxy dated march 14 1983 statement companys amended january 27 1988 special meeting lieu annual meeting stockholders held january 25 1984 1017 key employee incentive stock exhibit 1015 companys option plan dated march 14 annual report form 10k 1983 amended fiscal year ended july 31 restated january 28 1987 1018 1985 nonqualified stock exhibit 1019 companys option plan dated may 13 annual report form 10k 1985 fiscal year ended july 31 1985 1019 employee qualified stock exhibit g companys definitive purchase plan dated proxy statement dated december 9 january 22 1986 1985 companys special meeting lieu annual meeting stockholders held january 22 1020 proposed 1988 nonqualified exhibit 1020 companys stock option plan non annual report form 10k employee directors fiscal year ended july 31 1988 1021 form indemnification exhibit 1019 companys contract annual report form 10k fiscal year ended july 31 1987 1022 agreement plan merger exhibit 1022 companys sky computers inc annual report form 10k analogic corporation fiscal year ended july 31 1992 1023aagreement bk medical exhibits companys report holding analogic form 8k dated december 18 1992 corporation dated october 20 b addendum dated december 11 1992 agreement bk medical holding analogic corporation dated october 20 1992 c shareholders agreement bk medical holding analogic corporation dated december 11 1992 1024 key employee incentive stock exhibit companys option plan dated june 11 definitive proxy statement 1993 dated december 1 1993 companys annual meeting stockholders held january 21 exhibits title 21 list subsidiaries 23 consent coopers lybrand llp 27 financial data schedule exhibit 21 jurisdiction name incorporation analogic limited massachusetts analogic foreign sales corporation virgin islands analogic securities corporation massachusetts anadventure ii corporation massachusetts anadventure delaware corporation delaware anadventure corporation massachusetts bk medical denmark camtronics foreign sales corporation virgin islands camtronics ltd wisconsin sky computers incorporated massachusetts sky limited england consent independent accountants consent incorporation reference registration statement analogic corporation form s3 file nos 296488 331089 33 1463 form s8 file nos 295091 335913 336835 3353381 3327372 report dated september 8 1995 audits consolidated financial statements financial statement schedule analogic corporation july 31 1995 1994 years ended july 31 1995 1994 1993 report included annual report form 10k coopers lybrand llp october 3 1995item 14 exhibits financial statement schedules reports form 8k page number 1 financial statements report independent accountants 29 consolidated balance sheets july 31 1996 1995 30 31 consolidated statements income years ended july 31 1996 1995 1994 32 consolidated statements stockholders equity years ended july 31 1996 1995 1994 33 35 consolidated statements cash flows years ended july 31 1996 1995 1994 36 37 notes consolidated financial statements 38 51 2 financial statement schedule ii valuation qualifying accounts 52 schedules omitted required applicable required information furnished consolidated statements notes thereto 3 exhibits see index exhibits 53 56 b report form 8k reports form 8k filed registrant quarter ended july 31 1996 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation bernard gordon bernard gordon chairman board chief executive officer date october 9 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date october 9 1996 bernard gordon chairman board chief executive officer director date october 9 1996 bruce r rusch president chief operating officer director date october 9 1996 john tarello senior vice president treasurer director date october 9 1996 ross brown vice president director date october 9 1996 bruce w steinhauer director date october 9 1996 edward f voboril director date october 9 1996 gerald l wilson director report independent accountants board directors analogic corporation peabody massachusetts audited accompanying consolidated balance sheets analogic corporation subsidiaries july 31 1996 1995 related consolidated statements income stockholders equity cash flows financial statement schedule listed item 14a form 10k three years period ended july 31 1996 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position analogic corporation subsidiaries july 31 1996 1995 results operations cash flows three years period ended july 31 1996 conformity generally accepted accounting principles addition opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp boston massachusetts august 30 1996 analogic corporation subsidiaries consolidated balance sheets 000 omitted july 31 1996 1995 assets current assets cash equivalents 18040 12404 marketable securities market 82509 87398 accounts notes receivable net allowance doubtful accounts 1996 1426 1995 1361 45207 43980 accounts receivable affiliates 1608 1232 inventories 50232 46287 prepaid expenses current assets 4416 5108 total current assets 202012 196409 property plant equipment cost land improvements 4252 buildings 36825 36768 property capital leases 6251 6841 leasehold capital lease improvements 2090 2158 manufacturing equipment 63196 60850 furniture fixtures 19194 18642 motor vehicles 998 1206 132806 130717 less accumulated depreciation amortization 85050 80955 47756 49762 investments advances affiliated companies 8129 6574 excess cost acquired net assets net accumulated amortization 375 681 assets including unamortized software costs 1996 6073 1995 6413 6890 6772 265162 260198 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated balance sheets 000 omitted july 31 1996 1995 liabilities stockholders equity current liabilities mortgage notes payable 3644 365 obligations capital leases 442 393 accounts payable trade 11438 12467 accrued employee compensation benefits 9822 9008 accrued warranty 2521 1516 accrued expenses 3632 5029 accrued income taxes 1998 1832 total current liabilities 33497 30610 longterm debt mortgage notes payable 6677 7016 obligations capital leases 2778 3220 9455 10236 deferred income taxes 4832 4683 minority interest subsidiaries 4268 12489 excess acquired net assets cost net 1310 1287 commitments stockholders equity common stock 05 par authorized 30000000 shares issued 1996 13767614 shares issued 1995 13691925 shares 688 685 capital excess par value 21413 20517 retained earnings 202761 191938 unrealized holding gains losses 2092 2004 cumulative translation adjustments 1539 2846 228493 217990 less treasury stock cost 1996 1273073 shares 1995 1269280 shares 14550 14470 unearned compensation 2143 2627 total stockholders equity 211800 200893 265162 260198 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income 000 omitted except share data years ended july 31 1996 1995 1994 revenues product service net 205991 187964 177175 engineering licensing 7790 6070 2776 operating revenue 10528 9720 9166 interest dividend income 6151 5073 4628 total revenues 230460 208827 193745 cost sales expenses cost sales product service 125726 108203 95506 engineering licensing 7379 2769 2929 operating expenses 5627 5294 5258 general administrative 18463 17188 15492 selling 27195 29066 29278 research product development 29017 29890 26100 interest expense 832 812 1167 gain loss foreign exchange 524 666 amortization excess cost acquired net assets 306 317 387 amortization excess acquired net assets cost 542 533 577 total cost sales expenses 213479 193672 175540 income operations 16981 15155 18205 gain sale marketable securit 1736 equity net income losses unconsolidated affiliates 821 1405 income taxes 16160 16891 19610 provision income taxes 4241 3667 3038 minority interest net income loss consolidated subsidiaries 1146 518 1915 net income 13065 12706 14657 earnings per common equivalent share 104 102 118 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1996 1995 1994 000 omitted except share date common stock capital excess shares amount par value balance july 31 1993 13517599 676 18807 shares issued pursuant stock grants net cancellations 48750 2 696 shares issued pursuant stock options 35976 2 290 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 19 income tax reduction relating stock options 99 translation adjustments year net income year balance july 31 1994 13602325 680 19911 shares issued pursuant stock grants net cancellations 39500 2 608 shares issued pursuant stock options 50081 3 429 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 25 income tax reduction relating stock options 126 translation adjustments year net income year dividends paid 008 per share unrealized holding gains losses period 19 582 balance july 31 1995 13691925 685 20517 shares issued pursuant stock grants net cancellations 20500 1 275 shares issued pursuant stock options 55189 2 521 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 31 income tax reduction relating stock options 246 translation adjustments year net income year dividends paid 018 per share unrealized holding gains losses period 177 balance july 31 1996 13767614 688 21413 accompanying notes integral part financial statemen analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1996 1995 1994 000 omitted except share date unrealized cumulative retained holding translation earnings gains loss adjustments balance july 31 1993 165565 614 shares issued pursuant stock grants net cancellations shares issued pursuant stock options purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan income tax reduction relating stock options translation adjustments year 1172 net income year 14657 balance july 31 1994 180222 558 shares issued pursuant stock grants net cancellations shares issued pursuant stock options purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan income tax reduction relating stock options translation adjustments year 2288 net income year 12707 dividends paid 008 per share 991 unrealized holding gains losses period 2004 balance july 31 1995 191938 2004 2846 shares issued pursuant stock grants net cancellations shares issued pursuant stock options purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan income tax reduction relating stock options translation adjustments year 1307 net income year 13065 dividends paid 018 per share 2242 unrealized holding gains losses period 88 balance july 31 1996 202761 2092 1539 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1996 1995 1994 000 omitted except share date treasury stock total unearned stockholder shares amount compensation equity balance july 31 1993 1157761 12822 2705 168907 shares issued pursuant stock grants net cancel 10000 698 shares issued pursuant stock options 5000 54 346 purchases treasury stock 97800 1543 amortization unearned compensation 656 amounts related employee stock purchase plan 7293 78 97 income tax reduction relating stock options 99 translation adjustments year 1172 net income year 14657 balance july 31 1994 1253268 14233 2747 184391 shares issued pursuant stock grants net cancel 5000 610 shares issued pursuant stock options 432 purchases treasury stock 19200 326 amortization unearned compensation 730 amounts related employee stock purchase plan 8188 89 114 income tax reduction relating stock options 126 translation adjustments year 2288 net income year 12707 dividends paid 008 per share 991 unrealized holding gains losses period 2004 582 balance july 31 1995 1269280 14470 2627 200893 shares issued pursuant stock grants net cancel 9500 1 275 shares issued pursuant stock options 14100 147 670 purchases treasury stock 17500 345 amortization unearned compensation 759 amounts related employee stock purchase plan 9107 102 133 income tax reduction relating stock options 246 translation adjustments year 1307 net income year 13065 dividends paid 018 per share 2242 unrealized holding gains losses period 88 17 160 balance july 31 1996 1273073 14550 2143 211800 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flow 000 omitted years ended july 31 1996 1995 1994 cash flows operating activities net income 13065 12706 14657 adjustments reconcile net income net cash provided operating activities deferred income taxes 177 255 920 depreciation 6203 6365 6598 amortization capitalized software 2325 2355 1602 amortization excess cost net acquired assets 306 317 387 amortization excess acquired net assets cost 542 533 577 amortization assets deferred charges 32 39 3 minority interest net income losses consolidated subsidiaries 1146 518 1915 provision losses accounts receivable 65 21 179 gain sale marketable securities 1736 gain sale equipment 40 34 30 excess equity losses income unconsolidated affiliates dividend received 821 1105 compensation stock grants 759 731 656 changes operating assets liabilities decrease increase assets accounts notes receivable 1403 8561 3543 inventories 3945 5118 1229 prepaid expenses current assets 399 305 75 assets 426 17 74 increase decrease liabilities accounts payable trade 1029 4899 928 accrued expenses current liabilities 715 816 801 accrued income taxes 412 627 663 total adjustments 2189 639 4777 net cash provided operating activities 15254 13345 19434 cash flows investing activities investments advances affiliated companies 2376 143 1583 additions property plant equipment 6233 8217 7326 capitalized software 1985 3524 3305 proceeds sale property plant equipment 119 55 114 purchases marketable securities 21650 24062 12600 maturities marketable securities 26627 10475 9115 proceeds sale marketable securities 2300 net cash used investing activities 5498 23116 15585 analogic corporation subsidiaries consolidated statements cash flow 000 omitted years ended july 31 1996 1995 1994 cash flows operating activities continued cash flows financing activities proceeds overdraft facility 3305 payments debt capital lease obligations 758 2331 631 purchase common stock treasury 345 325 1543 purchase common stock majority owned subsidiary 160 582 201 issuance common stock pursuant stock options employee stock purchase plan 803 546 443 dividends paid shareholders 2242 992 purchase minority interest 3416 net cash used financing activities 2813 3684 1932 effect exchange rate changes cash 1307 2288 1172 net increase decrease cash equivalents 5636 11167 3089 cash equivalents beginning year 12404 23571 20482 cash equivalents end year 18040 12404 23571 accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies business operations companys operations consist design manufacture sale hightechnology highprecision analogdigital signal processing instruments systems customers medical industrial industry product service engineering licensing export revenue primarily customers europe asia amounted approximately 77600000 36 65200000 34 60800000 34 total product service engineering licensing revenue years ended july 31 1996 1995 1994 respectively significant accounting policies follows principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method significant intercompany accounts transactions eliminated b inventories stated lower cost market cost determined firstin firstout basis c property plant equipment financial reporting purposes depreciation amortization provided utilizing straightline method estimated useful lives assets lease terms whichever shorter computed principally utilizing accelerated methods income tax purposes property capital leases amortized lease terms revenue recognition revenues recognized product shipped service performed e capitalized software costs company capitalizes certain computer software costs amortized utilizing straightline method economic lives related products exceed three years accumulated amortization approximated 10001000 7676000 july 31 1996 1995 respectively analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued f warranty costs company provides estimated warranty costs products shipped g income taxes company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended permanently reinvested operations h earnings per share earnings per common equivalent share based upon weighted average common equivalent shares outstanding year primary fully diluted earnings per share number common equivalent shares utilized per share computations 12562085 12475035 12433821 fiscal 1996 1995 1994 respectively cash equivalents company considers shortterm deposits maturity three months less cash equivalents cash equivalents amounted approximately 16382000 9004000 july 31 1996 1995 respectively j concentration credit risk company grants credit domestic foreign original equipment manufacturers distributors end users company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution k marketable securities companys marketable securities categorized available forsale securities defined statement financial accounting standards 115 accounting certain investments debt equity securities unrealized holding gains losses reflected net amount separate component stockholders equity realized purpose computing realized gains losses cost identified specific identification basis l accounting standards statement financial accounting standards sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopt fair value method accounting employee stockbased compensation instead comply pro forma disclosure requirements beginning fiscal 1997 company believes adoption sfas 123 material impact companys financial position results operations analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued l accounting standards continued statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed requires impairment losses recognized carrying value asset exceeds fair value company regularly assesses longlived assets impairment therefore believe adoption standard fiscal 1997 material effect financial position results operations use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions disclosure contingencies date financial statements actual results could differ estimates n basis presentation certain financial statement items reclassified conform current years format 2 business combinations companys subsidiary camtronics entered agreement three founding stockholders founders also active employees camtronics agreement requires camtronics purchase 5 shares common stock originally issued founders option fiscal year beginning 1992 pursuant predetermined formula founder exercise right cause camtronics purchase outstanding shares rights shall lapse shall cumulative may exercised thereafter companys ownership camtronics increased approximately 65 fiscal 1992 approximately 68 fiscal 1996 result founders exercising conversion rights sell 5 shares amount 763000 244000 202000 fiscal 1996 1995 1994 respectively carrying value companys total investment camtronics exceeded portion underlying equity net assets approximately 1453000 excess amortized 10 year period accumulated amortization amounted 1197000 1071000 july 31 1996 1995 respectively january 1 1993 company acquired interest approximately 57 newlyformed company bk ultrasound systems bk 3607000 cash subordinated interest free shortterm loan 3500000 converted equity july 31 1993 companys ownership interest adjusted upward 59 fiscal 1994 accordance shareholders agreement bk danish corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques acquisition accounted purchase bks operations included companys consolidated financial statements beginning january 1 1993 companys equity net assets bk exceeded purchase price approximately 2662000 excess acquired net assets cost amortized 5 year period beginning january 1993 accumulated amortization amounted 1908000 1376000 july 31 1996 1995 respectively analogic corporation subsidiaries notes consolidated financial statements continued 2 business combinations continued july 1 1996 company acquired remaining 41 interest bk 3416000 cash companys equity net assets bk exceeded purchase price approximately 565000 excess amortized five year period beginning july 1 1996 amortization fiscal 1996 9000 april 1 1992 company acquired common stock sky computers inc sky 3161000 cash carrying value companys investment sky exceeded equity net assets approximately 895000 excess amortized 5 year period accumulated amortization 776000 597000 july 31 1996 1995 respectively 3 marketable securities marketable securities categorized availableforsale securities summarized follows gross unrealized july 31 1996 cost fair value gain loss debt securities issued 78675000 79651000 1185000 209000 various state local municipalities agencies equity securities 1742000 2858000 1116000 80417000 82509000 2301000 209000 july 31 1995 debt securities issued 84413000 85398000 1277000 292000 various state local municipalities agencies equity securities 981000 2000000 1019000 85394000 87398000 2296000 292000 contractual maturities range one nine years majority five years less 4 inventories components inventory follows july 31 1996 1995 raw materials 19363000 18883000 workinprocess 17830000 16037000 finished goods 13039000 11367000 50232000 46287000 analogic corporation subsidiaries notes consolidated financial statements continued 5 investments advances affiliated companies company owns 50 analogic scientific inc scientific joint venture corporation kejian corporation peoples republic china companys original investment 1500000 accounted using equity method accounting companys share scientifics income amounted 2000000 fiscal year 1994 company report income fiscal year 1996 1995 related investment dividends received scientific amounted 300000 fiscal 1994 dividends received fiscal year 1996 1995 fiscal 1996 company invested additional 500000 scientific carrying value investment 6200000 july 31 1996 5700000 july 31 1995 transactions scientific fiscal years 1996 1995 1994 consisted revenues approximately 735000 1076000 2990000 respectively july 31 1996 1995 accounts receivable affiliate 676000 1232000 respectively charge 595000 resulting companys share losses privatelyheld company accounted equity method recorded fiscal year 1994 fiscal year 1994 investment privatelyheld company exchanged common stock park meditech inc park june 1995 company loaned park 1500000 structured convertible subordinated promissory note interest 8 payable quarterly principal due june 1 1996 note convertible option company 600000 common shares park stock june 1 1996 addition company warrants convertible 200000 common shares park stock price 250 us june 1 1997 february 13 1996 company acquired 1715384 shares park common stock 11 convertible unsecured subordinated debenture principal amount 750000 consideration cancellation convertible subordinated promissory note amount 1500000 200000 common share purchase warrants certain restrictions convertible unsecured subordinated debenture may converted common shares price 120 canadian per common share company currently owns 5715384 shares approximately 14 outstanding shares park shares currently traded montreal exchange pkm well nasdaq small cap exchange pmdtf investment park included marketable securities july 31 1996 1995 respectively february 22 1996 company invested 2000000 33 interest newly formed privately held company design manufacture subassemblies medical imaging equipment transactions new formed privately held company consisted revenues approximately 2667000 fiscal 1996 july 31 1996 accounts receivable company 932000 companys 750000 investment limited partnership accounted using cost method company limited partner accordingly influence partnership fiscal 1996 company received distribution 623000 limited partnership analogic corporation subsidiaries notes consolidated financial statements continued 6 mortgage notes payable mortgage notes payable consists following july 31 1996 1995 3 mortgage note payable due 2017 payable quarterly collateralized land office manufacturing facilities 5516000 5699000 business development revenue bonds interest approximately 7 payable quarterly annual principal payments 150000 september 1 2005 collateralized land office manufacturing facilities callable companys option face value without penalty september 1 1996 august 31 1997 1500000 1650000 term loan prime rate 875 july 31 1995 due april 1996 payable monthly installments collateralized computer equipment software 32000 uncollateralized foreign bank overdraft facility interest 85 per year 3305000 10321000 7381000 less current portion 3644000 365000 6677000 7016000 principal maturities next five fiscal years notes follows 1997 3644000 1998 344000 1999 350000 2000 356000 2001 363000 analogic corporation subsidiaries notes consolidated financial statements continued 7 lease commitments related party transactions company leases three operating facilities partnership chairman former vice chairman partners leases accounted capital leases certain leases contain contingent rentals based upon cost living adjustments contingent rentals significant 1996 1995 1994 one companys whollyowned subsidiaries leased certain machinery equipment capital lease agreements expired 1996 property capital leases included property plant equipment follows july 31 1996 1995 land buildings 6251000 machinery equipment 590000 6251000 6841000 less accumulated amortization 4781000 5017000 net capital lease assets 1470000 1824000 certain companys subsidiaries lease manufacturing office space noncancelable operating leases expire 1999 contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 534000 610000 814000 net sublease income 1186000 1179000 1199000 fiscal 1996 1995 1994 respectively following schedule year future minimum lease payments july 31 1996 capital operating fiscal year leases 1997 812000 850000 1998 812000 857000 1999 812000 470000 2000 812000 40000 2001 812000 last years 2003 578000 4638000 2217000 less amount representing interest 95 176 1418000 present value minimum lease payments includes current portion 442000 3220000 analogic corporation notes consolidated financial statements continued 7 lease commitments related party transactions continued future minimum lease payments capital leases reduced sublease rental income approximately 1186000 included accounts notes receivable 200000 convertible debentures ultraanalog inc manufacturer analogtodigital digitaltoanalog converters bernard gordon companys chairman owns 72 outstanding common stock ultraanalog inc company solely option right acquire cost 8 stock option stock bonus plans july 31 1996 company three key employee stock option plans two lapsed granting options addition company one key employee stock bonus plan one nonemployee director stock option plan one employee stock purchase plan options granted four stock option plans become exercisable installments commencing earlier one year date grant later five years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value companys key employee stock bonus plan common stock may granted key employees terms conditions determined board directors generally participants stock bonus plan may dispose otherwise transfer stock granted three years date grant upon issuance stock plan unearned compensation equivalent market value date grant charged stockholders equity subsequently amortized periods restrictions lapse six years amortization 759000 730000 656000 recorded fiscal 1996 1995 1994 respectively employee stock purchase plan participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions six month period number options granted employee plan combined options issued plans limited maximum outstanding fair market value 25000 calendar year number shares issued pursuant plan totaled 9107 1996 8188 1995 7293 1994 july 31 1996 959105 shares reserved grant stock option bonus purchase plans analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued following table sets forth stock option transactions years ended july 31 1996 1995 1994 1996 1995 1994 option number option number option number price per price per price per share shares share shares share shares options outstanding beginning year 71251825 446502 71251800 359729 712516125 325955 options granted 18002775 151000 16501825 164850 147501800 109125 options exercised 71251650 69289 71251175 50081 71251400 40976 options cancelled 38425 27996 34375 options outstanding end year 8252775 489788 71251825 446502 71251800 359729 options exercisable end year 8252775 94964 71251650 140406 71251175 113791 9 profit sharing retirement plan company qualified profit sharing retirement plan benefit eligible employees plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing expense amounted 700000 1996 700000 1995 660000 1994 company 401k plans employees contribute 15 annual base income exceed maximum amount allowable internal revenue code one calendar year analogic corporation subsidiaries notes consolidated financial statements continued 10 interest total interest incurred amounted 1002000 988000 1261000 1996 1995 1994 respectively 170000 1996 176000 1995 94000 1994 capitalized 11 income taxes components provision income taxes follows july 31 1996 1995 1994 current income taxes federal 3757000 2795000 1747000 state foreign 307000 617000 371000 4064000 3412000 2118000 deferred income taxes benefit federal 187000 291000 915000 state foreign 10000 36000 5000 177000 255000 920000 4241000 3667000 3038000 tax effects principal temporary differences resulting deferred tax expense benefit follows july 31 1996 1995 1994 unrealized equity gainloss 369000 493000 424000 capitalized software 26000 151000 325000 depreciation 598000 306000 370000 bad debts 59000 17000 6000 inventory valuation 78000 42000 11000 benefit plans 175000 486000 18000 items net 234000 184000 176000 177000 255000 920000 income loss income taxes domestic foreign operations follows july 31 1996 1995 1994 domestic 19796000 17942000 17356000 foreign 3636000 1051000 2254000 16160000 16891000 19610000 analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued components deferred tax assets liabilities follows deferred tax deferred tax assets liabilities july 31 1996 depreciation 3212000 bad debt allowance 204000 capitalized interest costs 156000 473000 inventory 1613000 warranty 659000 benefit plans 1340000 lease transactions 710000 unrealized equity gainloss 828000 1689000 capitalized software 1878000 net operating loss carryforwards 2630000 alternative minimum tax credit carryforwards 511000 miscellaneous 401000 9052000 7252000 valuation allowance 4231000 4821000 7252000 july 31 1995 depreciation 2614000 bad debt allowance 145000 capitalized interest costs 305000 452000 inventory 445000 warranty 589000 benefit plans 1165000 lease transactions 720000 unrealized equity gainloss 400000 1630000 capitalized software 1852000 business credit carry forwards 742000 alternative minimum tax credit carryforwards 997000 miscellaneous 277000 5785000 6548000 valuation allowance 1491000 4294000 6548000 included prepaid expenses current assets 2401000 2429000 current deferred tax assets july 31 1996 1995 respectively analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued reconciliation income taxes united states statutory rate effective tax rate follows year ended july 31 1996 1995 1994 us federal statutory tax rate 35 tax loss dissolution foreign subsidiary 9 foreign sales corporation tax benefit 3 2 state income taxes net federal tax benefit 2 1 tax exempt interest 8 6 net losses profits subsidiaries affiliates taxed 7 1 general business credit utilized 3 1 alternative minimum tax 3 items net 1 2 5 effective tax rate 26 22 16 internal revenue service examined companys federal consolidated income tax returns fiscal 1992 following routine audit company notified internal revenue service proposes adjust companys tax returns years 1990 1992 increasing tax liability years 2837473 2151574 1762849 respectively major claims relate alleged forgiveness debt arising acquisition property subsidiary fdic alleged excess accumulation earnings transaction concerning forgiveness debt conducted accordance guidelines established companys independent auditors advised compliance irs regulations accordingly company believes claim without merit similarly companys counsel believes claims concerning excess accumulation earnings without foundation erroneously based upon lack understanding nature companys business company filed protest irs vigorously contests ill founded claims believes prevail two companys subsidiaries elected taxed foreign sales corporations fsc company alternative minimum tax credit carryforwards approximately 511000 may carried forward indefinitely one companys subsidiaries net operating loss carryforward approximately 1600000 expiring 2009 addition certain companys foreign subsidiaries net operating loss carryforwards approximately 4500000 may carried forward indefinitely analogic corporation subsidiaries notes consolidated financial statements continued 12 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 1996 1995 total net earnings revenues income per share quarters first 46478000 1359000 11 second 53146000 2000000 16 third 60486000 3762000 30 fourth 70350000 5944000 47 total 230460000 13065000 104 quarters first 50931000 3474000 28 second 52537000 3132000 25 third 49104000 1866000 15 fourth 56255000 4234000 34 total 208827000 12706000 102 13 transactions major customers industries one export customer accounted approximately 30000000 14 27700000 14 25700000 14 total product service engineering licensing revenue 1996 1995 1994 respectively total product service engineering licensing revenue one domestic customer accounted approximately 18800000 9 20100000 10 23700000 13 1996 1995 1994 respectively companys ten largest customers accounted approximately 57 product service engineering licensing revenue fiscal 1996 medical technology products consisting primarily electronic subsystems medical imaging equipment accounted approximately 71 product service engineering licensing revenue fiscal 1996 analogic corporation subsidiaries notes consolidated financial statements continued 14 supplemental disclosure cash flow information fiscal years 1996 1995 1994 interest paid amounted 970000 1371000 1039000 respectively income taxes paid fiscal years 1996 1995 1994 amounted 3040000 2802000 3763000 respectively 15 fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair value marketable securities estimated based quoted market prices securities 16 foreign operations financial information relating companys foreign domestic operations fiscal years 1996 1995 1994 follows fy 1996 foreign domestic total revenue 26377000 204083000 230460000 income loss operations 3791000 20772000 16981000 identifiable assets 23891000 241271000 265162000 fy 1995 revenue 31522000 177305000 208827000 income loss operations 1051000 16206000 15155000 identifiable assets 29313000 230885000 260198000 fy 1994 revenue 42231000 151514000 193745000 income operations 2254000 15951000 18205000 identifiable assets 32917000 206703000 239620000 analogic corporation subsidiaries schedule ii valuation qualifying accountsitem 14 exhibits financial statement schedules reports form 8k page number 1 financial statements report independent accountants 32 consolidated balance sheets july 31 1997 1996 33 consolidated statements income years ended july 31 1997 1996 1995 34 consolidated statements stockholders equity years ended july 31 1997 1996 1995 35 consolidated statements cash flows years ended july 31 1997 1996 1995 36 notes consolidated financial statements 37 52 2 financial statement schedule ii valuation qualifying accounts 53 schedules omitted required applicable required information furnished consolidated statements notes thereto 3 exhibits see index exhibits 54 58 b report form 8k reports form 8k filed registrant quarter ended july 31 1997 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation date october 9 1997 bernard gordon bernard gordon chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date october 9 1997 bernard gordon chairman board chief executive officer director date october 9 1997 bruce r rusch president chief operating officer director date october 9 1997 john tarello senior vice president treasurer director date october 9 1997 ross brown vice president director date october 9 1997 bruce w steinhauer director date october 9 1997 edward f voboril director date october 9 1997 gerald l wilson director report independent accountants board directors analogic corporation peabody massachusetts audited accompanying consolidated balance sheets analogic corporation subsidiaries july 31 1997 1996 related consolidated statements income stockholders equity cash flows financial statement schedule listed item 14a form 10k three years period ended july 31 1997 financial statements financial statement schedules responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position analogic corporation subsidiaries july 31 1997 1996 results operations cash flows three years period ended july 31 1997 conformity generally accepted accounting principles addition opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp boston massachusetts september 15 1997 analogic corporation subsidiaries consolidated balance sheets 000 omitted accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income 000 omitted except share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1997 1996 1995 000 omitted except share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows 000 omitted accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies business operations companys operations consist design manufacture sale hightechnology highprecision analogdigital signal processing instruments systems customers medical industrial industry product service engineering licensing export revenue primarily customers europe asia amounted approximately 81400000 34 77600000 36 65200000 34 total product service engineering licensing revenue years ended july 31 1997 1996 1995 respectively significant accounting policies follows principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method significant intercompany accounts transactions eliminated b inventories stated lower cost market cost determined firstin firstout basis c property plant equipment financial reporting purposes depreciation amortization provided utilizing straightline method estimated useful lives assets lease terms whichever shorter computed principally utilizing accelerated methods income tax purposes property capital leases amortized lease terms annual provisions depreciation amortization computed accordance following ranges estimated useful lives buildings 35 years property capital lease 14 23 years manufacturing equipment 4 7 years furniture fixtures 4 8 years leasehold capital lease improvements 3 10 years motor vehicles 3 years analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued revenue recognition revenues recognized product shipped service performed certain transactions request customer upon completion manufacturing process acceptance title customer company stores inventory pending shipping instructions recognizes revenue accounts receivables related sales approximately 4684000 1540000 july 31 1997 1996 respectively e capitalized software costs company capitalizes certain computer software costs technological feasibility established amortized utilizing straightline method economic lives related products exceed three years accumulated amortization approximated 12721000 9606000 july 31 1997 1996 respectively f warranty costs company provides estimated warranty costs products shipped g income taxes company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended permanently reinvested operations h earnings per share earnings per common equivalent share based upon weighted average common equivalent shares outstanding year primary fully diluted earnings per share number common equivalent shares utilized per share computations 12701800 12562085 12475035 fiscal 1997 1996 1995 respectively cash equivalents company considers shortterm deposits original maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 23956000 16382000 july 31 1997 1996 respectively j concentration credit risk company grants credit domestic foreign original equipment manufacturers distributors end users company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued k marketable securities companys marketable securities categorized availableforsale securities defined statement financial accounting standards 115 accounting certain investments debt equity securities unrealized holding gains losses reflected net amount separate component stockholders equity realized purpose computing realized gains losses cost identified specific identification basis l accounting standards statement financial accounting standards sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopt fair value method accounting employee stockbased compensation instead comply pro forma disclosure requirements see note 8 notes consolidated financial statements statement financial accounting standards sfas 128 earnings per share required adopted company december 15 1997 time company required change method currently used compute earnings per share restate prior periods new requirements calculating basic earnings per share dilutive effect stock options excluded expected material impact companys earnings per share statements financial accounting standards sfas 130 reporting comprehensive income statement financial accounting standards sfas 131 disclosures segments enterprise related information adopted fiscal 1999 sfas 130 establishes new standards reporting displaying comprehensive income components sfas 131 requires disclosure certain information regarding operating segments products services geographic areas operation major customers adoption statements expected impact companys consolidated financial position results operations business practices use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions disclosure contingencies date financial statements actual results could differ estimates analogic corporation subsidiaries notes consolidated financial statements continued 2 business combinations companys subsidiary camtronics entered agreement three founding stockholders founders also active employees camtronics agreement requires camtronics purchase 5 shares common stock originally issued founders option fiscal year beginning 1992 pursuant predetermined formula founder exercise right cause camtronics purchase outstanding shares rights shall lapse shall cumulative may exercised thereafter companys ownership camtronics increased approximately 65 fiscal 1992 approximately 68 fiscal 1996 result founders exercising conversion rights sell 5 shares amount 763000 244000 202000 fiscal 1996 1995 1994 respectively conversion rights exercised fiscal 1997 carrying value companys total investment camtronics exceeded portion underlying equity net assets approximately 1453000 excess amortized 10 year period accumulated amortization amounted 1282000 1197000 july 31 1997 1996 respectively january 1 1993 company acquired interest approximately 57 newlyformed company bk ultrasound systems bk 3607000 cash subordinated interest free shortterm loan 3500000 converted equity july 31 1993 companys ownership interest adjusted upward 59 fiscal 1994 accordance shareholders agreement bk danish corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques acquisition accounted purchase bks operations included companys consolidated financial statements beginning january 1 1993 companys equity net assets bk exceeded purchase price approximately 2662000 excess acquired net assets cost amortized 5 year period beginning january 1993 accumulated amortization amounted 2441000 1908000 july 31 1997 1996 respectively july 1 1996 company acquired remaining 41 interest bk 3416000 cash companys equity net assets bk exceeded purchase price approximately 565000 excess amortized five year period beginning july 1 1996 accumulated amortization amounted 123000 9000 july 31 1997 1996 respectively april 1 1992 company acquired common stock sky computers inc sky 3161000 cash carrying value companys investment sky exceeded equity net assets approximately 895000 excess amortized 5 year period accumulated amortization 895000 776000 july 31 1997 1996 respectively april 1 1997 carrying value companys investment sky fully amortized analogic corporation subsidiaries notes consolidated financial statements continued 3 marketable securities marketable securities categorized availableforsale securities summarized follows contractual maturities range one nine years majority five years less 4 inventories components inventory follows analogic corporation subsidiaries notes consolidated financial statements continued 5 investments advances affiliated companies company owns 50 analogic scientific inc scientific joint venture corporation kejian corporation peoples republic china companys original investment 1500000 accounted using equity method accounting companys share scientifics loss amounted 425000 fiscal year 1997 company report income loss fiscal years 1996 1995 related investment fiscal 1996 company invested additional 500000 scientific carrying value investment 5775000 july 31 1997 6200000 july 31 1996 transactions scientific fiscal years 1997 1996 1995 consisted revenues approximately 526000 735000 1076000 respectively july 31 1997 1996 accounts receivable affiliate 668000 676000 respectively february 13 1996 company acquired 1715384 shares park meditech inc common stock 11 convertible unsecured subordinated debenture principal amount 750000 consideration cancellation convertible subordinated promissory note amount 1500000 200000 common share purchase warrants certain restrictions convertible unsecured subordinated debenture may converted common shares price 120 canadian per common share company loaned park meditech inc 221000 december 1996 additional 294000 february 1997 structured promissory notes interest 11 secured assets park meditech inc july 3 1997 park meditech incs subsidiary park medical systems filed assignment bankruptcy trustee appointed sell assets park medical systems includes patents imaging technology view filing company recognized impairment investment park meditech inc wrote 1742000 company currently owns 5715384 shares approximately 14 outstanding shares park meditech inc park meditech inc shares traded montreal exchange pkm well nasdaq small cap exchange pmdtf investment park meditech inc included marketable securities july 31 1996 february 22 1996 company invested 2000000 33 interest privately held company designs manufacture medical imaging equipment effective may 1 1997 company increased interest 33 50 investment 340000 june 1997 company investor invested additional 1000000 carrying value investment 570000 july 31 1997 1179000 july 31 1996 transactions privately held company fiscal years 1997 1996 consisted revenues approximately 5406000 2667000 respectively july 31 1997 1996 accounts receivable company 1243000 932000 respectively companys 750000 investment limited partnership accounted using cost method company limited partner accordingly influence partnership fiscal 1996 company received distribution 623000 limited partnership analogic corporation subsidiaries notes consolidated financial statements continued 6 mortgage notes payable mortgage notes payable consists following principal maturities next five fiscal years notes follows 1998 344000 1999 350000 2000 356000 2001 363000 2002 369000 7 lease commitments related party transactions company leases three operating facilities partnership chairman former vice chairman partners leases accounted capital leases certain leases contain contingent rentals based upon cost living adjustments contingent rentals significant 1997 1996 1995 property capital leases included property plant equipment follows july 31 1997 1996 land buildings 6251000 less accumulated amortization 5085000 4781000 net capital lease assets 1166000 1470000 analogic corporation subsidiaries notes consolidated financial statements continued 7 lease commitments related party transactions continued certain companys subsidiaries lease manufacturing office space noncancelable operating leases expire 1999 contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 531000 534000 610000 net sublease income 1188000 1186000 1179000 fiscal 1997 1996 1995 respectively following schedule year future minimum lease payments july 31 1997 capital operating fiscal year leases 1998 812000 680000 1999 812000 239000 2000 812000 58000 2001 812000 5000 2002 213000 2003 213000 3674000 982000 less amount representing interest 95 176 896000 present value minimum lease payments includes current portion 497000 2778000 future minimum lease payments capital leases reduced sublease rental income approximately 1188000 included accounts notes receivable 200000 convertible debentures ultraanalog inc manufacturer analogtodigital digitaltoanalog converters bernard gordon companys chairman owns 72 outstanding common stock ultraanalog inc company solely option right acquire cost 8 stock option stock bonus plans july 31 1997 company three key employee stock option plans two lapsed granting options addition company one key employee stock bonus plan two nonemployee director stock option plans one employee stock purchase plan analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued options granted five stock option plans become exercisable installments commencing earlier one year date grant later five years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value companys key employee stock bonus plan common stock may granted key employees terms conditions determined board directors generally participants stock bonus plan may dispose otherwise transfer stock granted three years date grant upon issuance stock plan unearned compensation equivalent market value date grant charged stockholders equity subsequently amortized periods restrictions lapse six years amortization 663000 759000 730000 recorded fiscal 1997 1996 1995 respectively employee stock purchase plan participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions six month period number options granted employee plan combined options issued plans limited maximum outstanding fair market value 25000 calendar year number shares issued pursuant plan totaled 5671 1997 9107 1996 8188 1995 july 31 1997 927159 shares reserved grant stock option bonus purchase plans analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued following table sets forth stock option transactions years ended july 31 1997 1996 1995 following table summarizes information stock options outstanding july 31 1997 analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued statement financial accounting standards sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopt fair value method accounting employee stockbased compensation instead comply pro forma disclosure requirements fair value method companys stock options estimated using blackscholes option pricing model developed use estimating fair value traded options vesting restrictions fully transferable model requires input highly subjective assumptions including expected stock price volatility companys stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing model necessarily provide reliable single measure fair value stock options fair value companys stock options estimated using following weightedaverage assumptions 1997 1996 expected life years 7 volatility 38 riskfree interest rate 654 664 dividend yield 5 6 weightedaverage estimated fair value stock options granted fiscal 1997 1996 1530 1261 per share respectively pro forma purposes estimated fair value companys stock options amortized options vesting period companys pro forma information follows sfas 123 applicable options granted subsequent july 31 1995 pro forma effect fully reflected approximately 2000 analogic corporation subsidiaries notes consolidated financial statements continued 9 profit sharing retirement plan company qualified profit sharing retirement plan benefit eligible employees plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing expense amounted 900000 1997 700000 1996 700000 1995 company 401k plans employees contribute 15 annual base income exceed maximum amount allowable internal revenue code one calendar year 10 interest total interest incurred amounted 779000 1002000 988000 1997 1996 1995 respectively 172000 1997 170000 1996 176000 1995 capitalized 11 income taxes components provision income taxes follows tax effects principal temporary differences resulting deferred tax expense benefit follows analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued income loss income taxes domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued included prepaid expenses current assets 4577000 2401000 current deferred tax assets july 31 1997 1996 respectively reconciliation income taxes united states statutory rate effective tax rate follows year ended july 31 1997 1996 1995 us federal statutory tax rate 35 foreign sales corporation tax benefit 2 3 state income taxes net federal tax benefit 2 1 tax exempt interest 4 8 net losses foreign subsidiaries taxed 7 general business credit utilized 1 3 1 alternative minimum tax 2 3 items net 4 1 2 effective tax rate 24 26 22 internal revenue service examined companys federal consolidated income tax returns fiscal 1992 following routine audit company notified internal revenue service proposes adjust companys tax returns years 1990 1992 increasing tax liability years 2837473 2151574 1762849 respectively major claims relate alleged forgiveness debt arising acquisition property subsidiary fdic alleged excess accumulation earnings transaction concerning forgiveness debt conducted accordance guidelines established companys independent auditors advised compliance irs regulations accordingly company believes claim without merit similarly companys counsel believes claims concerning excess accumulation earnings without foundation erroneously based upon lack understanding nature companys business company filed protest irs vigorously contests ill founded claims believes prevail two companys subsidiaries elected taxed foreign sales corporations fsc one companys domestic subsidiaries net operating loss carryforward approximately 2200000 expiring 2009 analogic corporation subsidiaries notes consolidated financial statements continued 12 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 1997 1996 13 transactions major customers industries one export customer accounted approximately 41000000 17 total product service engineering licensing revenue 1997 another export customer accounted approximately 30000000 14 27700000 14 total product service engineering licensing revenue 1996 1995 respectively total product service engineering licensing revenue one domestic customer accounted approximately 20000000 8 1997 another domestic customer accounted approximately 18800000 9 20100000 10 1996 1995 respectively companys ten largest customers accounted approximately 57 product service engineering licensing revenue fiscal 1997 medical technology products consisting primarily electronic subsystems medical imaging equipment accounted approximately 73 product service engineering licensing revenue fiscal 1997 analogic corporation subsidiaries notes consolidated financial statements continued 14 supplemental disclosure cash flow information fiscal years 1997 1996 1995 interest paid amounted 745000 970000 1371000 respectively income taxes paid fiscal years 1997 1996 1995 amounted 8103000 3040000 2802000 respectively 15 fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair value marketable securities estimated based quoted market prices securities 16 foreign operations financial information relating companys foreign domestic operations fiscal years 1997 1996 1995 follows analogic corporation subsidiaries schedule ii valuation qualifying accounts index exhibits title 21 list subsidiaries 23 consent coopers lybrand llp 27 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k page number 1 financial statements report independent accountants 32 consolidated balance sheets july 31 1998 1997 33 consolidated statements income years ended july 31 1998 1997 1996 34 consolidated statements stockholders equity years ended july 31 1998 1997 1996 35 consolidated statements cash flows years ended july 31 1998 1997 1996 36 notes consolidated financial statements 37 53 2 financial statement schedule ii valuation qualifying accounts 54 schedules omitted required applicable required information furnished consolidated statements notes thereto 3 exhibits see index exhibits 55 59 b report form 8k reports form 8k filed registrant quarter ended july 31 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation date october 5 1998 bernard gordon bernard gordon chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date october 5 1998 bernard gordon bernard gordon chairman board chief executive officer director date october 5 1998 bruce r rusch bruce r rusch president chief operating officer director date october 5 1998 john tarello john tarello senior vice president treasurer director date october 5 1998 ross brown ross brown vice president director date october 5 1998 bruce w steinhauer bruce w steinhauer director date october 5 1998 edward f voboril edward f voboril director date october 5 1998 gerald l wilson gerald l wilson director report independent accountants board directors analogic corporation peabody massachusetts opinion consolidated financial statements listed index appearing item 14a1 present fairly material respects financial position analogic corporation subsidiaries july 31 1998 1997 results operations cash flows three years period ended july 31 1998 conformity generally accepted accounting principles addition opinion financial statement schedule listed index appearing item 14a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp boston massachusetts september 2 1998 analogic corporation subsidiaries consolidated balance sheets 000 omitted accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income 000 omitted except share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1998 1997 1996 000 omitted except share data common stock capital excess retained shares amount par value earnings balance july 31 1995 13691925 685 20517 191938 shares issued pursuant stock grants net cancellations 20500 1 275 9500 shares issued pursuant stock options 55189 2 521 14100 purchases treasury stock amortization unearned compensation amounts related employee stock purchase plan 31 income tax reduction relating stock options 246 translation adjustments year 1307 net income year 13065 dividends paid 018 per share 2242 unrealized holding gains losses period 88 177 balance july 31 1996 13767614 688 21413 shares issued pursuant stock grants net cancellations 10500 1 231 shares issued pursuant stock options 57250 3 904 amounts related employee stock purchase plan 84 income tax reduction relating stock options 284 tanslation adjustments year net income year 20090 dividends paid 020 per share 2508 balance july 31 1997 13835364 692 22916 220343 shares issued pursuant stock grants net cancellations 3000 70 shares issued pursuant stock options 13763 1 176 amortization unearned compensation amounts related employee stock purchase plan 81 income tax reduction relating stock options 255 net income year 23888 dividends paid 023 per share 2902 209 balance july 31 1998 13835127 693 23567 241329 accompanying notes integral part financial statements balance july 31 1995 treasury stock unrealized cumulative holdings translation gains losses adjustments shares amount balance 2004 2846 1269280 14470 shares issued pursuant stock grants 9500 1 net cancellations shares issued pursuant stock options 14100 147 purchases treasury stock 17500 345 amortization unearned compensation amounts related employee stock purchase plan 9107 102 17 balance july 31 1996 1273073 2143 shares issued pursuant stock grants net cancellations 6500 shares issued pursuant stock options 39249 369 amounts related employee stock purchase plan 5671 60 balance july 31 1997 1234653 14121 shares issued pursuant stock grants net cancellations 10000 shares issued pursuant stock options 33299 500 amounts related employee stock purchase plan 6007 106 balance july 31 1998 1205347 13515 total unearned stockholders compensation equity balance july 31 1995 2627 200893 shares issued pursuant stock grants 275 shares issued pursuant stock options 670 purchases treasury stock 345 amortization unearned compensation 759 amounts related employee stock purchase plan 133 income tax reduction relating stock options 246 translation adjustments year 1307 net income year 13065 dividends paid 018 per share 2242 unrealized hold gains losses period 88 160 balance july 31 1996 2143 211800 shares issued pursuant stock grants net cancellactions 231 shares issued pursuant stock options 1276 amortization unearned compensation 664 amounts related employee stock purchase plans 145 income tax reduction relating stock options 284 translation adjustments year 3156 net income year 20090 dividends paid 020 per share 2508 unrealized holding gains losses period 379 balance july 31 1997 1710 228216 shares issued pursuant stock grants net cancellations 70 shares issued pursuant stock options 677 amortization unearned compensation 538 amounts related employee stock purchase plan 187 income tax reducation relating stock options 255 translation adjustments year 244 net income year 23888 dividends paid 023 per share 2092 unrealized hold gains losses period 57 209 balance july 31 1998 1102 251255 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows 000 omitted accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies business operations companys operations consist design manufacture sale hightechnology highprecision analogdigital signal processing instruments systems customers medical industrial industry product service engineering licensing export revenue primarily customers europe asia amounted approximately 92292000 33 81395000 34 77600000 36 total product service engineering licensing revenue years ended july 31 1998 1997 1996 respectively significant accounting policies follows principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method significant intercompany accounts transactions eliminated b inventories stated lower cost market cost determined firstin firstout basis c property plant equipment financial reporting purposes depreciation amortization provided utilizing straightline method estimated useful lives assets lease terms whichever shorter computed principally utilizing accelerated methods income tax purposes property capital leases amortized lease terms annual provisions depreciation amortization computed accordance following ranges estimated useful lives buildings 35 years property capital lease 14 23 years manufacturing equipment 4 7 years furniture fixtures 4 8 years leasehold capital lease improvements 3 10 years motor vehicles 3 years analogic corporation subsidiaries notes consolidated financial statements continued 1summary business operations significant accounting policies continued revenue recognition revenues recognized product shipped service performed certain transactions request customer upon completion manufacturing process acceptance title customer company stores inventory pending shipping instructions recognizes revenue accounts receivables related sales approximately 668000 4684000 july 31 1998 1997 respectively e capitalized software costs company capitalizes certain computer software costs technological feasability established amortized utilizing straightline method economic lives related products exceed three years accumulated amortization approximated 15127000 12721000 july 31 1998 1997 respectively f warranty costs company provides estimated warranty costs products shipped g income taxes company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended permanently reinvested operations h earnings per share basic pershare earnings based upon weighted average common shares outstanding year diluted pershare earnings based upon weighted average common shares potential new shares stock options number shares utilized basic pershare computations 12614303 12553628 12454728 fiscal 1998 1997 1996 number shares utilized diluted pershare computations 12793027 12701800 12562175 fiscal 1998 1997 1996 respectively cash equivalents company considers shortterm deposits original maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 28684000 23956000 july 31 1998 1997 respectively analogic corporation subsidiaries notes consolidated financial statements continued 1summary business operations significant accounting policies continued j concentration credit risk company grants credit domestic foreign original equipment manufacturers distributors end users company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution k marketable securities companys marketable securities categorized available forsale securities defined statement financial accounting standards 115 accounting certain investments debt equity securities unrealized holding gains losses reflected net amount separate component stockholders equity realized purpose computing realized gains losses cost identified specific identification basis l accounting standards statements financial accounting standards sfas 130 reporting comprehensive income statement financial accounting standards sfas 131 disclosures segments enterprise related information adopted fiscal 1999 sfas 130 establishes new standards reporting displaying comprehensive income components sfas 131 requires disclosure certain information regarding operating segments products services geographic areas operation major customers adoption statements expected impact companys consolidated financial position results operations business practices disclosure requirements reviewed june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities establishes new model accounting derivative hedging activities supersedes amends number existing standards provisions sfas 133 effective fiscal quarters years beginning june 15 1999 company believes statement impact financial position results operations cash flows company hold derivative instruments engage hedging activities present time use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts expenses reporting periods actual results could differ estimates analogic corporation subsidiaries notes consolidated financial statements continued 2 business combinations companys subsidiary camtronics entered agreement three founding stockholders founders also active employees camtronics agreement requires camtronics purchase 5 shares common stock originally issued founders option fiscal year beginning 1992 pursuant predetermined formula founder exercise right cause camtronics purchase outstanding shares rights shall lapse shall cumulative may exercised thereafter companys ownership camtronics increased approximately 65 fiscal 1992 approximately 77 fiscal 1998 result founders exercising rights sell 5 shares period addition may 1998 company purchased one founders camtronics entire equity interest camtronics 1600000 carrying value companys total investment camtronics exceeded portion underlying equity net assets approximately 1453000 excess amortized 10 year period accumulated amortization amounted 1453000 1282000 july 31 1998 1997 respectively january 1 1993 company acquired interest approximately 57 newlyformed company b k ultrasound systems b k 3607000 cash subordinated interest free shortterm loan 3500000 converted equity july 31 1993 companys ownership interest adjusted upward 59 fiscal 1994 accordance shareholders agreement b k danish corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques acquisition accounted purchase b ks operations included companys consolidated financial statements since january 1 1993 companys equity net assets b k exceeded purchase price approximately 2662000 excess acquired net assets cost amortized 5 year period beginning january 1993 accumulated amortization amounted 2662000 2441000 july 31 1998 and1997 respectively july 1 1996 company acquired remaining 41 interest b k 3416000 cash companys equity net assets b k exceeded purchase price portion investment approximately 565000 excess amortized five year period beginning july 1 1996 accumulated amortization amounted 236000 123000 july 31 1998 1997 respectively analogic corporation subsidiaries notes consolidated financial statements continued 3 marketable securities marketable securities categorized availableforsale securities summarized follows contractual maturities range one eight years majority five years less 4 inventories components inventory follows analogic corporation subsidiaries notes consolidated financial statements continued 5 investments advances affiliated companies company owns 50 analogic scientific inc scientific joint venture corporation kejian corporation peoples republic china companys original investment 1500000 accounted using equity method accounting companys share scientifics loss amounted 575000 fiscal 1998 425000 fiscal year 1997 company report income loss fiscal year 1996 related investment fiscal 1996 company invested additional 500000 scientific carrying value investment 5200000 july 31 1998 5775000 july 31 1997 transactions scientific fiscal years 1998 1997 1996 consisted revenues approximately 1116000 526000 735000 respectively july 31 1998 1997 accounts receivable affiliate 977000 668000 respectively february 13 1996 company acquired 1715384 shares park meditech inc common stock 11 convertible unsecured subordinated debenture principal amount 750000 consideration cancellation convertible subordinated promissory note amount 1500000 200000 common share purchase warrants certain restrictions convertible unsecured subordinated debenture could converted common shares price 120 canadian per common share company loaned park meditech inc 221000 december 1996 additional 294000 february 1997 structured promissory notes interest 11 secured assets park meditech inc debenture promissory notes written fiscal 1998 july 3 1997 park meditech incs subsidary park medical systems filed assignment bankruptcy trustee appointed sell assets park medical systems includes patents imaging technology view filing company recognized impairment investment park meditech inc wrote remaining carrying value 1742000 fiscal 1997 february 22 1996 company invested 2000000 33 interest privately held company designs manufacture medical imaging equipment effective may 1 1997 company increased interest 33 50 investment 340000 june 1997 company investor invested additional 1000000 fiscal year 1998 company investor invested 3340000 carrying value investment 422000 july 31 1998 570000 july 31 1997 transactions privately held company fiscal years 1998 1997 consisted revenues approximately 8678000 5406000 respectively july 31 1998 1997 accounts receivable company 1582000 1243000 respectively companys 750000 investment limited partnership accounted using cost method company limited partner accordingly influence partnership fiscal 1998 company received distribution stock publicly traded company limited partnership company sold stock gain 997000 analogic corporation subsidiaries notes consolidated financial statements continued 6 mortgage notes payable mortgage notes payable consists following principal maturities next five fiscal years notes follows 1999 2950000 2000 356000 2001 363000 2002 369000 2003 376000 7lease commitments related party transactions company leases three operating facilities partnership chairman former vice chairman partners leases accounted capital leases certain leases contain contingent rentals based upon cost living adjustments contingent rentals significant 1998 1997 1996 property capital leases included property plant equipment follows analogic corporation subsidiaries notes consolidated financial statements continued 7lease commitments related party transactions continued certain companys subsidiaries lease manufacturing office space noncancelable operating leases expire 1999 contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 513000 531000 534000 net sublease income 1144000 1188000 1186000 fiscal 1998 1997 1996 respectively following schedule year future minimum lease payments july 31 1998 future minimum lease payments capital leases reduced sublease rental income approximately 1144000 included accounts notes receivable 200000 convertible debentures ultraanalog inc manufacturer analogtodigital digitaltoanalog converters bernard gordon companys chairman owns 72 outstanding common stock ultraanalog inc company solely option right acquire cost 8 stock option stock bonus plans july 31 1998 company three key employee stock option plans two lapsed granting options addition company one key employee stock bonus plan two nonemployee director stock option plans one employee stock purchase plan analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued options granted five stock option plans become exercisable installments commencing earlier one year date grant later five years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value companys key employee stock bonus plan common stock may granted key employees terms conditions determined board directors generally participants stock bonus plan may dispose otherwise transfer stock granted three years date grant upon issuance stock plan unearned compensation equivalent market value date grant charged stockholders equity subsequently amortized periods restrictions lapse six years amortization 538000 663000 759000 recorded fiscal 1998 1997 1996 respectively employee stock purchase plan participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions six month period number options granted employee plan combined options issued plans limited maximum outstanding fair market value 25000 calendar year number shares issued pursuant plan totaled 6007 1998 5671 1997 9107 1996 july 31 1998 844068 shares reserved grant stock option bonus purchase plans analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued following table sets forth stock option transactions years ended july 31 1998 1997 1996 following table summarizes information stock options outstanding july 31 1998 analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued statement financial accounting standards sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopted fair value method accounting employee stockbased compensation instead comply pro forma disclosure requirements fair value method companys stock options estimated using black scholes option pricing model developed use estimating fair value traded options vesting restrictions fully transferable model requires input highly subjective assumptions including expected stock price volatility companys stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing model necessarily provide reliable single measure fair value stock options fair value companys stock options estimated using following weightedaverage assumptions weightedaverage estimated fair value stock options granted fiscal 1998 fiscal 1997 1971 1530 per share respectively pro forma purposes estimated fair value companys stock options amortized options vesting period companys pro forma information follows sfas 123 applicable options granted subsequent july 31 1995 pro forma effect fully reflected approximately 2000 analogic corporation subsidiaries notes consolidated financial statements continued 9 profit sharing retirement plan company qualified profit sharing retirement plan benefit eligible employees plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code company contribution amounted 1000000 1998 900000 1997 700000 1996 company 401k plans employees contribute 15 annual base income exceed maximum amount allowable internal revenue code one calendar year 10interest total interest incurred amounted 659000 779000 1002000 1998 1997 1996 respectively 151000 1998 172000 1997 170000 1996 capitalized 11income taxes components provision income taxes follows tax effects principal temporary differences resulting deferred tax expense benefit follows analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued income loss income taxes domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued included prepaid expenses current assets 3402000 4577000 current deferred tax assets july 31 1998 1997 respectively reconciliation income taxes united states statutory rate effective tax rate follows previously reported routine audit company notified internal revenue service irs proposed adjust companys tax returns years 1990 1992 increasing tax liability years 2837473 2151574 1762849 respectively major claims relate alleged forgiveness debt arising acquisition property subsidiary fdic alleged excess accumulation earnings march 1998 company received notice irs upheld companys position proposed adjustments canceled two companys subsidiaries elected taxed foreign sales corporations fsc analogic corporation subsidiaries notes consolidated financial statements continued 12 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 1998 1997 13 transactions major customers industries one export customer accounted approximately 45000000 41000000 16 17 total product service engineering licensing revenue 1998 1997 respectively another export customer accounted approximately 30000000 14 total product service engineering licensing revenue 1996 total product service engineering licensing revenue one domestic customer accounted approximately 21000000 8 20000000 8 1998 1997 respectively another domestic customer accounted approximately 18800000 9 1996 companys ten largest customers accounted approximately 56 product service engineering licensing revenue fiscal 1998 medical technology products consisting primarily electronic subsystems medical imaging equipmentaccounted approximately 74 product service engineering licensing revenue fiscal 1998 analogic corporation subsidiaries notes consolidated financial statements continued 14 supplemental disclosure cash flow information fiscal years 1998 1997 1996 interest paid amounted 586000 745000 970000 respectively income taxes paid fiscal years 1998 1997 1996 amounted 13114000 8103000 3040000 respectively 15 fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair value marketable securities estimated based quoted market prices securities 16 foreign operations financial information relating companys foreign domestic operations fiscal years 1998 1997 1996 follows 17 year 2000 year 2000 issue result computer programs written using two digits rather four digits define applicable year computer programs timesensitive software may recognize date using 00 year 1900 rather year 2000 companys internal systems correctly recognize date information year changes 2000 could adverse impact companys operations analogic corporation subsidiaries notes consolidated financial statements continued 17 year 2000 continued company undertaken considerable effort assess actions resources required make systems year 2000 compliant currently company utilizing internal external resources upgrade computer hardware software systems company also identifying implementing changes information systems replaced order make year 2000 compliant company also assessing possible effects year 2000 issues significant vendors customers could turn affect companys operations company yet able determine however whether suppliers service providers need make software modifications replacements whether failure make software corrections adverse effect companys operations financial condition company currently estimates year 2000 costs next two fiscal years range 40 million 60 million estimated costs based managements best projections yet guarantee forecasts achieved actual results could differ materially anticipated cost project funded operating cash flows analogic corporation subsidiaries schedule ii valuation qualifying accounts index exhibits title incorporated reference 31 restated articles organization exhibit 31 companys amended march 15 1988 form 10k fiscal ended july 31 1988 32 bylaws amended january 27 exhibit 32 companys 1988 annual report form 10k fiscal year ended july 31 1988 101 lease dated march 5 1976 exhibit 6e companys bernard gordon analogic registration statement form s14 file 261959 102 amendment lease dated exhibit companys report may 1 1977 bernard form 8k dated may 1 1977 gordon analogic 103 lease dated january 16 1976 exhibit companys annual bernard gordon data report form 10k precision corporation fiscal year ended related assignment lease july 31 1977 dated october 31 1979 data precision corporation analogic 104 lease dated october 31 1977 exhibit 6d companys audubon realty ltd registation statement form data precision corporation s14 file 261959 related letter agreement dated january 18 1978 b amendment lease dated exhibit companys annual june 19 1979 audubon report form 10k fiscal year ended realty ltd analogic july 31 1982 c third amendment lease dated exhibit companys annual report august 2 1982 form 10k fiscal year ended july 31 1982 fourth amendment lease dated exhibit 191 quarterly report form december 31 1982 10q three months ended january 31 1983 105 alease dated march 16 1981 exhibit ii companys quarterly audubon realty ltd analogic report form 10q three months ended april 30 1981 bamendment lease dated exhibit companys annual report october 31 1984 form 10k fiscal year ended july 31 1985 106 land disposition agreement exhibit companys annual report city peabody community form 10k fiscal year ended development authority analogic july 31 1981 corporation 107 loan agreement among city exhibit companys annual report peabody community develop form 10k fiscal year ended ment authority analogic july 31 1981 corporation 108 amendments urban development exhibit 1013 companys annual action grant agreement dated report form 10k fiscal year august 28 1986 september 30 ended july 31 1986 109 promissory note analogic payable exhibit companys annual report peabody community development form 10k fiscal year ended authority july 31 1981 1010a stockholder agreement july 9 exhibits companys report 1986 among siemens ag form 8k dated july 31 1986 scc analogic including following exhibits thereto b development agreement dated july 28 1986 siemens ag medical electronics laboratories inc c manufacturing agreement dated july 28 1986 analogic medical electronics laboratories inc license agreement dated july 28 1986 analogic medical electronics laboratories inc e license agreement dated exhibits companys report july 28 1986 form 8k dated july 31 1986 siemens ag medical electronics laboratories inc f license agreement ii dated july 28 1986 siemens ag medical electronics laboratories inc g sublease dated july 28 1986 analogic sublessor medical electronics laboratories inc sublessee 1011 stock purchase agreement exhibit 1011 companys annual march 11 1988 among report form 10k fiscal year siemens ag scc sms mel ended july 31 1988 analogic 1012a anamass partnership agreement exhibit 1012a companys annual dated july 5 1988 report form 10k fiscal year ended anadventure july 31 1988 corporation massapea inc b ground lease agreement exhibit 1012b companys annual dated july 5 1988 report form 10k fiscal year ended analogic anamass july 31 1988 partnership c equity infusion agreement exhibit 1012c quarterly report form 10q three months ended january 31 1991 resolution agreement exhibit 1012d companys annual dated july 31 1991 report form 10k fiscal year ended ratified august 8 1991 july 31 1991 1013 key employee stock option plan exhibit 107 companys annual report dated april 21 1978 amended form 10k fiscal year ended restated december 4 1981 july 31 1987 amended october 9 1984 january 28 1987 1014 key employee stock option plan exhibit 108 companys annual report dated august 8 1980 amended form 10k fiscal year ended restated december 4 1981 july 31 1987 amended october 9 1984 january 28 1987 1015a analogic corporation profit exhibit 6c companys registration sharing plan dated july 26 1977 statement form s14 file 261959 b amendments 234 5 said exhibit 1010b companys annual profit sharing plan report form 10k fiscal year ended july 31 1980 c restated analogic corporation exhibit 109c companys annual profit sharing plan dated report form 10k year ended july 31 1985 amendment july 31 1985 1 thereto dated august 20 1016 key employee stock bonus plan exhibit definitive proxy statement dated march 14 1983 companys special meeting amended january 27 1988 lieu annual meeting stockholders held january 25 1984 file 3327372 1017 key employee incentive stock exhibit 1015 companys annual option plan dated march 14 1983 report form 10k fiscal year amended restated ended july 31 1987 file 2 95091 january 28 1987 1018 1985 nonqualified stock option exhibit 1019 companys annual plan dated may 13 1985 report form 10k fiscal year ended july 31 1985 file 33 6835 1019a employee qualified stock purchase exhibit g companys definitive purchase plan dated june 10 1986 proxy statement dated december 9 companys special meeting lieu annual meeting stockholders held january 22 1986 file 335913 b said employee stock purchase exhibit companys definitive plan amended october 9 proxy statement dated december 1 1997 companys annual meeting shareholders held january 23 1998 1020 proposed 1988 nonqualified exhibit 1020 companys annual stock option plan non report form 10k fiscal year employee directors ended july 31 1988 file 33 27372 1021 form indemnification exhibit 1019 companys annual contract report form 10k fiscal year ended july 31 1987 1022 agreement plan merger exhibit 1022 companys annual sky computers inc report form 10k fiscal year analogic corporation ended july 31 1992 1023a agreement bk medical exhibits companys report holding analogic form 8k dated december 18 1992 corporation dated october 20 b addendum dated december 11 1992 agreement bk medical holding analogic corporation dated october 20 1992 c shareholders agreement bk medical holding analogic corporation dated december 11 1992 1024 key employee incentive stock exhibit companys definitive option plan dated june 11 1993 proxy statement dated december 1 companys annual meeting stockholders held january 21 file 3353381 1025 nonqualified stock option plan exhibit companys definitive nonemployee directors dated proxy statement dated december 2 january 31 1997 companys annual meeting stockholders held january 24 1997 exhibits title 21 list subsidiaries 23 consent pricewaterhousecoopers llp 27 financial data schedule exhibit 21 jurisdiction name incorporation analogic limited massachusetts analogic foreign sales corporation virgin islands analogic securities corporation massachusetts anadventure ii corporation massachusetts anadventure delaware corporation delaware anadventure corporation massachusetts b k ultrasound systems denmark b k medical systems inc massachusetts camtronics foreign sales corporation virgin islands camtronics ltd wisconsin international security systems corporation massachusetts sky computers incorporated massachusetts sky limited england exhibit 23 consent independent accountants consent incorporation reference registration statement analogic corporation form s8 file nos 295091 335913 336835 3353381 3327372 33340715 report dated september 2 1998 audits consolidated financial statements financial statement schedule analogic corporation july 31 1998 1997 years ended july 31 1998 1997 1996 report included annual report form 10k pricewaterhousecoopers llp october 1 1998item 14 exhibits financial statement schedules reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation date october 19 2000 bernard gordon bernard gordon chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date october 19 2000 bernard gordon bernard gordon chairman board chief executive officer director date october 19 2000 thomas j miller jr thomas j miller jr president chief operating officer director date october 19 2000 john j millerick john j millerick senior vice president chief financial officer treasurer date october 19 2000 john tarello john tarello director date october 19 2000 ross brown ross brown director date october 19 2000 bruce w steinhauer bruce w steinhauer director date october 19 2000 edward f voboril edward f voboril director date october 19 2000 gerald l wilson gerald l wilson director report independent accountants board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 14a1 page 22 present fairly material respects financial position analogic corporation subsidiaries july 31 2000 1999 results operations cash flows three years period ended july 31 2000 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 14a2 page 22 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp pricewaterhousecoopers llp boston massachusetts september 21 2000 analogic corporation subsidiaries consolidated balance sheets accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders’ equity years ended july 31 2000 1999 1998 additional columns continued table first columns repeated accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statement cash flows accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies business operations company’s operations consist design manufacture sale high technology high performance highprecision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products medical industrial use company subject risks common companies medical instrumentation technology industry including limited development competitors new technological innovations dependence key personnel loss significant oem customer protection proprietary technology compliance regulations domestic foreign regulatory authorities agencies product service engineering licensing export revenue primarily customers europe asia amounted approximately 93911000 34 95504000 37 92292000 33 total product service engineering licensing revenue years ended july 31 2000 1999 1998 respectively significant accounting policies follows principles consolidation consolidated financial statements include accounts company wholly owned majorityowned subsidiaries investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method significant intercompany accounts transactions eliminated b inventories stated lower cost market costs determined using standard cost approximates firstin firstout fifo method c property plant equipment fixed assets recorded cost provisions depreciation based estimated useful lives using straightline method leasehold improvements depreciated shorter remainder lease’s term life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected income annual provisions depreciation amortization computed accordance following ranges estimated useful lives revenue recognition revenue product sales recognized shipment provided significant obligations remain outstanding resulting receivable deemed collectible management service revenues recognized time services rendered company significant obligations analogic corporation subsidiaries notes consolidated financial statements continued customer certain transactions request customer revenue recognized bill hold basis completion manufacture bill hold transactions meet specified revenue recognition criteria include normal billing credit payment terms firm commitment transfer customers risks rewards ownership total revenue related bill hold transactions approximately 1806000 2049000 668000 years ended july 31 20001999 1998 respectively e capitalized software costs company capitalizes certain computer software costs technological feasibility established amortized utilizing straightline method economic lives related products exceed three years accumulated amortization approximated 18883000 17104000 july 31 2000 1999 respectively f warranty costs company provides estimated warranty costs products shipped g research product development costs research product development costs expensed incurred h income taxes company accounts income taxes liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized earnings per share basic pershare earnings based upon weighted average common shares outstanding year diluted pershare earnings based upon weighted average common shares potential new shares stock options number shares utilized basic pershare computations 12817129 12683326 12614303 fiscal 2000 1999 1998 number shares utilized diluted pershare computations 12883063 12790836 12793027 fiscal 2000 1999 1998 respectively j cash equivalents company considers shortterm deposits original maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 26372000 29258000 july 31 2000 1999 respectively k concentration credit risk company grants credit domestic foreign original equipment manufacturers distributors end users company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution analogic corporation subsidiaries notes consolidated financial statements continued l marketable securities company’s marketable securities categorized availableforsale securities defined statement financial accounting standards 115 “accounting certain investments debt equity securities” unrealized holding gains losses reflected net amount separate component stockholders’ equity realized purpose computing realized gains losses cost identified specific identification basis accounting standards june 1998 financial accounting standards board “fasb” issued statement financial accounting standards sfas 133 “accounting derivative instruments hedging activities” standard established accounting reporting standards requiring recognition derivative instruments either assets liabilities statement financial position measure instruments fair value june 1999 fasb issued sfas 137 defers effective date sfas 133 fiscal years beginning june 15 2000 june 2000 fasb issued sfas 138 amends certain derivative instruments certain hedging activities sfas 133 company currently hold derivative instruments currently engage hedging activities expect adoption sfas 133 sfas 138 material impact financial position operating results december 1999 securities exchange commission issued staff accounting bulletin 101 “sab 101” “revenue recognition financial statements” amended sab 101a sab 101b “sab101” effective later quarter ending july 31 2001 sab 101 clarifies securities exchange commission’s views regarding recognition revenue company adopt sab 101 fourth quarter 2001 company currently evaluating impact sab 101 company’s financial position results operations march 2000 financial accounting standards board issued interpretation 44 “accounting certain transactions involving stock compensation interpretation accounting principles board apb opinion 25” fin 44 fin 44 clarifies application apb opinion 25 including definition employee purposes applying apb opinion 25 criteria determining whether plan qualifies noncompensatory plan accounting consequence various modifications terms previously fixed stock options awards accounting exchange stock compensation awards business combination fin 44 effective july 1 2000 certain conclusions fin 44 cover specific events occurred either december 15 1998 january 12 2000 company expect application fin 44 material impact result operations financial position n use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts expenses reporting periods actual results could differ estimates comprehensive income statement financial accounting standards 130 “sfas 130” “reporting comprehensive income” establishes new rules reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements shareholders’ equity comprehensive income consists net income unrealized gains losses investments foreign currency translation adjustments analogic corporation subsidiaries notes consolidated financial statements continued p stockbased compensation statement financial accounting standards 123 “sfas 123” “accounting stockbased compensation” encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopted fair value method accounting employee stockbased compensation instead complies pro forma disclosure requirements q fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair values marketable securities estimated based quoted market price securities r impairment longlived assets company evaluates recoverability longlived assets primarily fixed assets accordance statement financial accounting standards 121 sfas 121 “accounting impairment longlived assets disposed of” sfas 121 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairments required recognized years ended july 31 2000 1999 1998 basis presentation certain financial statement items reclassified conform current year’s format 2 business combinations company’s subsidiary camtronics entered agreement three founding stockholders “founders” two remain active employees camtronics agreement requires camtronics purchase 5 shares camtronics common stock originally issued founders option fiscal year beginning 1992 pursuant predetermined formula founder exercise right cause camtronics purchase outstanding shares rights shall lapse shall cumulative may exercised hereafter july 31 2000 founders’ remaining shares valued predetermined formula price total value 28 million company’s ownership camtronics increased approximately 65 fiscal 1992 approximately 81 fiscal 2000 result one founders selling entire equity interest camtronics company 1600000 founders exercising rights sell 5 shares period carrying value company’s total investment camtronics exceeded portion underlying equity net assets approximately 1453000 fully amortized january 1 1993 company acquired interest approximately 57 newly formed company bk medical systems “bk” 3607000 cash subordinated interest free shortterm loan 3500000 converted equity july 31 1993 company’s ownership interest adjusted upward 59 fiscal 1994 accordance shareholders’ agreement bk danish corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques acquisition accounted purchase bk’s operations included company’s consolidated financial statements since january 1 1993 company’s equity net assets bk exceeded purchase price approximately 2662000 fully amortized july 31 1998 july 1 1996 company acquired remaining 41 interest bk analogic corporation subsidiaries notes consolidated financial statements continued 3416000 cash company’s equity net assets bk exceeded purchase price portion investment approximately 565000 excess amortized fiveyear period beginning july 1 1996 accumulated amortization amounted 462000 349000 july 31 2000 1999 respectively june 28 1999 company acquired fixed assets noranda advanced materials’ medical detectors pure metal businesses approximately 55 million company renamed anrad located st laurent quebec anrad’s objective develop manufacture seleniumbased flat panel xray detectors medical industrial markets acquisition accounted purchase anrad operations included company’s consolidated financial statements since june 28 1999 fourth quarter fiscal 2000 anrad sold assets pure metal business cost approximately 700000 cash former employees gain loss recognized company connection sale 3 marketable securities marketable securities categorized availableforsale securities summarized follows contractual maturities range one seven years majority five years less analogic corporation subsidiaries notes consolidated financial statements continued 4 balance sheet information additional information certain balance sheet accounts follows years ended 5 investments advances affiliated companies company owns 50 analogic scientific inc “scientific” joint venture corporation kejian corporation people’s republic china company’s original investment 1500000 accounted using equity method accounting company’s share scientific’s profit amounted 925000 fiscal year 2000 company record income loss associated investment fiscal 1999 carrying value investment 6125000 july 31 2000 5200000 july 31 1999 transactions scientific fiscal years 2000 1999 1998 consisted revenues approximately 5575000 2610000 1116000 respectively july 31 2000 1999 net accounts receivable affiliate 3063000 1884000 respectively fiscal 2000 company made additional investment 3068000 3950000 fiscal 1999 privately held company funded research development design manufacture medical imaging equipment since fiscal 1996 company made cumulative investment 13698000 return 50 equity position privately held company fiscal 2000 1999 transactions privately held company consisted revenues 3559000 10177000 respectively analogic corporation subsidiaries notes consolidated financial statements continued upon completion research development phase private company sold intellectual property new company form license distributed assets company original investor ceased operations company conjunction original investor retains 50 interest new company receive license related royalties based upon future sales medical imaging equipment fiscal 2000 company received final distribution 1771802 shares restricted securities publicly traded company limited partnership restriction 620865 shares withdrawn january 1 2001 balance 1150937 shares march 29 2001 july 31 2000 company recognized loss approximately 110000 value shares fiscal 1998 company received distribution stock limited partnership sold gain 997000 company’s investment limited partnership accounted using cost method company limited partner accordingly influence partnership carrying value investment july 31 2000 664000 6 mortgage notes payable mortgage notes payable consists following principal maturities next five fiscal years notes follows 2001 363000 2002 369000 2003 376000 2004 383000 2005 390000 total interest incurred amounted 472000 518000 659000 2000 1999 1998 respectively 171000 2000 154000 1999 151000 1998 capitalized 7 lease commitments related nonrelated third parties company leases three operating facilities partnership chairman former vice chairman partners leases accounted capital leases certain leases contain contingent rentals based upon costofliving adjustments contingent rentals significant 2000 1999 1998 property capital leases included property plant equipment follows analogic corporation subsidiaries notes consolidated financial statements continued certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 989000 764000 513000 net sublease income 1143000 1108000 1144000 fiscal 2000 1999 1998 respectively following schedule year future minimum lease payments july 31 2000 future minimum lease payments capital leases reduced sublease rental income approximately 1143000 8 stock option stock bonus plans july 31 2000 company four key employee stock option plans two lapsed granting options addition company one key employee stock bonus plan two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted four key employee stock option plans become exercisable installments commencing earlier three years date grant later seven years date grant unexercised options expire eight years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value options granted two nonemployee director stock option plans become exercisable installments commencing one year date grant remain exercisable ten years date grant options issued plans non qualified options issued prices 100 fair market value date grant company’s key employee stock bonus plan common stock may granted key employees terms conditions determined board directors generally participants stock bonus plan may dispose otherwise transfer stock granted three years date grant upon issuance stock plan unearned compensation equivalent market value date grant charged stockholders’ equity subsequently amortized periods restrictions lapse six years shares granted company’s key employee stock bonus plan 87000 weighted average fair market value 2426000 fiscal 2000 22000 shares weighted average fair market value 736000 fiscal 1999 3000 shares weighted average fair market value 109000 analogic corporation subsidiaries notes consolidated financial statements continued fiscal 1998 amortization unearned compensation 644000 527000 538000 recorded fiscal 2000 1999 1998 respectively employee stock purchase plan participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding fair market value 25000 calendar year number shares issued pursuant plan totaled 11940 2000 12389 1999 6007 1998 july 31 2000 1033384 shares reserved grant stock option bonus purchase plans following table sets forth stock option transactions years ended july 31 2000 1999 1998 following table summarizes information stock options outstanding july 31 2000 fair value method company’s stock options estimated using blackscholes optionpricing model developed use estimating fair value traded options vesting restrictions fully transferable model requires input highly subjective assumptions including expected stock price volatility company’s stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate management’s opinion existing model necessarily provide analogic corporation subsidiaries notes consolidated financial statements continued reliable single measure fair value stock options fair value company’s stock options estimated using following weightedaverage assumptions weightedaverage estimated fair value stock options granted fiscal 2000 1999 1998 1907 1913 1971 per share respectively pro forma purposes estimated fair value company’s stock options amortized options’ vesting period company’s pro forma information follows 9 profit sharing retirement plan company qualified profit sharing retirement plan benefit eligible employees plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing expense amounted 1000000 fiscal years 2000 1999 1998 company 401k plans employees contribute 15 annual base income exceed maximum amount allowable internal revenue code one calendar year analogic corporation subsidiaries notes consolidated financial statements continued 10 income taxes components provision income taxes follows tax effects principal temporary differences resulting deferred tax expense benefit follows income loss income taxes domestic foreign operations follows analogic corporation subsidiaries notes consolidated financial statements continued components deferred tax assets liabilities follows reconciliation income taxes united states statutory rate effective tax rate follows two company’s subsidiaries elected taxed foreign sales corporation fsc analogic corporation subsidiaries notes consolidated financial statements continued 11 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 2000 1999 12 transactions major customers industries one export customer accounted approximately 44000000 47000000 16 18 total product service engineering licensing revenue fiscal 2000 1999 respectively total product service engineering licensing revenue one domestic customer accounted approximately 28000000 10 20000000 8 fiscal 2000 1999 respectively company’s ten largest customers accounted approximately 60 product service engineering licensing revenue fiscal 2000 medical technology products consisting primarily electronic systems subsystems medical imaging equipment accounted approximately 73 product service engineering licensing revenue fiscal 2000 analogic corporation subsidiaries notes consolidated financial statements continued 13 supplemental disclosure cash flow information changes operating assets liabilities follows years ended fiscal years 2000 1999 1998 interest paid amounted 431000 505000 586000 respectively income taxes paid fiscal years 2000 1999 1998 amounted 6044000 9092000 13114000 respectively 14 earnings per share company’s reported net income number shares utilized earnings per share calculations fiscal years ending july 31 2000 1999 1998 follows 15 segment information company’s operations primarily within single segment within electronics industry medical instrumentation technology products operations encompass design manufacture sale high technology highperformance high precision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products medical industrial use segment represents company’s hotel operation interest dividend income company’s operations meet materiality requirements statement thus required separately disclosed accounting policies segments described summary analogic corporation subsidiaries notes consolidated financial statements continued significant accounting policies table presents information company’s reportable segments 16 foreign operations financial information relating company’s foreign domestic operations fiscal years 2000 1999 1998 follows analogic corporation subsidiaries schedule ii valuation qualifying accounts index exhibits exhibitsitem 14 exhibits financial statement schedules reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation date october 25 2001 bernard gordon bernard gordon chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent accountants board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 14a1 page 24 present fairly material respects financial position analogic corporation subsidiaries july 31 2001 2000 results operations cash flows three years period ended july 31 2001 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 14a2 page 24 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp boston massachusetts october 1 2001 analogic corporation subsidiaries consolidated balance sheets accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 2001 2000 1999 000 omitted except share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statement cash flows accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation subsidiaries analogic company engaged primarily design manufacture sale high technology high performance highprecision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products medical industrial use company subject risks common companies medical instrumentation technology industry including limited development competitors new technological innovations dependence key personnel loss significant customer protection proprietary technology compliance regulations domestic foreign regulatory authorities agencies significant accounting policies follows principles consolidation consolidated financial statements include accounts company subsidiaries whollyowned investments companies ownership interests range 20 50 percent andor company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b inventories stated lower cost market using firstin firstout fifo method inventories include material labor manufacturing overhead costs c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives assets capital leases leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected income expenditures maintenance repairs charged expense cost significant improvements extend life underlying asset capitalized annual provisions depreciation amortization computed accordance following ranges estimated useful lives interest capitalized connection house construction fixed assets capitalized interest recorded part asset relates amortized assets estimated useful life total interest 108 171 154 capitalized fiscal 2001 2000 1999 respectively analogic corporation subsidiaries notes consolidated financial statements continued revenue recognition revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance service revenues recognized time services rendered company significant obligations customer company provides engineering services customers contractual basis recognizes revenue using percentage completion method license revenue based contractual agreements reached customers recognized term license revenues related hotel operations recognized services performed certain transactions request customers revenue recognized bill hold basis completion manufacture bill hold transactions met specified revenue recognition criteria included normal billing credit payment terms firm commitment transfer customers risks rewards ownership total receivable related bill hold transactions approximately 1151 1806 2049 july 31 2001 2000 1999 respectively e capitalized software costs accordance fas 86 company capitalizes certain computer software costs primarily labor overhead develops use products capitalization commences company determines detailed review product technologically feasible capitalized costs amortized straightline basis economic lives related products generally three years amortization expense 1647 1778 1977 fiscal 2001 2000 1999 respectively unamortized balance capitalized software 5488 5368 july 31 2001 2000 respectively f warranty costs company provides estimated warranty costs products shipped g research product development costs research product development costs expensed incurred h income taxes company accounts income taxes liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized net income per share basic net income per share based upon weighted average common shares outstanding period diluted net income per share based upon weighted average common shares calculated considering impact common stock equivalents outstanding stock options restricted stock converted common stock beginning period analogic corporation subsidiaries notes consolidated financial statements continued j cash equivalents company considers shortterm deposits original maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 46000 26000 july 31 2001 2000 respectively k concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company places cash investments marketable securities high credit quality financial instruments policy limits amount credit exposure one financial institution company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers financial condition l marketable securities companys marketable securities categorized availableforsale securities defined statement financial accounting standards 115 accounting certain investments debt equity securities unrealized marketable securities gains losses reflected net amount separate component stockholders equity realized purpose computing realized gains losses cost identified specific identification basis accounting standards june 2001 financial accounting standards board fasb issued statement financial accounting standard sfas 141 business combinations sfas 141 sfas 141 requires business combinations accounted purchase method certain acquired intangible assets business combination recognized assets apart goodwill sfas 141 effective business combinations initiated june 30 2001 business combinations accounted purchase method date acquisition june 30 2001 management reviewed sfas 141 believe material effect financial position results operations june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 requires ratable amortization goodwill replaced periodic tests goodwills impairment intangible assets goodwill amortized useful lives provisions sfas 142 effective fiscal years beginning december 15 2001 thus adopted company required august 1 2002 management reviewed sfas 142 believe material effect financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 supercedes fasb statement 121 sfas 121 accounting impairment longlived assets long lived assets disposed sfas 144 applies longlived assets including discontinued operations consequently amends accounting principles board opinion 30 apb 30 reporting results operations reporting effects disposal segment business sfas 144 effective financial statements issued fiscal years beginning december 15 2001 thus adopted company required august 1 2002 management currently determining effect sfas 144 financial position results operations analogic corporation subsidiaries notes consolidated financial statements continued n use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts expenses reporting periods estimates include reserves accounts receivable inventories liabilities actual results could differ estimates comprehensive income statement financial accounting standards 130 sfas 130 reporting comprehensive income established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders equity comprehensive income consists unrealized gains losses marketable securities foreign currency translation adjustments p stockbased compensation statement financial accounting standards 123 sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopted fair value method accounting employee stockbased compensation instead complies pro forma disclosure requirements q fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair values marketable securities estimated based quoted market price securities r impairment longlived assets company evaluates recoverability longlived assets primarily fixed assets accordance statement financial accounting standards 121 sfas 121 accounting impairment longlived assets disposed sfas 121 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets translation foreign currencies assets liabilities companys foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected cumulative translation adjustments consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow included operations period occur analogic corporation subsidiaries notes consolidated financial statements continued basis presentation certain financial statement items reclassified conform current years format 2 business combinations july 2001 company ownership camtronics medical systems ltd formerly camtronics ltd increased 81 100 result company acquiring outstanding shares camtronics common stock company issued 190255 shares common stock treasury value 7584 acquire remaining 19 minority interest company recorded premium excess book value 3227 1240 applied property plant equipment 1987 applied intangible assets classified assets balance sheet related software systems technology january 1993 company acquired interest approximately 57 newly formed company bk medical systems bk danish corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques companys ownership interest adjusted upward 59 fiscal 1994 accordance shareholders agreement july 1996 company acquired remaining 41 interest bk 3416 cash companys equity net assets bk exceeded purchase price portion investment approximately 565 excess fully amortized fiscal 2001 accumulated amortization amounted 565 462 july 31 2001 2000 respectively june 28 1999 company acquired fixed assets noranda advanced materials medical detectors pure metal businesses approximately 5500 company renamed anrad corporation located st laurent quebec anrads objective develop manufacture seleniumbased flat panel xray detectors medical industrial markets acquisition accounted purchase anrad operations included companys consolidated financial statements since june 28 1999 fourth quarter fiscal 2000 anrad sold assets pure metal business cost approximately 700 cash former employees gain loss recognized company connection sale 3 marketable securities marketable securities categorized availableforsale securities summarized follows analogic corporation subsidiaries notes consolidated financial statements continued cost estimated fair value current debt securities july 31 2001 contractual maturity shown expected maturities differ contractual maturities issuers securities may right repay obligations without prepayment penalties 4 balance sheet information additional information certain balance sheet accounts follows years ended decrease property capital lease leasehold capital lease improvements due expiration real estate capital lease analogic corporation subsidiaries notes consolidated financial statements continued 5 asset impairment charges company recognized asset impairment charges 3200 fiscal 2001 attributable certain assets anatel companys telecommunications subsidiary result significant deterioration telecommunication business company evaluated recoverability certain assets wrote 1500 inventory 1500 capitalized software 200 capital equipments company required reduce carrying value assets fair value recognized asset impairment charges carrying value affected assets exceeded projected future undiscounted cash flows 6 investments advances affiliated companies investment shenzhen anke hightech co ltd october 2000 analogic scientific inc asi joint venture corporation located peoples republic china entered separate agreements four investors resulted investors buying 108 equity interest asi existing investors transaction approval company shareholder prior transaction 50 equity ownership interest asi result companys ownership asi reduced 54 446 january 18 2001 company name changed analogic scientific inc shenzhen anke hightech co ltd sahco company accounts investment equity method accounting whereby company adjusts investment balance recognize share sahcos earnings losses changes sahcos capital investment dividends received fiscal 2001 company became aware certain differences local statutory accounting practices used sahco us generally accepted accounting principles gaap primarily respect valuation accounts receivable inventory revenue recognition quarter ended january 31 2001 company evaluated potential differences accounting basis concluded adjustments necessary prior periods resulting reduction companys investment sahco 2375 july 31 2000 1808 net tax effect reduced carrying value companys investment july 31 2000 6125 3750 sahco historically provided company current quarterly information regarding financial results ensure company adequate time review adjust financial information provided sahco conform us gaap company changed effective first fiscal quarter ended october 31 2000 method recording sahcos financial results uses previous quarters financial information sahco adjust investment account current quarter thereby resulting consistently applied quarterly delay recording equitybased accounting accordingly company recognized share sahcos previous calendar quarter profit 414000 282000 net tax effect three months ended october 31 2000 adjusted beginning retained earnings 282000 change impact fiscal year 2000 companys share sahcos losses amounted 51 fiscal year 2001 compared profit 865 fiscal year 2000 carrying value investment 3699 july 31 2001 3750 july 31 2000 transactions sahco fiscal years 2001 2000 1999 consisted revenues approximately 3237 5575 2610 respectively july 31 2001 2000 net accounts receivable affiliate 2350 3063 respectively b investments company along another investor owned 50 interest private company design development medical imaging equipment upon completion research development phase private company sold intellectual property form license newly formed limited liability analogic corporation subsidiaries notes consolidated financial statements continued company called enhanced ct technology llc ectt distributed assets company original investor ceased operations company conjunction original investor retains 50 interest ectt receive license related royalties based upon future sales medical imaging equipment company accounted transfer historical cost continue account investment using equity method accounting companys share losses previous private company amounted 2665 companys share profit newly formed limited partnership 1789 fiscal 2001 441 fiscal 2000 carrying value companys investment ectt july 31 2001 1230 441 july 31 2000 company owns 1771802 shares norland medical systems inc received fiscal 2000 limited partnership norland partners 25 owned analogic partnership dissolved fiscal 2000 upon distributing shares norland medical systems inc respective partners time distribution shares restricted however restriction 620865 shares lapsed january 1 2001 remaining 1150937 shares became unrestricted march 29 2001 july 31 2000 company recognized loss approximately 110 reduced value norland shares market value 664 believed temporary impairment value occurred fiscal 2001 company recorded additional loss 487 reduced value shares market value 177 july 31 2001 7 mortgage notes payable mortgage notes payable consists following principal maturities next five fiscal years thereafter notes follows 2002 369 2003 376 2004 383 2005 390 2006 397 3350 thereafter total interest incurred amounted 348 472 518 fiscal 2001 2000 1999 respectively 108 171 154 capitalized company currently approximately 100 million revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2001 fiscal 2000 8 lease commitments related nonrelated third parties company leased three operating facilities partnership chairman former vice chairman partners leases accounted capital leases july 31 2001 two leases expired renewed leases contain rent escalation clauses based upon costofliving adjustments rent adjustments significant fiscal 2001 2000 1999 analogic corporation subsidiaries notes consolidated financial statements continued property capital leases included property plant equipment follows companys danish subsidiary bk announced may 2001 construction new 135000 square foot facility herlev north copenhagen manufacture specialized diagnostic ultrasound equipment estimated cost 15500 new facility scheduled completion may 2002 host manufacturing research development service marketing sales administrative functions new facility expected financed combination internally generated cash borrowings certain companys subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 1423 989 764 net sublease income 872 1143 1108 fiscal 2001 2000 1999 respectively following schedule year future minimum lease payments july 31 2001 9 stock option stock bonus plans july 31 2001 company four key employee stock option plans two lapsed granting options addition company two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted four key employee stock option plans generally become exercisable installments commencing earlier two years date grant later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value analogic corporation subsidiaries notes consolidated financial statements continued options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant companys key employee stock bonus plans common stock may granted key employees terms conditions determined board directors generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans vest four equal installments beginning third year date grant upon issuance stock plans unearned compensation equivalent market value date grant charged stockholders equity subsequently amortized periods restrictions lapse six years shares granted companys key employee stock bonus plan 89000 weighted average fair market value 4161 per share fiscal 2001 87000 shares weighted average fair market value 2789 per share fiscal 2000 22000 shares weighted average fair market value 3316 per share fiscal 1999 amortization unearned compensation 976 644 527 recorded fiscal 2001 2000 1999 respectively employee stock purchase plan eligible participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25000 calendar year number shares issued pursuant plan totaled 7864 2001 11940 2000 12389 1999 july 31 2001 758523 shares reserved grant stock option bonus purchase plans following table sets forth stock option transactions years ended july 31 2001 2000 1999 analogic corporation subsidiaries notes consolidated financial statements continued following table summarizes information stock options outstanding july 31 2001 fair value companys stock options estimated using blackscholes optionpricing model developed use estimating fair value traded options vesting restrictions fully transferable model requires input highly subjective assumptions including expected stock price volatility companys stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing model necessarily provide reliable single measure fair value stock options fair value companys stock options estimated using following weightedaverage assumptions weightedaverage estimated fair value stock options granted fiscal 2001 2000 1999 1845 1911 1913 per share respectively pro forma purposes estimated fair value companys stock options amortized options vesting period companys pro forma information follows analogic corporation subsidiaries notes consolidated financial statements continued 10 retirement plans company qualified profit sharing retirement plan retirement plan benefit eligible employees retirement plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing expense amounted 1000 fiscal years 2000 1999 company contribute retirement plan fiscal 2001 company sponsors 401k plan provide retirement benefits employee allowed section 401k internal revenue code plan provides taxdeferred salary deductions eligible employees may contribute 1 15 annual compensation plan limited maximum annual amount set periodically internal revenue service beginning fiscal 2001 company matched employee contributions dollar 3 eligible earning per year per person contributions vest immediately company contributions plans totaled 2009 fiscal 2001 11 income taxes components provision income taxes follows tax effects principal temporary differences resulting deferred tax expense benefit follows analogic corporation subsidiaries notes consolidated financial statements continued income loss income taxes domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation subsidiaries notes consolidated financial statements continued reconciliation income taxes united states statutory rate effective tax rate follows july 31 2001 company capital loss carryforwards 1970 carryforwards expire 2003 amount 1617 2005 amount 353 two companys subsidiaries elected taxed foreign sales corporations fsc 12 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 2001 2000 company recorded asset impairment losses 3200 fourth quarter fiscal 2001 related anatel companys telecommunications subsidiary note 5 13 transactions major customers industries one export customer accounted approximately 78000 44000 22 16 total product engineering revenue fiscal 2001 2000 respectively total product engineering revenue analogic corporation subsidiaries notes consolidated financial statements continued one domestic customer accounted approximately 37000 10 28000 10 fiscal 2001 2000 respectively companys ten largest customers accounted approximately 62 product engineering revenue fiscal 2001 medical technology products consisting primarily electronic systems subsystems medical imaging equipment accounted approximately 79 product engineering revenue fiscal 2001 14 supplemental disclosure cash flow information changes operating assets liabilities follows years ended fiscal years 2001 2000 1999 interest paid amounted 420 431 505 respectively income tax paid fiscal years 2001 2000 1999 amounted 8308 6044 9092 respectively supplemental information regarding noncash investing financing activities capital lease obligations incurred purchase new equipment 565 fiscal 2001 issued 190255 shares common stock remaining interest subsidiary 7584 note 2 analogic corporation subsidiaries notes consolidated financial statements continued 15 net income per share companys reported net income number shares utilized net income per share calculations fiscal years ending july 31 2001 2000 1999 follows stock options purchase approximately 90000 199000 150000 shares common stock outstanding years ended july 31 2001 2000 1999 respectively included calculation diluted net income per share options exercise prices greater average market price companys common stock years although stock options antidilutive fiscal 2001 2000 1999 may dilutive future years calculations 16 segment information companys operations primarily within single segment within electronics industry medical instrumentation technology products operations encompass design manufacture sale high technology highperformance high precision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products medical industrial use segment represents companys hotel operation companys operations meet materiality requirements separate disclosure accounting policies segments analogic corporation subsidiaries notes consolidated financial statements continued described summary significant accounting policies table presents information companys reportable segments significant amount identifiable assets categorized relates mainly companys cash equivalents marketable securities information regarding geographic areas years ended july 31 2001 2000 1999 follows revenues attributed countries based location customers analogic corporation subsidiaries notes consolidated financial statements continued 17 foreign operations financial information relating companys foreign domestic operations fiscal years 2001 2000 1999 follows 18 subsequent event september 2001 corporation announced acquired 19 interest cedara software corporation mississauga ontario canada return equity investment 75 million considerations cedara premier independent provider imaging software technology custom imaging software development leading original equipment manufacturers oems healthcare industry cedara enables healthcare solution providers integrate better imaging software systems hardware fields computed tomography ct magnetic resonance imaging mri analogic agreed refinance debt owed cedara bank lender provision credit facility analogics principal bank refinancing debt directly analogic two seats cedaras seven person board directors company account investment equity method investment due companys ability exercise influence operating financial policies analogic corporation subsidiaries schedule ii valuation qualifying accounts index exhibits exhibititem 14 controls procedures applicable part iv item 15nanitem 14 principal independent accountant fees services following table summarizes appropriate fees billed company independent auditor fees audit services billed related fiscal 2004 consisted substantially following • audit company’s july 31 2004 annual financial statements • reviews company’s quarterly financial statements fiscal 2004 • initial planning internal control attestation procedures required sarbanesoxley act 2002 section 404 prior delay effective date company fees audit services billed related fiscal 2003 consisted substantially following • audit company’s july 31 2003 annual financial statements • reviews company’s quarterly financial statements fiscal 2003 • services restatement company’s financial statements b fees auditrelated services billed related fiscal 2004 2003 consisted following • filing sec form s8 • pension benefit plans • consultation concerning accounting financial reporting standards c fees tax services billed fiscal 2004 2003 consisted substantially tax compliance tax planning advice relation • us foreign tax compliance • tax planning advice services relating international restructuring plan company pay fees fiscal 2003 2004 pricewaterhousecoopers llp fees related services approved audit committee audit committee adopted policy charter preapprove services audit nonaudit provided company independent auditor except de minimis nonaudit services may approved accordance applicable sec rules including paragraph c 7 c rule 201 regulation sx considering nature services provided independent auditor audit committee determined services compatible provision independent audit services audit committee discussed services company management independent auditor determine permitted rules regulations concerning auditor independence promulgated sec american institute certified public accountants none services approved audit committee pursuant paragraph c 7 c rule 201 regulation sx part iv item 15item 14 principal accountant fees services following table summarizes fees billed company independent registered public accounting firm fees audit services billed related fiscal 2005 consisted substantially following • audit company’s july 31 2005 annual financial statements • reviews company’s quarterly financial statements fiscal 2005 • internal control attestation procedures required sarbanesoxley act 2002 section 404 fees audit services billed related fiscal 2004 consisted substantially following • audit company’s july 31 2004 annual financial statements • reviews company’s quarterly financial statements fiscal 2004 • audits related restatement company’s financial statements • internal control attestation procedures required sarbanesoxley act 2002 section 404 prior delay effective date company b fees auditrelated services billed related fiscal 2005 2004 consisted following • filing sec form s8 • audits benefit plans c fees tax services billed fiscal 2005 2004 consisted substantially tax compliance tax planning advice relation • us foreign tax compliance • tax planning advice services relating international restructuring plan company incur fees fiscal 2005 2004 fees related services approved audit committee audit committee adopted policy charter preapprove services audit nonaudit provided company independent registered public accounting firm except de minimis nonaudit services may approved accordance applicable sec rules including paragraph c7ic rule 201 regulation sx considering nature services provided independent registered public accounting firm fiscal 2005 2004 audit committee determined services compatible provision independent audit services audit committee discussed services company management independent registered public accounting firm determine permitted rules regulations concerning auditor independence promulgated sec american institute certified public accountants none services approved audit committee pursuant paragraph c7ic rule 201 regulation sx part iv item 15item 14 principal accountant fees services following table summarizes fees billed company independent registered public accounting firm fees audit services billed related fiscal 2006 consisted substantially following • audit company’s july 31 2006 annual financial statements • reviews company’s quarterly financial statements fiscal 2006 • internal control attestation procedures required sarbanesoxley act 2002 section 404 fees audit services billed related fiscal 2005 consisted substantially following • audit company’s july 31 2005 annual financial statements • reviews company’s quarterly financial statements fiscal 2005 • internal control attestation procedures required sarbanesoxley act 2002 section 404 b fees auditrelated services billed related fiscal 2006 2005 consisted following • filing sec forms s8 8k c fees tax services billed fiscal 2006 fiscal 2005 consisted substantially following • us foreign tax compliance • tax planning advice services relating international restructuring plan fees related services approved audit committee audit committee adopted policy charter preapprove services audit nonaudit provided company independent registered public accounting firm except de minimis nonaudit services may approved accordance applicable sec rules including paragraph c7ic rule 201 regulation sx considering nature services provided independent registered public accounting firm fiscal 2006 fiscal 2005 audit committee determined services compatible provision independent audit services audit committee discussed services company management independent registered public accounting firm determine permitted rules regulations concerning auditor independence promulgated sec american institute certified public accountants none services approved audit committee pursuant exception set fourth paragraph c7ic rule 201 regulation sx part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “information regarding company’s independent registered public accounting firm” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15item 14 exhibits financial statement schedules reports form 8k page number 1 financial statements report independent accountants 29 consolidated balance sheets july 31 1999 1998 30 consolidated statements income years ended july 31 1999 1998 1997 31 consolidated statements stockholders equity years ended july 31 1999 1998 1997 32 consolidated statements cash flows years ended july 31 1999 1998 1997 33 notes consolidated financial statements 34 51 ii valuation qualifying accounts 53 schedules omitted required applicable required information furnished consolidated statements notes thereto 3 exhibits see index exhibits 54 59 b report form 8k reports form 8k filed registrant quarter ended july 31 1999 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation date october 7 1999 bernard gordon bernard gordon chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date october 7 1999 bernard gordon bernard gordon chairman board chief executive officer director date october 7 1999 john tarello john tarello senior vice president treasurer director date october 7 1999 ross brown ross brown vice president director date october 7 1999 bruce w steinhauer bruce w steinhauer director date october 7 1999 edward f voboril edward f voboril director date october 7 1999 gerald l wilson gerald l wilson director report independent accountants board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 14a1on page 27 present fairly material respects financial position analogic corporation subsidiaries july 31 1999 1998 results operations cash flows three years period ended july 31 1999 conformity generally accepted accounting principles addition opinion financial statement schedule listed index appearing item 14a2on page 27 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp boston massachusetts august 27 1999 analogic corporation subsidiaries consolidated balance sheets thousands accompanying notes integral part financial statements analogic corporation subsidiaries consolidated balance sheetsin thousands accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income thousands except per share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1999 1998 1997 thousands except share data analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1999 1998 1997 thousands except per share datacontinued analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 1999 1998 1997 thousands except per share datacontinued accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows thousands analogic corporation subsidiaries consolidated statements cash flows thousandscontinued accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements 1 summary business operations significant accounting policies business operations companys operations consist design manufacture sale hightechnology highprecision analogdigital signal processing instruments systems customers medical industrial industry product service engineering licensing export revenue primarily customers europe asia amounted approximately 95504000 37 92292000 33 81395000 34 total product service engineering licensing revenue years ended july 31 1999 1998 1997 respectively significant accounting policies follows principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method significant intercompany accounts transactions eliminated b inventories stated lower cost market cost determined firstin firstout basis c property plant equipment financial reporting purposes depreciation amortization provided utilizing straightline method estimated useful lives assets lease terms whichever shorter computed principally utilizing accelerated methods income tax purposes property capital leases amortized lease terms annual provisions depreciation amortization computed accordance following ranges estimated useful lives analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued revenue recognition revenues recognized product shipped service performed certain transactions request customer upon completion manufacturing process acceptance title customer company stores inventory pending shipping instructions recognizes revenue accounts receivables related sales approximately 2049000 668000 july 31 1999 1998 respectively e capitalized software costs company capitalizes certain computer software costs technological feasability established amortized utilizing straightline method economic lives related products exceed three years accumulated amortization approximated 17104000 15127000 july 31 1999 1998 respectively f warranty costs company provides estimated warranty costs products shipped g income taxes company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended permanently reinvested operations h earnings per share basic pershare earnings based upon weighted average common shares outstanding year diluted pershare earnings based upon weighted average common shares potential new shares stock options number shares utilized basic pershare computations 12683326 12614303 12553628 fiscal 1999 1998 1997 number shares utilized diluted pershare computations 12790836 12793027 12701800 fiscal 1999 1998 1997 respectively cash equivalents company considers shortterm deposits original maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 29258000 28684000 july 31 1999 1998 respectively j concentration credit risk company grants credit domestic foreign original equipment manufacturers distributors end users company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution analogic corporation subsidiaries notes consolidated financial statements continued 1 summary business operations significant accounting policies continued k marketable securities companys marketable securities categorized availablefor sale securities defined statement financial accounting standards 115 accounting certain investments debt equity securities unrealized holding gains losses reflected net amount separate component stockholders equity realized purpose computing realized gains losses cost identified identification basis l accounting standards statements financial accounting standards sfas 130 reporting comprehensive income statement financial accounting standards sfas 131 disclosures segments enterprise related information adopted fiscal 1999 sfas 130 establishes new standards reporting displaying comprehensive income components sfas 131 requires disclosure certain information regarding operating segments products serives geographic areas operation major customers adoption statements impact companys consolidated financial position results operations business practices see note 17 notes consolidated financial statements june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities established new model accounting derivative hedging activities supersedes amends number existing standards provisions sfas 133 effective fiscal quarters years beginning june 15 1999 company believes statement impact financial position results operations cash flows company hold derivative instruments engage hedging activities present time use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts expenses reporting periods actual results could differ estimates analogic corporation subsidiaries notes consolidated financial statements continued 2 business combinations companys subsidiary camtronics entered agreement three founding stockholders founder also active employees camtronics agreement requires camtronics purchase 5 shares common stock originally issued founders option fiscal year beginning 1992 pursuant predetermined formula founder exercise right cause camtronics purchase outstanding shares rights shall lapse shall cumulative may exercised hereafter companys ownership camtronics increased approximately 65 fiscal 1992 approximately 77 fiscal 1998 result founders exercising rights sell 5 shares period addition may 1998 company purchased one founders camtronics entire equity interest camtronics 1600000 carrying value companys total investment camtronics exceeded portion underlying equity net assets approximately 1453000 fully amortized january 1 1993 company acquired interest approximately 57 newlyformed company bk ultrasound systems bk 3607000 cash subordinated interest free shortterm loan 3500000 converted equity july 31 1993 companys ownership interest adjusted upward 59 fiscal 1994 accordance shareholders agreement bk danish corporation primarily engaged design manufacture ultrasound imaging devices used urology various sonographic techniques acquisition accounted purchase bks operations included companys consolidated financial statements since january 1 1993 companys equity net assets bk exceeded purchase price approximately 2662000 fully amortized 1998 july 1 1996 company acquired remaining 41 interest bk 3416000 cash companys equity net assets bk exceeded purchase price portion investment approximately 565000 excess amortized five year period beginning july 1 1996 accumulated amortization amounted 349000 236000 july 31 1999 1998 respectively june 28 1999 company acquired assets noranda advanced materials medical detectors pure metal businesses approximately 55 million company renamed anrad located st laurent quebec anrads objective develop manufacture seleniumbased flat panel xray detectors medical industrial markets acquisition accounted purchase anrad operations included companys consolidated financial statements since june 28 1999 analogic corporation subsidiaries notes consolidated financial statements continued 3 marketable securities marketable securities categorized availableforsale securities summarized follows contractual maturities range one seven years majority five years less 4 inventories components inventory follows analogic corporation subsidiaries notes consolidated financial statements continued 5 investments advances affiliated companies company owns 50 analogic scientific inc scientific joint venture corporation kejian corporation peoples republic china companys original investment 1500000 accounted using equity method accounting companys share scientifics loss amounted 575000 425000 fiscal years 1998 1997 respectively company record income loss associated investment fiscal 1999 fiscal 1996 company additional 500000 scientific carrying value investment 5200000 july 31 1999 1998 transactions scientific fiscal years 1999 1998 1997 consisted revenues approximately 2610000 1116000 526000 respectively july 31 1999 1998 accounts receivable affiliate 1884000 977000 respectively february 13 1996 company acquired 1715384 shares park meditech inc common stock 11 convertible unsecured subordinated debenture principal amount 750000 consideration cancellation convertible subordinated promissory note amount 1500000 200000 common share purchase warrants certain restrictions convertible unsecured subordinated debenture may converted common shares price 120 canadian per common share company loaned park meditech inc 221000 december 1996 additional 294000 february 1997 structured promissory notes interest 11 secured assets park meditech inc debenture promissory notes written fiscal 1998 july 3 1997 park meditech incs subsidary park medical systems filed assignment bankruptcy trustee appointed sell assets park medical systems includes patents imaging technology view filing company recognized impairment investment park meditech inc wrote 1742000 fiscal 1997 february 22 1996 company invested 2000000 33 interest privately held company designs manufacture medical imaging equipment effective may 1 1997 company increased interest 33 50 investment 340000 june 1997 company investor invested additional 1000000 fiscal year 1999 company investor invested 3950000 carrying value investment negative 408000 july 31 1999 422000 july 31 1998 transactions privately held company fiscal years 1999 1998 consisted revenues approximately 10177000 8678000 respectively july 31 1999 1998 accounts receivable form company 3061000 1582000 respectively companys 780000 investment limited partnership accounted using cost method company limited partner accordingly influence partnership fiscal 1999 company invested 30000 limited partnership general administrative purposes fiscal 1998 company received distribution stock publicly traded company limited partnership company sold stock gain 997000 fiscal 1998 analogic corporation subsidiaries notes consolidated financial statements continued 6 mortgage notes payable mortgage notes payable consists following principal maturities next five fiscal years notes follows 2000 356000 2001 363000 2002 369000 2003 376000 2004 383000 7 lease commitments related party transactions company leases three operating facilities partnership chairman former vice chairman partners leases accounted capital leases certain leases contain contingent rentals based upon cost living adjustments contingent rentals significant 1999 1998 1997 property capital leases included property plant equipment follows analogic corporation subsidiaries notes consolidated financial statements continued 7 lease commitments related party transactions continued certain companys subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense approximated 764000 513000 531000 net sublease income 1108000 1144000 1188000 fiscal 1999 1998 1997 respectively following schedule year future minimum lease payments july 31 1999 future minimum lease payments capital leases reduced sublease rental income approximately 1108000 included accounts notes receivable fiscal year 1998 200000 convertible debentures ultraanalog inc manufacturer analogtodigital digitaltoanalog converters note paid full fiscal 1999 bernard gordon companys chairman sold 72 interest outstanding common stock ultraanalog inc fiscal year 1999 8 stock option stock bonus plans july 31 1999 company four key employee stock option plans two lapsed granting options addition company one key employee stock bonus plan two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued options granted five stock option plans become exercisable installments commencing earlier one year date grant later five years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value companys key employee stock bonus plan common stock may granted key employees terms conditions determined board directors generally participants stock bonus plan may dispose otherwise transfer stock granted three years date grant upon issuance stock plan unearned compensation equivalent market value date grant charged stock holders equity subsequently amortized periods restriction lapse six years amortization 527000 538000 663000 recorded fiscal 1999 1998 1997 respectively employee stock purchase plan participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions six month period number options granted employee plan combined options issued plans limited maximum outstanding fair market value 25000 calendar year number shares issued pursuant plan totaled 12389 1999 6007 1998 5671 1997 july 31 1999 1211376 shares reserved grant stock option bonus purchase plans analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued following table sets forth stock option transactions years ended july 31 1999 1998 analogic corporation notes consolidated financial statements continued 8 stock option stock bonus plans continued following table sets forth stock option transactions years ended july 31 1997 following table summarizes information stock options outstanding july 31 1999 following table summarized information stock options exercisable july 31 1999 analogic corporation subsidiaries notes consolidated financial statements continued 8 stock option stock bonus plans continued statement financial accounting standards sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopt fair value method accounting employee stockbased compensation instead comply pro forma disclosure requirements fair value method companys stock options estimated using blackscholes option pricing model developed use estimating fair value traded options vesting restrictions fully transferable model requires input highly subjective assumptions including expected stock price volatility companys stock options character istics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing model exisitng model nessarily provide reliable single measure fair value stock options fair value companys stock options estimated using following weightedaverage assumptions weightedaverage estimated fair value stock options granted fiscal 1999 1998 1997 19131917 1530 per share respectively pro forma purposes estimated fair value companys stock options amortized options vesting period companys pro forma information follows sfas 123 applicable options granted subsequent july 31 1995 pro forma effect fully reflected approximately 2000 analogic corporation subsidiaries notes consolidated financial statements continued 9 profit sharing retirement plan company qualified profit sharing retirement plan benefit eligible employees plan provides company shall make contributions current accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing expense amounted 1000000 1999 1000000 1998 900000 1997 company 401k plans employees contribute 15 annual base income exceed maximum amount allowable internal revenue code one calendar year 10 interest total interest incurred amounted 518000 659000 779000 1999 1998 1997 respectively 154000 1999 151000 1998 172000 1997 capitalized 11 income taxes components provision income taxes follows analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued tax effects principal temporary differences resulting deferred tax expense benefit follows income loss income taxes domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation subsidiaries notes consolidated financial statements continued 11 income taxes continued included prepaid expenses current assets 4317000 3402000 current deferred tax assets july 31 1999 1998 respectively reconciliation income taxes united states statutory rate effective tax rate follows two companys subsidiaries elected taxed foreign sales corporation fsc analogic corporation subsidiaries notes consolidated financial statements continued 12 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 1999 1998 13 transactions major customers industries one export customer accounted approximately 47000000 45000000 18 16 total product service engineering licensing revenue 1999 1998 respectively total product service engineering licensing revenue one domestic customer accounted approximately 20000000 8 21000000 8 1999 1998 respectively companys ten largest customers accounted approximately 60 product service engineering licensing revenue fiscal 1999 medical technology products consisting primarily electronic subsystems medical imaging equipment accounted approximately 78 product service engineering licensing revenue fiscal 1999 analogic corporation subsidiaries notes consolidated financial statements continued 14 supplemental disclosure cash flow information fiscal years 1999 1998 1997 interest paid amounted 505000 586000 745000 respectively income taxes paid fiscal years 1999 1998 1997 amounted 9092 000 13114000 8103000 respectively 15 fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value company believes similar terms mortgage notes payable would attainable fair value marketable securities estimated based quoted market prices securities 16 earnings per share earnings per share information restated conform sfas 128 earnings per share company adopted effective fiscal year 1999 basic earnings per common share calculated dividing net income weighted average number common shares outstanding period diluted earnings per share calculated dividing net income sum weighted average number common shares would outstanding potentially dilutive common shares issued following table indicates number shares utilized earnings per shares calculations fiscal years enidng july 31 1999 1998 1997 respectively 17 segment information effective july 31 1999 company adopted sfas 131 disclosures segments enterprise selected information sfas 131 supersedes previously issued segment reporting disclosures requires reporting segment information consistent way management operates company adoption sfas 131 impact companys financial portion results operations companys operations primarily within single segment within electronics industry medical technology products design manufacture sale high technology highperformance high precision data acquisition conversion analogdigital signal processing instruments systems corporate segment represents companys hotel operation interest dividend income companys operations meet materiality requirements statement thus required separately disclosed segment disclosures presented prior years restated conform presentation adopted current fiscal year accounting policies segments described summary significant accounting policies table presents information companys reportable segments 18 foreign operations financial information relating companys foreign domestic operations fiscal years 1999 1998 1997 follows analogic corporation subsidiaries schedule ii valuation qualifying accounts analogic corporation subsidiaries schedule ii valuation qualifying accounts index exhibits title incorporated reference 31 restated articles organization exhibit 31 companys annual amended march 15 1988 report form 10k fiscal year ended july 311988 32 bylaws amended january 27 exhibit 32 companys annual 1988 report form 10k fiscal year ended july 31 1988 101 lease dated march 5 1976 exhibit 6e companys bernard gordon analogic registration statement form s14 file 261959 102 amendment lease dated exhibit companys report dated may 1 1977 bernard form 8k may 1 1977 gordon analogic 103 lease dated january 16 1976 exhibit companys annual bernard gordon data report form 10k fiscal precision corporation year ended july 31 1977 related assignment lease dated october 31 1979 data precision corporation analogic 104 alease dated october 31 1977 exhibit 6d companys audubon realty ltd registration statement form data precision corporation s14 file 261959 related letter agreement dated january 18 1978 bamendment lease dated exhibit companys annual july 19 1979 audubon report form 10k fiscal realty ltd analogic year ended july 31 1982 cthird amendment lease exhibit companys annual dated august 2 1982 report form 10k fiscal year ended july 31 1982 dfourth amendment lease exhibit 191 quarterly report dated dedember 31 1982 form 10k three months ended january 31 1983 105 alease dated march 161981 exhibit ii companys quarterly audubon realty ltd report form 10q three analogic months ended april 30 1981 bamendment lease dated exhibit companys annual report october 31 1984 form 10k fiscal year ended july 31 1985 106 land disposition agreement exhibit companys annual report city peabody form 10k fiscal year ended community development authority july 311981 analogic corporation 107 loan agreement among city exhibit companys annual peabody community develop report form 10k fiscal ment authority analogic year ended july 311981 corporation 108 amendments urban development exhibit 1013 companys action grant agreement dated annual report form 10k august 281986 september 30 fiscal year ended july 31 1986 109 promissory note analogic pay exhibit companys annual able peabody community develop report form 10k fiscal ment authority year ended july 311981 1010astockholder agreement exhibits companys report july 9 1986 among siemens form 8k dated july 31 1986 ag scc analogic including following exhibits thereto bdevelopment agreement dated july 28 1986 siemens ag medical electronics laboratories inc cmanufacturing agreement dated july 28 1986 analogic medical electronics laboratories inc dlicense agreement dated july 28 1986 analogic medical electronics laboratories inc elicense agreement dated exhibits companys report july 28 1986 siemens form 8k dated july 31 1986 ag medical electronics laboratories inc flicense agreement ii dated july 28 1986 siemens ag medical electronics laboratories inc gsublease dated july 28 1986 analogic sub lessor medical electronics laboratories inc sublessee 1011 stock purchase agreement exhibit 1011 companys annual march 11 1988 among report form 10k fiscal year siemens ag scc sms mel ended july 311988 analogic 1012aanamass partnership agreement exhibit 1012a companys dated july 5 1988 annual report form 10k fiscal anadventure corporation year ended july 31 1988 massapea inc bground lease agreement dated exhibit 1012b companys july 5 1988 analogic annual report form 10k fiscal anamass partnership year ended july 31 1988 cequity infusion agreement exhibit 1012c quarterly report form 10q three months ended january 31 1991 dresolution agreement dated exhibit 1012d companys july 31 1991 ratified annual report form 10k fiscal august 8 1991 year ended july 31 1991 1013key employee stock option plan exhibit 107 companys annual dated april 21 1978 amend report form 10k fiscal ed restated december 4 year ended july 31 1987 1981 amended october 9 1984 january 28 1014key employee stock option plan exhibit 108 companys annual dated august 8 1980 amend report form 10k fiscal ed restated december 4 1981 year ended july 31 1987 amended october 9 1984 january 28 1987 1015aanalogic corporation profit exhibit 6c companys sharing plan dated july 26 1977 registration statement form s14 file 261959 bamendments 234 5 exhibit 1010b companys said profit sharing plan annual report form 10k fiscal year ended july 31 1980 crestated analogic corpora exhibit 109c companys tion profit sharing plan dated annual report form 10k july 31 1985 amendment year ended july 31 1985 1 thereto dated august 20 1016key employee stock bonus plan exhibit definitive proxy state dated march 14 1983 ment companys special meeting amended january 27 1988 lieu annual meeting stockholders held january 25 1984 file nol 3327372 1017 key employee incentive stock exhibit 1015 companys annual option plan dated march 14 report form 10k fiscal 1983 amended restated year ended july 31 1987 file january 28 1987 295091 1018 1985 nonqualified stock option exhibit 1019 companys annual plan dated may 13 1985 report form 10k fiscal year ended july 31 1985 file 336835 1019 employee qualified stock exhibit g companys definitive purchase plan dated june 10 proxy statement dated december 9 1985 1986 companys special meeting lieu annual meeting stockholders held january 22 1986 file no335913 b said employee stock exhibit companys definitive purchase plan amended proxy statement dated december 1 1997 october 9 1997 companys annual meeting shareholders held january 23 1998 1020 proposed 1988 nonqualified exhibit 1020 companys annual stock option plan non report form 10k fiscal employee directors year ended july 31 1988 file 3327372 1021 form indemnification exhibit 1019 companys annual contract report form 10k fiscal year ended july 31 1987 1022 agreement plan merger exhibit 1022 companys annual sky computers inc report form 10k fiscal analogic corporation year ended july 31 1992 1023aagreement bk medical exhibits companys report holding analogic corp form 8k dated december 18 1992 oration dated october 20 1992 baddendum dated december 11 1992 agreement bk medical holding analogic corporation dated october 20 cshareholders agreement bk medical holding analogic corporation dated december 11 1992 1024 key employee incentive stock exhibit companys definitive option plan dated june 11 proxy statement dated december 1 1993 1983 companys annual meeting stockholders held january 21 1994 file 3353381 1025 nonqualified stock option plan exhibit companys nonemployee directors dated definitive proxy statement dated january 31 1997 december 2 1996 companys annual meeting stockholders held january 24 1997 1026 key employee incentive stock exhibit companys option plan dated june 11 1998 definitive proxy statement dated december 1 1998 companys annual meeting stockholders held january 22 1999 exhibits title 21 list subsidiaries 23 consent pricewaterhousecoopers llp 27 financial data schedule exhibit 21 jurisdiction name incorporation analogic limited massachusetts analogic foreign sales corporation virgin islands analogic securities corporation massachusetts anadventure ii corporation massachusetts anadventure 3 corporation massachusetts anadventure delaware corporation delaware anrad corporation province nova scotia bk ultrasound systems denmark camtronics foreign sales corporation virgin islands camtronics ltd wisconsin international security systems corporation massachusetts sky computers incorporated massachusetts sky limited england exhibit 23 consent independent accountants consent incorporation reference registration statement analogic corporation form s8 file nos 295091 335913 336835 3353381 3327372 report dated august 27 1999 audits consolidated financial statements financial statement schedule analogic corporation july 31 1999 1998 three years ended july 31 1999 1998 1997 report included annual report form 10k pricewaterhousecoopers llp october 4 1999item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “information regarding company’s independent registered public accounting firm” part iv item 15item 14 principal accountant fees services information required item incorporated herein reference proxy statement caption “independent registered public accounting firm’s fees” part iv item 15 item 7 managements discussion analysis financial conditions results operations results operations fiscal 1994 compared fiscal 1993 product service engineering licensing revenues fiscal 1994 179951000 compared 165001000 fiscal 1993 increase 14950000 principally due increase sales medical technology products 23578000 offset decreased sales signal processing technology products 7448000 industrial technology products 1180000 increase medical technology products sales primarily due inclusion bk operating revenue 9166000 8556000 represents revenue hotel operation fiscal 1994 1993 respectively percentage total cost sales total net sales fiscal 1994 1993 55 operating costs associated hotel fiscal years 1994 1993 5258000 5095000 respectively general administrative selling expenses increased 7282000 primarily due inclusion bk research product development expenses increased 466000 due addition staff supporting new medical technology product development programs computer software costs 3305000 2127000 capitalized fiscal 1994 1993 respectively amortization capitalized software amounted 1602000 1218000 fiscal 1994 1993 respectively amortization excess cost fair value net assets acquired camtronics 208000 184000 fiscal 1994 1993 respectively amortization excess cost fair value net assets acquired sky 179000 177000 fiscal 1994 1993 respectively amortization excess fair value net assets cost acquired bk 577000 266000 fiscal 1994 1993 respectively fiscal 1994 1993 companys investment analogic scientific increased 2000000 reflecting companys share analogic scientifics income fiscal 1994 1993 companys investment reduced cash dividend received 300000 500000 respectively equity net losses unconsolidated affiliate located canada amounted 595000 1700000 fiscal 1994 1993 respectively see note 4 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1994 1993 amounted 1157000 1166000 respectively minority interest net losses domestic subsidiary fiscal 1994 1993 amounted 177000 435000 respectively company ceased operations sales marketing organization third quarter fiscal 1994 significant financial impact anticipated companys future financial results minority interest net income companys consolidated foreign subsidiary bk fiscal 1994 935000 fiscal 1993 minority interest net loss bk 169000 effective tax rate fiscal 1994 16 vs 30 fiscal 1993 decrease primarily due tax loss benefit related dissolution foreign subsidiary impact income taxes net income fiscal 1994 14657000 118 per share compared 12445000 101 per share fiscal 1993 fiscal 1993 compared fiscal 1992 product service engineering licensing revenues fiscal 1993 165001000 compared 136990000 fiscal 1992 increase 28011000 principally due increase sales medical technology products 23370000 signal processing technology products 7601000 offset decreased sales industrial technology products 2960000 increase medical technology products sales primarily due inclusion bk increase signal processing technology sales primarily due sky operating revenue 8556000 8088000 represents revenue hotel operation fiscal 1993 1992 respectively percentage total cost sales total net sales fiscal 1993 1992 55 61 respectively decrease due primarily inclusion bk sky generating proportionately higher margins companys traditional revenue sectors operating costs associated hotel fiscal years 1993 1992 5095000 5165000 respectively general administrative selling expenses increased 9026000 primarily due inclusion sky bk majorityowned subsidiary research product development expenses increased 3648000 due addition staff supporting new product development programs inclusion bk within medical technology products sector along addition sky within signal processing technology sector interest expense decreased 411000 primarily due reduction debt incurred connection purchase hotel computer software costs 2127000 1715000 capitalized fiscal 1993 1992 respectively amortization capitalized software amounted 1218000 1022000 fiscal 1993 1992 respectively amortization excess cost fair value net assets acquired camtronics 184000 159000 fiscal 1993 1992 respectively amortization excess cost fair value net assets acquired sky 177000 62000 fiscal 1993 1992 respectively amortization excess fair value net assets cost acquired bk 266000 fiscal 1993 fiscal 1992 whollyowned foreign subsidiary sold real estate nordenstadt germany gain 1864000 fiscal 1993 1992 companys investment analogic scientific increased 2000000 3423000 respectively reflecting companys share analogic scientifics income fiscal 1993 1992 companys investment reduced cash dividend received 500000 1423000 respectively fiscal 1993 includes 1700000 charge resulting companys share equity losses privatelyheld company located canada minority interest net income companys consolidated subsidiary camtronics fiscal 1993 1992 amounted 1166000 959000 respectively minority interest net losses domestic subsidiary bk fiscal 1993 435000 169000 respectively effective tax rate fiscal 1993 30 vs 19 fiscal 1992 increase primarily due lower nontaxable interest dividend income percentage taxable income fiscal 1993 vs fiscal 1992 increase also due taxable income foreign investment fiscal 1993 vs nontaxable income fiscal 1992 foreign investment addition fiscal 1992 included nontaxable net profits foreign subsidiary net income fiscal 1993 12445000 101 per share compared 9910000 78 per share fiscal 1992 fiscal 1992 company adopted statement financial accounting standards 109 accounting income taxes adoption statement 109 material impact companys consolidated financial statements financial position companys balance sheet july 31 1994 reflects current ratio 68 1 compared 64 1 july 31 1993 cash equivalents marketable securities along accounts notes receivable constitute approximately 74 current assets july 31 1994 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution management anticipate difficulties financing operations anticipated levels companys ebt equity ratio 30 1 july 31 1994 32 1 july 31 1993 capital expenditures fiscal 1994 totaled approximately 7326000 part stock repurchase program authorized board directors company made following purchases common stock treasury 97800 shares fiscal 1994 aggregate cost 1543000 121200 shares fiscal 1993 aggregate cost 1363000 1103300 shares fiscal 1992 aggregate cost 12279000 impact inflation overall inflation material impact companys operations past three fiscal years effect recently issued accounting standards may 1993 statement financial accounting standards 115 accounting certain investments debt equity securities sfas 115 issued company adopt sfas 115 first quarter fiscal 1995 companys marketable securities expected categorized available sale securities defined sfas 115 reflected balance sheet fair value unrealized holding gains losses reflected net amount separate component stock holders equity realized impact companys financial position results operations expected material item 8item 7 managements discussion analysis financial conditions results operations results operations fiscal 1995 compared fiscal 1994 product service engineering licensing revenues fiscal 1995 194034000 compared 179951000 fiscal 1994 increase 14083000 principally due increase sales medical technology products 14292000 signal processing technology products 5888000 offset decreased sales industrial technology products 6097000 operating revenue 9720000 9166000 represents revenue hotel operation fiscal 1995 1994 respectively percentage total cost sales total net sales fiscal 1995 1994 57 55 respectively increase primarily due higher direct material costs less favorable product mix lower selling prices caused competitive pressures certain medical technology products additional manufacturing costs associated introduction new products operating costs associated hotel fiscal years 1995 1994 5294000 5258000 respectively general administrative selling expenses increased 1484000 primarily due increased staffing related expenses support new products research product development expenses increased 3790000 primarily due companys efforts designing developing newer sophisticated complete systems medical industrial technology markets along large investment research development staff equipment company anticipates making similar investments next several quarters new products enter production loss foreign exchange fiscal 1995 amounted 666000 primarily companys subsidiary denmark computer software costs 3524000 3305000 capitalized fiscal 1995 1994 respectively amortization capitalized software amounted 2355000 1602000 fiscal 1995 1994 respectively interest expense decreased approximately 350000 primarily due reduction debt increase amount interest capitalized amortization excess cost fair value net assets acquired camtronics 138000 208000 fiscal 1995 1994 respectively amortization excess cost fair value net assets acquired sky 179000 fiscal 1995 1994 amortization excess fair value net assets cost acquired bk 533000 577000 fiscal 1995 1994 respectively july 1995 company sold 2300000 common shares park meditech net price 100 per share resulting gain 1736000 see note 4 notes consolidated financial statements fiscal 1994 companys investment analogic scientific increased 2000000 reflecting companys share analogic scientifics income fiscal 1994 companys investment reduced cash dividend received 300000 1995 change value companys investment analogic scientific equity net losses unconsolidated affiliate located canada amounted 595000 fiscal 1994 see note 4 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1995 1994 amounted 765000 1157000 respectively minority interest net losses domestic subsidiary fiscal 1994 amounted 177000 company ceased operations sales marketing organization third quarter fiscal 1994 minority interest net loss companys consolidated foreign subsidiary bk fiscal 1995 247000 fiscal 1994 minority interest net income bk 935000 effective tax rate fiscal 1995 22 vs 16 fiscal 1994 fiscal 1994 includes tax loss benefit related dissolution foreign subsidiary impact income tax net income fiscal 1995 12706000 102 per share compared 14657000 118 per share fiscal 1994 fiscal 1994 compared fiscal 1993 product service engineering licensing revenues fiscal 1994 179951000 compared 165001000 fiscal 1993 increase 14950000 principally due increase sales medical technology products 23578000 offset decreased sales signal processing technology products 7448000 industrial technology products 1180000 increase medical technology products sales primarily due inclusion bk operating revenue 9166000 8556000 represented revenue hotel operation fiscal 1994 1993 respectively percentage total cost sales total net sales fiscal 1994 1993 55 operating costs associated hotel fiscal years 1994 1993 5258000 5095000 respectively general administrative selling expenses increased 7282000 primarily due inclusion bk research product development expenses increased 466000 due addition staff supporting new medical technology product development programs computer software costs 3305000 2127000 capitalized fiscal 1994 1993 respectively amortization capitalized software amounted 1602000 1218000 fiscal 1994 1993 respectively amortization excess cost fair value net assets acquired camtronics 208000 184000 fiscal 1994 1993 respectively amortization excess cost fair value net assets acquired sky 179000 177000 fiscal 1994 1993 respectively amortization excess fair value net assets cost acquired bk 577000 266000 fiscal 1994 1993 respectively fiscal 1994 1993 companys investment analogic scientific increased 2000000 reflecting companys share analogic scientifics income fiscal 1994 1993 companys investment reduced cash dividend received 300000 500000 respectively equity net losses unconsolidated affiliate located canada amounted 595000 1700000 fiscal 1994 1993 respectively see note 4 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1994 1993 amounted 1157000 1166000 respectively minority interest net losses domestic subsidiary fiscal 1994 1993 amounted 177000 435000 respectively company ceased operations sales marketing organization third quarter fiscal 1994 significant financial impact anticipated companys future financial results minority interest net income companys consolidated foreign subsidiary bk fiscal 1994 935000 fiscal 1993 minority interest net loss bk 169000 effective tax rate fiscal 1994 16 vs 30 fiscal 1993 decrease primarily due tax loss benefit related dissolution foreign subsidiary impact income taxes net income fiscal 1994 14657000 118 per share compared 12445000 101 per share fiscal 1993 financial position companys balance sheet july 31 1995 reflects current ratio 64 1 compared 68 1 july 31 1994 cash equivalents marketable securities along accounts notes receivable constitute approximately 74 current assets july 31 1995 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution management anticipate difficulties financing operations anticipated levels companys debt equity ratio 30 1 july 31 1995 1994 capital expenditures fiscal 1995 totaled approximately 8217000 part stock repurchase program authorized board directors company made following purchases common stock treasury 19200 shares fiscal 1995 aggregate cost 326000 97800 shares fiscal 1994 aggregate cost 1543000 121200 shares fiscal 1993 aggregate cost 1363000 impact inflation overall inflation material impact companys operations past three fiscal years item 8item 7 managements discussion analysis financial conditions results operations results operations fiscal 1996 compared fiscal 1995 product service engineering licensing revenues fiscal 1996 213781000 compared 194034000 fiscal 1995 increase 19747000 principally due increased sales medical technology products 12141000 signal processing technology products 4464000 industrial technology products 3142000 operating revenue 10528000 9720000 represents revenue hotel operation fiscal 1996 1995 respectively interest dividend income increased primarily due distribution limited partnership company invested see note 5 notes consolidated financial statements percentage total cost sales total net sales fiscal 1996 1995 62 57 respectively increase primarily due higher direct material costs less favorable product mix lower selling prices caused competitive pressures certain ultrasound medical technology products additional manufacturing costs associated introduction companys unique light weight lowpower ct scanner operating costs associated hotel fiscal years 1996 1995 5627000 5294000 respectively general administrative selling expenses decreased 596000 result lower selling expenses primarily areas advertising staff expenses offset higher general administrative expenses relating staffing research product development expenses decreased 873000 primarily due reduction engineering effort applicable development mobile ct scanner gain foreign exchange fiscal 1996 amounted 524000 compared loss 666000 fiscal 1995 primarily companys subsidiary denmark computer software costs 1985000 3524000 capitalized fiscal 1996 1995 respectively amortization capitalized software amounted 2325000 2355000 fiscal 1996 1995 respectively amortization excess cost fair value net assets acquired camtronics 127000 138000 fiscal 1996 1995 respectively amortization excess cost fair value net assets acquired sky 179000 fiscal 1996 1995 amortization excess fair value net assets cost acquired bk 542000 533000 fiscal 1996 1995 respectively companys share losses newly formed privately held company amounted 821000 fiscal 1996 see note 5 notes consolidated financial statements fiscal 1996 compared fiscal 1995 continued july 1995 company sold 2300000 common shares park meditech net price 100 per share resulting gain 1736000 see note 5 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1996 1995 amounted 224000 765000 respectively minority interest net loss companys consolidated foreign subsidiary bk fiscal 1996 1995 1370000 247000 respectively effective tax rate fiscal 1996 26 vs 22 fiscal 1995 increase primarily result losses foreign subsidiary tax benefit offset part utilization alternative minimum tax credits net income fiscal 1996 13065000 104 per share compared 12706000 102 per share fiscal 1995 fiscal 1995 compared fiscal 1994 product service engineering licensing revenues fiscal 1995 194034000 compared 179951000 fiscal 1994 increase 14083000 principally due increase sales medical technology products 14292000 signal processing technology products 5888000 offset decreased sales industrial technology products 6097000 operating revenue 9720000 9166000 represents revenue hotel operation fiscal 1995 1994 respectively percentage total cost sales total net sales fiscal 1995 1994 57 55 respectively increase primarily due higher direct material costs less favorable product mix lower selling prices caused competitive pressures certain medical technology products additional manufacturing costs associated introduction new products operating costs associated hotel fiscal years 1995 1994 5294000 5258000 respectively general administrative selling expenses increased 1484000 primarily due increased staffing related expenses support new products research product development expenses increased 3790000 primarily due companys efforts designing developing newer sophisticated complete systems medical industrial technology markets along large investment research development staff equipment company anticipates making similar investments next several quarters new products enter production loss foreign exchange fiscal 1995 amounted 666000 primarily companys subsidiary denmark computer software costs 3524000 3305000 capitalized fiscal 1995 1994 respectively amortization capitalized software amounted 2355000 1602000 fiscal 1995 1994 respectively fiscal 1995 compared fiscal 1994 continued interest expense decreased approximately 350000 primarily due reduction debt increase amount interest capitalized amortization excess cost fair value net assets acquired camtronics 138000 208000 fiscal 1995 1994 respectively amortization excess cost fair value net assets acquired sky 179000 fiscal 1995 1994 amortization excess fair value net assets cost acquired bk 533000 577000 fiscal 1995 1994 respectively july 1995 company sold 2300000 common shares park meditech net price 100 per share resulting gain 1736000 fiscal 1994 companys investment analogic scientific increased 2000000 reflecting companys share analogic scientifics income fiscal 1994 companys investment reduced cash dividend received 300000 1995 change value companys investment analogic scientific equity net losses unconsolidated affiliate located canada amounted 595000 fiscal 1994 see note 5 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1995 1994 amounted 765000 1157000 respectively minority interest net losses domestic subsidiary fiscal 1994 amounted 177000 company ceased operations sales marketing organization third quarter fiscal 1994 minority interest net loss companys consolidated foreign subsidiary bk fiscal 1995 247000 fiscal 1994 minority interest net income bk 935000 effective tax rate fiscal 1995 22 vs 16 fiscal 1994 fiscal 1994 includes tax loss benefit related dissolution foreign subsidiary impact income tax net income fiscal 1995 12706000 102 per share compared 14657000 118 per share fiscal 1994 financial position companys balance sheet july 31 1996 reflects current ratio 60 1 compared 64 1 july 31 1995 cash equivalents marketable securities along accounts notes receivable constitute approximately 73 current assets july 31 1996 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution management anticipate difficulties financing operations anticipated levels companys debt equity ratio 25 1 july 31 1996 compared 30 1 july 31 1995 financial position continued february 22 1996 company invested 2000000 33 interest newly formed privately held company design manufacture subassemblies medical imaging equipment july 1 1996 company acquired remaining 41 minority interest bk 3416000 cash company owns 100 outstanding shares bk capital expenditures fiscal 1996 totaled approximately 6233000 part stock repurchase program authorized board directors company made following purchases common stock treasury 17500 shares fiscal 1996 aggregate cost 345000 19200 shares fiscal 1995 aggregate cost 326000 97800 shares fiscal 1994 aggregate cost 1543000 impact inflation overall inflation material impact companys operations past three fiscal years accounting standards statement financial accounting standards sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopt fair value method accounting employee stockbased compensation instead comply pro forma disclosure requirements beginning fiscal 1997 company believes adoption sfas 123 material impact companys financial position results operations statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed requires impairment losses recognized carrying value asset exceeds fair value company regularly assesses longlived assets impairment therefore believe adoption standard fiscal 1997 material effect financial position results operations item 8item 7 managements discussion analysis financial conditions results operations results operations fiscal 1997 compared fiscal 1996 product service engineering licensing revenues fiscal 1997 239550000 compared 213781000 fiscal 1996 increase 12 increase 25769000 principally due increase sales medical technology products 24101000 primarily due sales new computed tomography ct scanner archium cardiac digital archive system signal processing technology products 4099000 offset reduction industrial technology products 2431000 operating revenue 11591000 10528000 represents revenue hotel operation fiscal 1997 1996 respectively interest dividend income decreased primarily due dividend distribution received limited partnership fiscal 1996 dividend distribution received fiscal 1997 limited partnership see note 5 notes consolidated financial statements percentage total cost sales total net sales fiscal 1997 1996 59 62 respectively decrease primarily due 12 increase sales diminished start manufacturing costs associated new ct scanner favorable product mix operating costs associated hotel fiscal years 1997 1996 5959000 5627000 respectively general administrative selling expenses decreased 2137000 primarily due cost reduction program companys danish subsidiary along lower staffing requirements within companys domestic operations research product development expenses increased 4931000 primarily due expanding effort applicable developing complex medical imaging systems increased amortization capitalized computer software costs computer software costs 1480000 1985000 capitalized fiscal 1997 1996 respectively amortization capitalized software amounted 3115000 2325000 fiscal 1997 1996 respectively gain foreign exchange fiscal 1997 amounted 1045000 compared 524000 fiscal 1996 primarily companys subsidiary denmark amortization excess cost fair value net assets acquired camtronics 85000 127000 fiscal 1997 1996 respectively amortization excess cost fair value net assets acquired sky 119000 179000 fiscal 1997 1996 respectively fiscal 1997 compared fiscal 1996 continued amortization excess fair value net assets cost acquired bk 645000 542000 fiscal 1997 1996 respectively companys share losses privately held company amounted 1949000 821000 fiscal 1997 fiscal 1996 respectively see note 5 notes consolidated financial statements fiscal 1997 companys investment analogic scientific decreased 425000 reflecting companys share analogic scientifics loss see note 5 notes consolidated financial statements fiscal 1997 includes 1742000 charge resulting write companys investment park meditech inc see note 5 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1997 1996 amounted 1270000 224000 respectively minority interest net loss companys consolidated foreign subsidiary bk fiscal 1996 1370000 july 1 1996 company purchased remaining 41 minority interest bk effective tax rate fiscal 1997 24 vs 26 fiscal 1996 change primarily result increase utilization tax credits net income fiscal 1997 20090000 158 per share compared 13065000 104 per share fiscal 1996 results operations include charge 1742000 writeoff marketable security charge excluded earnings per share would 166 fiscal 1997 fiscal 1996 compared fiscal 1995 product service engineering licensing revenues fiscal 1996 213781000 compared 194034000 fiscal 1995 increase 19747000 principally due increase sales medical technology products 12141000 signal processing technology products 4464000 industrial technology products 3142000 fiscal 1996 company began shipments lightweight computed tomography ct scanner primarily responsible increase sales medical technology products operating revenue 10528000 9720000 represents revenue hotel operation fiscal 1996 1995 respectively interest dividend income increased primarily due distribution limited partnership company invested see note 5 notes consolidated financial statements fiscal 1996 compared fiscal 1995 continued percentage total cost sales total net sales fiscal 1996 1995 62 57 respectively increase primarily due higher direct material costs less favorable product mix lower selling prices caused competitive pressures certain medical technology products additional manufacturing costs associated introduction companys unique light weight lowpower ct scanner operating costs associated hotel fiscal years 1996 1995 5627000 5294000 respectively general administrative selling expenses decreased 596000 result lower selling expenses primarily areas advertising staff expenses offset higher general administrative expenses relating staffing research product development expenses decreased 873000 primarily due reduction engineering effort applicable development mobile ct scanner gain foreign exchange fiscal 1996 amounted 524000 compared loss 666000 fiscal 1995 primarily companys subsidiary denmark computer software costs 1985000 3524000 capitalized fiscal 1996 1995 respectively amortization capitalized software amounted 2325000 2355000 fiscal 1996 1995 respectively amortization excess cost fair value net assets acquired camtronics 127000 138000 fiscal 1996 1995 respectively amortization excess cost fair value net assets acquired sky 179000 fiscal 1996 1995 amortization excess fair value net assets cost acquired bk 542000 533000 fiscal 1996 1995 respectively companys share losses newly formed privately held company amounted 821000 fiscal 1996 see note 5 notes consolidated financial statements july 1995 company sold 2300000 common shares park meditech net price 100 per share resulting gain 1736000 see note 5 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1996 1995 amounted 224000 765000 respectively minority interest net loss companys consolidated foreign subsidiary bk fiscal 1996 1995 1370000 247000 respectively effective tax rate fiscal 1996 26 vs 22 fiscal 1995 increase primarily result losses foreign subsidiary tax benefit offset part utilization alternative minimum tax credits net income fiscal 1996 13065000 104 per share compared 12706000 102 per share fiscal 1995 financial position companys balance sheet july 31 1997 reflects current ratio 62 1 compared 60 1 july 31 1996 cash equivalents marketable securities along accounts notes receivable constitute approximately 75 current assets july 31 1997 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution management anticipate difficulties financing operations anticipated levels companys debt equity ratio 24 1 july 31 1997 compared 25 1 july 31 1996 fiscal 1997 funds provided operations amounted 33404000 net income 20090000 depreciation amortization 8920000 major contributors increases accounts notes receivable 5766000 major use operating cash following investing activities resulted decrease cash 18162000 1997 company invested 1340000 additional interest privately held company designs manufactures medical imaging equipment capital expenditures fiscal 1997 amounted 6301000 capitalized computer software cost approximately 1500000 company also made additional investment 9108000 marketable securities net maturities following finances activities resulted net reduction cash amount 5172000 dividends paid shareholders fiscal year amounted 2508000 cash flows financing activities decreased payment uncollateralized foreign bank overdraft facility amount 3305000 offset proceeds stock options exercised amount 1421000 total investments advances affiliated companies decreased 1034000 decrease due companys share equity losses privately held company amount 1949000 analogic scientific 425000 offset additional investment 1340000 privately held company notes payable decreased 3644000 6677000 end fiscal 1997 primarily due payment uncollateralized foreign bank overdraft facility minority interest consolidated subsidiaries increased 1270000 represents 32 minority interest camtronics financial position continued companys three largest customers significant valued customer phillips ge siemens accounted approximately 171 84 78 respectively product service engineering licensing revenue fiscal year ended july 31 1997 loss one customers would material adverse effect upon companys business capital expenditures fiscal 1997 totaled approximately 6300000 part stock repurchase program authorized board directors company purchased 17500 shares common stock treasury fiscal 1996 aggregate cost 345000 shares repurchased fiscal 1997 impact inflation overall inflation material impact companys operations past three fiscal years accounting standards february 1997 financial accounting standards board fasb issued statement 128 earnings per share required adopted company december 15 1997 time company required change method currently used compute earnings per share restate prior periods new requirements calculating basic earnings per share dilutive effect stock options excluded expected material impact companys earnings per share june 1997 fasb issued statement 130 sfas 130 reporting comprehensive income statement 131 sfas 131 disclosures segments enterprise related information company required adopt statements fiscal 1999 sfas 130 establishes new standards reporting displaying comprehensive income components sfas 131 requires disclosure certain information regarding operating segments products services geographic areas operation major customers adoption statements expected impact companys consolidated financial position results operations business practices item 8item 7 managements discussion analysis financial condition results operations fiscal 1998 compared fiscal 1997 product service engineering licensing revenues fiscal 1998 276562000 compared 239550000 fiscal 1997 increase 15 increase 37012000 principally due increased sales medical technology products 30060000 primarily due continued strengthening demand digital laser imaging systems magnetic resonance imaging products new products digital ultrasound subsystems ultrasound systems companys danish subsidiary bk signal processing technology products 4532000 primarily due company entering new growing market dsp resource boards computer telephony integration applications automated directory assistance voice internet industrial technology products 2420000 primarily due increased demand companys high frequency ate boards operating revenue 12036000 11591000 represents revenue hotel operation fiscal 1998 1997 respectively percentage total cost sales total net sales fiscal 1998 1997 60 59 respectively operating costs associated hotel fiscal years 1998 1997 6091000 5959000 respectively general administrative selling expenses increased 2619000 primarily due increases bad debt reserve legal expenditures related patent filings research product development expenses increased 2229000 primarily due companys expanding engineering efforts applicable developing complex imaging systems new digital ultrasound subsystems ultrasound systems companys danish subsidiary b k computer software costs 1658000 1480000 capitalized fiscal 1998 1997 respectively amortization capitalized software amounted 2406000 3115000 fiscal 1998 1997 respectively gain foreign exchange 1045000 realized 1997 versus loss 4000 fiscal 1998 companys share losses privately held company amount 3488000 1949000 fiscal 1998 1997 respectively see note 5 notes consolidated financial statements amortization excess fair value net assets cost acquired b k 335000 645000 fiscal 1998 1997 respectively fiscal 1998 companys investment another privately held company increased 447000 reflecting companys share equity fiscal 1998 compared fiscal 1997 continued fiscal 1998 companys investment analogic scientific decreased 575000 reflecting companys share analogic scientifics equity see note 5 notes consolidated financial statements fiscal 1998 company recorded reserve 400000 reflecting partial impairment 19 investment another privately held company fiscal 1998 company sold 140560 common shares publicly traded company resulting gain 997000 see note 5 notes consolidated statements minority interest net income companys consolidated subsidiary camtronics fiscal 1998 amounted 1098000 compared 1270000 fiscal 1997 fourth quarter fiscal 1998 company purchased one founders camtronics entire equity interest camtronics 1600000 transaction companys share camtronics increased approximately 77 see note 2 notes consolidated financial statements effective tax rate fiscal 1998 32 vs 24 fiscal 1997 increase primarily due alternative minimum tax credit carryforwards utilized fiscal 1997 available fiscal 1998 see note 11 notes consolidated financial statements net income fiscal 1998 23888000 compared net income 20090000 period last year basic pershare earnings net income divided weighted average common shares outstanding 189 160 diluted pershare earnings net income divided weighted average common shares potential new shares stock options also increased 187 158 prior periods per share amounts restated reflect adoption fasb 128 see notes 1e 1l 12 notes consolidated financial statements fiscal 1997 compared fiscal 1996 product service engineering licensing revenues fiscal 1997 239550000 compared 213781000 fiscal 1996 increase 12 increase 25769000 principally due increase sales medical technology products 24101000 primarily due sales new computed tomography ct scanner archium cardiac digital archive system signal processing technology products 4099000 offset reduction industrial technology products 2431000 operating revenue 11591000 10528000 represents revenue hotel operation fiscal 1997 1996 respectively interest dividend income decreased primarily due dividend distribution received limited partnership fiscal 1996 dividend distribution received fiscal 1997 limited partnership see note 5 notes consolidated financial statements percentage total cost sales total net sales fiscal 1997 1996 59 62 respectively decrease primarily due 12 increase sales diminished start manufacturing costs associated new ct scanner favorable product mix operating costs associated hotel fiscal years 1997 1996 5959000 5627000 respectively general administrative selling expenses decreased 2137000 primarily due cost reduction program companys danish subsidiary along lower staffing requirements within companys domestic operations research product development expenses increased 4931000 primarily due expanding effort applicable developing complex medical imaging systems increased amortization capitalized computer software costs computer software costs 1480000 1985000 capitalized fiscal 1997 1996 respectively amortization capitalized software amounted 3115000 2325000 fiscal 1997 1996 respectively gain foreign exchange fiscal 1997 amounted 1045000 compared 524000 fiscal 1996 primarily companys subsidiary denmark amortization excess cost fair value net assets acquired camtronics 85000 127000 fiscal 1997 1996 respectively amortization excess cost fair value net assets acquired sky 119000 179000 fiscal 1997 1996 respectively amortization excess fair value net assets cost acquired b k 645000 542000 fiscal 1997 1996 respectively companys share losses privately held company amounted 1949000 821000 fiscal 1997 fiscal 1996 respectively fiscal 1997 companys investment analogic scientific decreased 425000 reflecting companys share analogic scientifics loss fiscal 1997 compared fiscal 1996 continued fiscal 1997 includes 1742000 charge resulting write companys investment park meditech inc see note 5 notes consolidated financial statements minority interest net income companys consolidated subsidiary camtronics fiscal 1997 1996 amounted 1270000 224000 respectively minority interest net loss companys consolidated foreign subsidiary b k fiscal 1996 1370000 july 1 1996 company purchased remaining 41 minority interest b k effective tax rate fiscal 1997 24 vs 26 fiscal 1996 change primarily result increase utilization tax credits net income fiscal 1997 20090000 compared 13065000 fiscal 1996 basic pershare earnings 160 fiscal 1997 105 fiscal 1996 diluted pershare earnings 158 fiscal 1997 104 fiscal 1996 financial position companys balance sheet july 31 1998 reflects current ratio 65 1 compared 62 1 july 31 1997 cash equivalents marketable securities along accounts notes receivable constitute approximately 74 current assets july 31 1998 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution management anticipate difficulties financing operations anticipated levels companys debt equity ratio 21 1 july 31 1998 compared 24 1 july 31 1997 fiscal 1998 funds provided operations amounted 27593000 net income 23888000 depreciation amortization 10651000 major contributors increases accounts notes receivable 3281000 inventory 7116000 major use operating cash following investing activities resulted decrease cash 23267000 1998 company invested 3340000 privately held company designs manufactures medical imaging equipment capital expenditures fiscal 1998 amounted 14598000 capitalized computer software cost 1658000 company also made additional investment 4717000 marketable securities net maturities proceeds sale marketable securities amounted 997000 following finance activities resulted net reduction cash amount 1880000 dividends paid shareholders fiscal year amounted 2902000 cash flows financing activities decreased purchase stock camtronics amount 1600000 offset proceeds stock options exercised amount 863000 proceeds camtronics unsecured bank line credit 2600000 total investments advances affiliated companies decreased 723000 decrease due companys share equity losses privately held company amount 3488000 analogic scientific 575000 offset additional investment 3340000 privately held company notes payable increased 2256000 8933000 end fiscal 1998 primarily due borrowing line credit camtronics minority interest consolidated subsidiaries increased 1098000 represents minority interest camtronics companys three largest customers significant valued customer philips ge imation corp accounted approximately 161 77 72 respectively product service engineering licensing revenue fiscal year ended july 31 1998 loss one customers would material adverse effect upon companys business financial position continued part stock repurchase program authorized board directors company purchased 17500 shares common stock treasury fiscal 1996 aggregate cost 345000 shares repurchased fiscal 1998 fiscal 1997 impact inflation overall inflation material impact companys operations past three fiscal years accounting standards june 1997 fasb issued statement 130 sfas 130 reporting comprehensive income statement 131 sfas 131 disclosures segments enterprise related information company required adopt statements fiscal 1999 sfas 130 establishes new standards reporting displaying comprehensive income components sfas 131 requires disclosure certain information regarding operating segments products services geographic areas operation major customers adoption statements expected impact companys consolidated financial position results operations business practices disclosure requirements reviewed june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities establishes new model accounting derivative hedging activities supersedes amends number existing standards provisions sfas 133 effective fiscal quarters years beginning june 15 1999 company believes statement impact financial position results operations cash flows company hold derivative instruments engage hedging activities present time year 2000 issue result computer programs written using two digits rather four digits define applicable year computer programs timesensitive software may recognize date using 00 year 1900 rather year 2000 companys internal systems correctly recognize date information year changes 2000 could adverse impact companys operations company undertaken considerable effort assess impact necessary resources required make systems year 2000 compliant currently company utilizing internal external resources upgrade computer hardware software systems company also identifying implementing changes information systems replaced order make year 2000 compliant company also assessing possible effects year 2000 issues significant vendors customers could turn affect companys operations company yet able determine however whether suppliers service providers need make software modifications replacements whether failure make software corrections adverse effect companys operations financial condition financial position continued company currently estimates year 2000 costs next two fiscal years range 40 million 60 million estimated costs based managements best projections yet guarantee forecasts achieved actual results could differ materially anticipated cost project funded operating cash flows item 8item 7 management’s discussion analysis financial conditions results operations results operations fiscal 2000 compared fiscal 1999 product service engineering licensing revenues fiscal 2000 278543000 compared 260945000 fiscal 1999 increase 7 increase 17598000 principally due increase sales industrial technology products 11133000 result higher demand company’s high frequency automatic test equipment ate boards increase sales 6492000 signal processing technology products primarily due sales exact explosive assessment computed tomography systems revenues medical technology products level prior year operating revenue 13038000 12015000 represents revenue hotel operation fiscal 2000 1999 respectively increase 1023000 hotel revenue due increase occupancy room rates prior year interest dividend income fiscal 2000 6038000 compared 6734000 fiscal 1999 decrease 696000 primarily due interest earned city peabody real estate tax abatement recorded fiscal year 2000 282000 versus 842000 recorded fiscal year 1999 cost sales compared total net sales fiscal 2000 1999 increased 3 63 60 increase primarily due reduction selling prices higher manufacturing costs operating costs associated hotel fiscal years 2000 1999 6203000 6098000 respectively general administrative expenses 27526000 year ended july 31 2000 compared 21230000 year ended july 31 1999 increase 6296000 due primarily additional expenses associated canadian subsidiary anrad acquired june 1999 increased personnel expenses additions bad debt provision costs associated new enterprise resource planning erp system partially offset decrease staffing bk subsidiary selling expenses 26207000 year ended july 31 2000 versus 25735000 year ended july 31 1999 increase 472000 primarily due increase sales personnel marketing programs partially offset reduced staffing bk subsidiary research product development expenses 38260000 year ended july 31 2000 compared 39598000 year ended july 31 1999 decrease 1338000 fiscal year 2000 versus fiscal year 1999 primarily due higher capitalized software costs lower expenses bk subsidiary computer software costs 2972000 2462000 capitalized fiscal 2000 1999 respectively amortization capitalized software amounted 1778000 1977000 fiscal 2000 1999 respectively loss foreign exchange fiscal 2000 amounted 159000 compared 59000 loss fiscal 1999 primarily company’s bk subsidiary amortization excess fair value net assets cost acquired bk 113000 year fiscal 2000 1999 company’s share losses privately held company amounted 2225000 4780000 fiscal 2000 fiscal 1999 respectively see note 5 notes consolidated financial statements fiscal 2000 company’s investment analogic scientific increased 925000 reflecting company’s share analogic scientific’s profit company record income loss associated investment fiscal 1999 see note 5 notes consolidated financial statements fiscal 2000 company received final distribution 1771802 shares restricted securities publicly traded company limited partnership july 31 2000 company recognized loss approximately 110000 value shares see note 5 notes consolidated financial statements minority interest net income company’s consolidated subsidiary camtronics fiscal 2000 amounted 487000 compared 758000 fiscal 1999 fiscal year 2000 founders employees camtronics exercised rights sell shares back camtronics subsequent transactions company’s share camtronics increased approximately 81 see note 2 notes consolidated financial statements effective tax rate increased 20 31 fiscal 2000 primarily result net losses foreign subsidiaries tax benefits fiscal 2000 also fiscal 1999 effective tax rate reflected benefit reversal prior year tax provisions net income fiscal 2000 14108000 compared net income 19513000 period last year basic pershare earnings 110 compared 154 fiscal 1999 diluted pershare earnings 110 compared 153 fiscal 1999 fiscal 1999 compared fiscal 1998 product service engineering licensing revenues fiscal 1999 260945000 compared 276562000 fiscal 1998 decrease 6 decrease 15617000 principally due completion foreign government contract danish subsidiary well softness asian south american markets adversely impacted oem customers reduced demand products computer telephony semiconductor industries contributed approximately 6000000 revenue shortfall partially offsetting revenue declines initial fourth quarter shipments exact system used airport security operating revenue 12015000 12036000 represents revenue hotel operation fiscal 1999 1998 respectively interest dividend income increased 860000 primarily due interest earned city peabody real estate tax abatement percentage total cost sales total net sales fiscal 1999 1998 60 operating costs associated hotel fiscal years 1999 1998 6098000 6091000 respectively general administrative selling expenses increased 825000 2 primarily due higher operating costs company’s danish subsidiary partially offset lower staffing requirements within company’s domestic operations research product development expenses increased 3421000 primarily due expanding effort applicable developing new class complex medical imaging systems computer software costs 2462000 1658000 capitalized fiscal 1999 1998 respectively amortization capitalized software amounted 1977000 2406000 fiscal 1999 1998 respectively loss foreign exchange fiscal 1999 amounted 59000 compared 4000 loss fiscal 1998 primarily company’s subsidiary denmark amortization excess fair value net assets cost acquired bk 113000 335000 fiscal 1999 1998 respectively company’s share losses privately held company amount 4780000 3488000 fiscal 1999 1998 respectively see note 5 notes consolidated financial statements fiscal 1998 company’s investment analogic scientific decreased 575000 reflecting company’s share analogic scientific’s losses company record income loss associated investment 1999 see note 5 notes consolidated financial statements fiscal 1998 company recorded write 400000 reflecting partial impairment 19 investment another privately held company adjustments fiscal 1999 fiscal 1998 company sold 140560 common shares publicly traded company resulting gain 997000 see note 5 notes consolidated statements minority interest net income company’s consolidated subsidiary camtronics fiscal 1999 amounted 758000 compared 1098000 fiscal 1998 fourth quarter fiscal 1998 company purchased one founders camtronics entire equity interest camtronics 1600000 transaction company’s share camtronics increased approximately 77 see note 2 notes consolidated financial statements effective tax rate fiscal 1999 20 vs 32 fiscal 1998 decrease due increased benefits tax exempt interest increased general business credits impact resolution prior year tax audit increased fsc foreign sales corporation benefit net income fiscal 1999 19513000 compared net income 23888000 period last year basic pershare earnings 154 189 diluted pershare earnings 153 187 financial position company’s balance sheet july 31 2000 reflects current ratio 60 1 compared 70 1 july 31 1999 cash equivalents marketable securities well accounts notes receivable constitute approximately 70 current assets july 31 2000 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution management anticipate difficulties financing operations anticipated levels company’s debt equity ratio 20 1 july 31 2000 compared 18 1 july 31 1999 company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related local currency revenue operating expenses europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2000 due short maturities instruments company maintains bond investment portfolio various issuers types maturities company’s cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value company’s investment portfolio company currently hedge interest rate exposures fiscal 2000 funds provided operations 14260000 major components 14260000 net income 14108000 depreciation amortization 13787000 offset increases inventories 9903000 accounts notes affiliates receivables 6924000 following investing activities resulted cash decrease 12030000 fiscal 2000 company invested additional 3068000 privately held company funded research development design manufacture medical imaging equipment capital expenditures fiscal 2000 amounted 12998000 capitalized computer software costs approximately 2972000 company also decreased investment marketable securities 6035000 net maturities financing activities resulted net cash reduction 2806000 primarily due dividends paid shareholders 3590000 payments debt capital lease obligations 987000 partially offset proceeds stock options exercised 1771000 total investments advances affiliated companies increased 1658000 increase primarily due additional investment 3068000 privately held company 925000 company’s share analogic scientific’s profits partially offset 2225000 company’s share equity losses privately held company notes payable decreased 1075000 5639000 end fiscal 2000 primarily due repayment notes payable 361000 obligations capital leases 714000 minority interest consolidated subsidiary decreased 318000 represents minority interest camtronics company’s three largest customers significant valued customer philips general electric toshiba accounted approximately 16 10 9 respectively product service engineering licensing revenue fiscal year ended july 31 2000 loss one customers would material adverse effect upon company’s business part stock repurchase program authorized board directors company purchased 16000 shares common stock treasury fiscal 1999 aggregate cost 549000 shares repurchased fiscal 2000 impact inflation overall inflation material impact company’s operations past three fiscal years accounting standards june 1998 financial accounting standards board “fasb” issued statement financial accounting standards sfas 133 “accounting derivative instruments hedging activities” standard established accounting reporting standards requiring recognition derivative instruments either assets liabilities statement financial position measure instruments fair value june 1999 fasb issued sfas 137 defers effective date sfas 133 fiscal years beginning june 15 2000 june 2000 fasb issued sfas 138 amends certain derivative instruments certain hedging activities sfas 133 company currently hold derivative instruments currently engage hedging activities expect adoption sfas 133 sfas 138 material impact financial position operating results december 1999 securities exchange commission issued staff accounting bulletin 101 “sab 101” “revenue recognition financial statements” amended sab 101a sab 101b “sab 101” effective later quarter ending july 31 2001 sab 101 clarifies securities exchange commission’s views regarding recognition revenue company adopt sab 101 fourth quarter 2001 company currently evaluating impact sab 101 company’s financial position results operations march 2000 financial accounting standards board issued interpretation 44 “accounting certain transactions involving stock compensation interpretation accounting principles board apb opinion 25” fin 44 fin 44 clarifies application apb opinion 25 including definition employee purposes applying apb opinion 25 criteria determining whether plan qualifies noncompensatory plan accounting consequence various modifications terms previously fixed stock options awards accounting exchange stock compensation awards business combination fin 44 effective july 1 2000 certain conclusions fin 44 cover specific events occurred either december 15 1998 january 12 2000 company expect application fin 44 material impact results operations financial position year 2000 update company successfully implemented new enterprise resource planning erp system fiscal year 2000 due size complexity system company anticipated experienced problems implementation company resolved problems system functioning planned company’s full cost implement erp system included hardware software license consulting costs incurred company personnel dedicated project 85 million company capitalized 63 million expensed remaining costs 22 total cost project funded operating cash flows company believes spend significant funds excess monies spent erp system become year 2000 compliant item 8item 7 managements discussion analysis financial conditions results operations following discussion provides analysis analogic corporations financial condition results operations read conjunction consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains forwardlooking statements within meaning securities act 1933 securities exchange act 1934 forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements analogic corporation differ projected results statements historical fact company makes document incorporated reference forwardlooking see business environment risk factors page 13 results operations fiscal 2001 compared fiscal 2000 product revenue fiscal 2001 3201 million compared 2552 million fiscal 2000 increase 649 million 25 increase principally due increase sales medical technology products 709 million 39 attributed increased demand fully featured midrange computed tomography ct systems digital radiography systems patient monitors advanced cardiovascular information management systems increase sales 41 million 15 industrial technology products due demand companys high frequency automatic test equipment ate boards increase product revenue partially offset decrease signal processing technology products 101 million 21 caused dramatic downturn demand network access boards used internet telephony market engineering revenue fiscal 2001 277 million compared 233 million fiscal 2000 increase 19 increase 44 million primarily due increase projects developing imaging equipment revenues 128 million 130 million represent revenue companys hotel operation fiscal 2001 2000 respectively cost product sales 2047 million fiscal 2001 compared 1592 million fiscal 2000 cost product sales percentage product revenue 640 fiscal 2001 compared 624 fiscal 2000 increase primarily due higher manufacturing costs changes product mix engineering cost sales 232 million fiscal 2001 compared 174 million fiscal 2000 total cost engineering sales percentage engineering revenue increased 75 fiscal 2000 84 fiscal 2001 increase mainly attributable higher costs projects developing imaging equipment costs sales 64 million 62 million companys hotel operation fiscal 2001 2000 respectively asset impairment charges 32 million fiscal 2001 relates anatel companys telecommunications subsidiary writedown certain assets estimated net realizable value related voice internet protocol business anatel estimated fair value assets based various methodologies including review business outlook telecommunications market comparison current asset carrying value projected undiscounted cash flow rd expenses 413 million fiscal 2001 11 total revenue compared 383 million 13 total revenue fiscal 2000 increase 30 million due research development activities across companys product lines decline percentage 13 11 due higher revenue period selling marketing expenses 331 million fiscal 2001 versus 262 million fiscal 2000 increase 69 million 26 increase primarily due companys subsidiary camtronics increasing sales personnel marketing programs switching selling products directly end users prior practice selling oems 12 million increase due sky computer subsidiary offering total solution sales package remaining increase 20 million primarily associated additional selling marketing efforts support companys revenue growth percentage total revenues selling expenses remained unchanged 9 general administrative expenses 328 million fiscal 2001 compared 275 million fiscal 2000 percentage total revenues general administrative expenses 9 fiscal 2001 2000 increase 53 million primarily due higher personnel costs 35 million 18 million costs support companys growth computer software costs 36 million 30 million capitalized fiscal 2001 2000 respectively amortization capitalized software amounted 16 million 18 million fiscal 2001 2000 respectively included research product development expenses interest income net fiscal 2001 54 million compared 57 million fiscal 2000 decrease primarily due 03 million interest income recorded fiscal 2000 real estate tax abatement company recorded net income equity unconsolidated subsidiaries 19 million fiscal 2001 compared losses 13 million fiscal 2000 improvement mainly due reduction losses investment enhanced ct technology llc 22 million loss fiscal 2000 18 million income fiscal 2001 addition company recognized loss 01 million fiscal 2001 investment shenzhen anke hightech co ltd compared gain fiscal 2000 09 million see note 6 notes consolidated financial statements expense 06 million fiscal 2001 compared 02 million fiscal 2000 increase expense mainly due write approximately 04 million reflect difference companys investment cost current market value restricted securities company received fiscal 2000 final distribution shares publicly traded company made limited partnership company invested effective tax rate decreased 30 fiscal 2001 compared 31 fiscal 2000 net income fiscal 2001 152 million compared 141 million fiscal 2000 net income fiscal 2001 includes asset impairment charge 32 million related companys telecommunications subsidiary anatel basic earnings per share 118 compared 110 fiscal 2000 diluted pershare earnings 117 compared 109 fiscal 2000 fiscal 2000 compared fiscal 1999 product revenue fiscal 2000 2552 million compared 2429 million fiscal 1999 increase 123 million 50 increase principally due increase sales industrial technology products 114 million result higher demand companys high frequency automatic test equipment ate boards increase sales 64 million signal processing technology products primarily due sales exact explosive assessment computed tomography systems increase offset decrease 54 million revenues medical technology products mainly related enterprisewide information systems cardiac patient data engineering revenue fiscal 2000 233 million compared 181 million fiscal 1999 increase 29 increase primarily due revenues generated designs companys direct conversion series amorphous selenium based xray flat panel detectors revenues 130 million 120 million represents revenue companys hotel operation fiscal 2000 1999 respectively increase due increase occupancy room rates prior year cost product sales 1592 million fiscal 2000 compared 1441 million fiscal 1999 increase 151 million 11 cost product sales percentage product revenue 624 fiscal 2000 compared 593 fiscal 1999 increase 3 increase primarily due reduction selling prices higher manufacturing costs cost engineering sales 174 million fiscal 2000 compared 126 million fiscal 1999 total cost engineering sales percentage engineering revenue increased 70 fiscal 1999 75 fiscal 2000 operating costs associated hotel fiscal years 2000 1999 62 million 61 million respectively gross margins hotel operation increased 49 fiscal 1999 52 fiscal 2000 mainly due increased room rates research product development rd expenses 383 million fiscal 2000 compared 396 million fiscal 1999 decrease 13 million 3 decrease due lower rd expenses 14 million companys bk subsidiary related ultrasound products decrease part overall cost reduction plan subsidiary fiscal 2000 improve profitability accordingly companys rd expenses percentage total revenue decreased 15 fiscal 1999 131 fiscal 2000 selling marketing expenses 262 million fiscal 2000 versus 257 fiscal 1999 increase 05 million 2 increase primarily due increase sales personnel marketing programs 07 million companys camtronics subsidiary changing sales strategy selling products directly end users rather prior practice selling oems sky computer subsidiary 07 million offering total solution sales package partially offset 14 million reduced staffing companys bk subsidiary reducing operating expenses improve profitability percentage total revenues selling expenses remained unchanged 9 general administrative ga expenses 275 million fiscal 2000 compared 212 million fiscal 1999 increase 63 million 30 percentage revenues ga expenses increased 8 fiscal 1999 9 fiscal 2000 increase due primarily 17 million additional expenses associated companys canadian subsidiary anrad acquired june 1999 increased personnel expenses additions bad debt provision operating costs associated new enterprise resource planning erp system partially offset decrease 06 million result decreased staffing increase profitability companys bk subsidiary net interest income fiscal 2000 57 million compared 64 million fiscal 1999 decrease 07 million 11 decrease primarily due interest real estate tax abatement recorded fiscal 2000 03 million versus 08 million recorded fiscal 1999 company recorded net losses equity unconsolidated subsidiaries 13 million fiscal 2000 compared losses 51 million fiscal 1999 net decrease losses 38 million see note 6 notes consolidated financial statements decrease mainly due reduction losses investment enhanced ct technology llc 48 million fiscal 1999 22 million fiscal 2000 addition company recognized income 09 million fiscal 2000 investment shenzhen anke hightech co ltd compared loss 04 million fiscal 1999 fiscal 2000 company received final distribution 1771802 shares restricted securities publicly traded company limited partnership july 31 2000 company recognized loss approximately 01 million value shares see note 6 notes consolidated financial statements companys effective tax rate increased 20 fiscal 1999 31 fiscal 2000 primarily result net losses foreign subsidiaries tax benefits fiscal 2000 also fiscal 1999 effective tax rate reflected benefit reversal prior year tax provisions minority interest net income companys consolidated subsidiary camtronics fiscal 2000 amounted 05 million compared 08 million fiscal 1999 fiscal 2000 founders employees camtronics exercised rights sell shares back camtronics subsequent transactions companys share camtronics increased approximately 81 see note 2 notes consolidated financial statements net income fiscal 2000 141 million compared net income 192 million period last year basic pershare earnings 110 compared 151 fiscal 1999 diluted pershare earnings 109 compared 150 fiscal 1999 liquidity capital resources cash equivalents marketable securities totaled 1229 million 1164 million july 31 2001 2000 respectively working capital 2245 million 2130 million july 31 2001 2000 respectively companys balance sheet july 31 2001 reflects current ratio 61 1 compared 60 1 july 31 2000 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact companys financial results companys primary exposure related local currency revenue operating expenses europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2001 due short maturities instruments company maintains bond investment portfolio various issuers types maturities companys cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value companys investment portfolio company currently hedge interest rate exposures cash flow provided operations 275 million fiscal 2001 150 million fiscal 2000 375 million fiscal 1999 increase cash flows operations fiscal 2001 fiscal 2000 primarily result increase operating income decrease working capital balances increase noncash items decrease working capital balances primarily due increase trade receivables fiscal 2001 related primarily higher sales decrease accounts payable net cash used investing activities 80 million fiscal 2001 compared net cash used investing activity 128 million fiscal 2000 287 million fiscal 1999 decrease primarily due lower investments advances affiliated companies net proceeds marketable securities increase property plant equipment 48 million primarily related construction addition existing building companys wholly owned subsidiary camtronics net cash used financing activities 28 million fiscal 2001 29 million fiscal 2000 63 million fiscal 1999 decrease primarily due higher proceeds stock options exercised minority interest subsidiary decreased 43 million result company acquiring remaining 19 interest camtronics company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements next 12 months impact inflation overall inflation material impact companys operations past three fiscal years new accounting pronouncements june 2001 financial accounting standards board fasb issued statement financial accounting standard sfas 141 business combinations sfas 141 sfas 141 requires business combinations accounted purchase method certain acquired intangible assets business combination recognized assets apart goodwill sfas 141 effective business combinations initiated june 30 2001 business combinations accounted purchase method date acquisition june 30 2001 management reviewed sfas 141 believe material effect financial position results operations june 2001 fasb issued sfas 142 goodwill intangible assetssfas 142 requires ratable amortization goodwill replaced periodic tests goodwills impairment intangible assets goodwill amortized useful lives provisions sfas 142 effective fiscal years beginning december 15 2001 thus adopted company required august 1 2002 management reviewed sfas 142 believe material effect financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 supercedes fasb statement 121 sfas 121 accounting impairment longlived assets long lived assets disposed sfas 144 applies longlived assets including discontinued operations consequently amends accounting principles board opinion 30 apb 30 reporting results operations reporting effects disposal segment business sfas 144 effective financial statements issued fiscal years beginning december 15 2001 thus adopted company required august 1 2002 management currently determining effect sfas 144 financial position results operations business environment risk factors forward looking statements annual report form 10k contain statements extent recitation historical facts constitute forward looking statements pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures involve risk uncertainties actual events results may differ significantly indicated forwardlooking statements result number important factors including discussed risk factors carefully consider risks described making investment decision respect analogic common stock additional risks presently known us currently deem immaterial may also impair business risks could material negative effect business financial condition results operations significant portion revenue currently comes small number customers decrease revenue theses customers could harm operating results depend small number customers large portion business changes customers orders may significant impact operating results major customer significantly reduces amount business us would adverse impact operating results following table sets forth percentages total net sales three largest customers last three fiscal years percentage total net sales ten largest customers years although seeking broaden customer base continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition generate significant accounts receivable connection products sell services provide major customers although major customers large corporations one customers become insolvent otherwise unable pay services operating results financial condition could adversely affected competition existing new companies medical instrumentation technology industry could cause us experience downward pressure prices fewer customer orders reduced margins inability take advantage new business opportunities loss market share operate highly competitive industry subject competition based upon product design performance pricing quality services believe innovative engineering product reliability important factors growth try maintain competitive pricing products directly comparable products manufactured others many instances products conform exacting specifications carry higher price analogous products manufactured others competitors include divisions larger diversified organizations well several specialized companies greater resources larger staffs many oem customers potential oem customers capacity design manufacture products manufacture face competition research product development groups manufacturing operations current potential customers continually evaluate benefits internal research product development manufacturing versus outsourcing depend suppliers sole source components production would substantially curtailed suppliers able meet demands alternative sources available order raw materials components complete customers orders raw materials components ordered solesource suppliers although work customers suppliers minimize impact shortages raw materials components sometimes experience shortterm adverse effects due price fluctuations delayed shipments past industrywide shortages electronics components significant shortage raw materials components occur may delay shipments pay premium pricing would adversely affect operating results cases supply shortages particular components substantially curtail production products using components always able pass price increases customers accordingly raw material component price increases could adversely affect operating results also depend small number suppliers affiliated customers competitors others may small poorly financed companies many raw materials components use business unable continue purchase raw materials components suppliers operating results would adversely affected many costs fixed margins depend volume output facilities reduction volume adversely affect margins left excess inventory operating results adversely affected longlead times specialized product designs typically purchase components manufacture products customer orders anticipation customer orders based customer forecasts variety reasons decreased enduser demand products manufacturing customers may purchase products manufactured purchased components either event would attempt recoup materials manufacturing costs means returning components vendors disposing excess inventory channels requiring oem customers purchase otherwise compensate us excess inventory significant customer agreements give us ability require oem customers extent unsuccessful recouping material manufacturing costs would net sales adversely affected also operating results would disproportionately adversely affected moreover carrying excess inventory would reduce working capital available continue operate grow business uncertainties adverse trends affecting industry major customers may adversely affect operating results business depends primarily specific segment electronics industry medical instrumentation technology products subject rapid technological change pricing margin pressure industry historically cyclical subject significant downturns characterized diminished product demand rapid declines average selling prices production overcapacity addition changes government policy relating reimbursement purchase use medical capital equipment could also affect sales customers markets also subject economic cycles likely experience recessionary periods future economic conditions affecting industry general major customers particular may adversely affect operating results businesses outside medical instrumentation technology product sector subject greater technological cyclical pressures customers delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business products used number customers production medical devices subject high level regulatory oversight delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained may withdrawn modified medical devices cannot marketed united states without clearance approval fda medical devices sold united states must also manufactured compliance fda good manufacturing practices regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling states may also regulate manufacture sale use medical devices medical device products also subject approval regulation foreign regulatory safety agencies annual quarterly operating results subject fluctuations could affect market price common stock annual quarterly results may vary significantly depending various factors many beyond control may meet expectations securities analysts investors occurs price common stock would likely decline factors include variations timing volume customer orders relative manufacturing capacity introduction market acceptance customers new products changes demand customers existing products timing expenditures anticipation future orders effectiveness managing manufacturing processes changes competitive economic conditions generally customers markets changes cost availability components skilled labor foreign currency exposure case many technology companies typically ship significant portion products last month quarter result delay anticipated sales likely result deferral associated revenue beyond end particular quarter would significant effect operating results quarter addition operating expenses vary directly net sales difficult adjust short term result net sales particular quarter expectations could proportionately reduce operating expenses quarter therefore revenue shortfall would disproportionate adverse effect operating results quarter loss key personnel could hurt business industry experience technological expertise operate highly competitive industry depend services key senior executives technological experts loss services one several key employees inability attract train retain qualified skilled employees specifically engineering operations personnel could result loss customers otherwise inhibit ability operate grow business successfully unable maintain technological expertise research product development manufacturing processes able successfully compete believe future success depend upon ability provide research product development manufacturing services meet changing needs customers requires successfully anticipate respond technological changes design manufacturing processes costeffective timely manner result continually evaluate advantages feasibility new product design manufacturing processes cannot however assure development efforts successful item 7aitem 7 managements discussion analysis financial conditions results operations following discussion provides analysis analogic corporations financial condition results operations read conjunction consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains forwardlooking statements within meaning securities exchange act 1934 statements historical fact company makes document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements analogic corporation differ projected results see business environment risk factors page 17 critical accounting policies u securities exchange commission sec issued financial reporting release 60 cautionary advice regarding disclosure critical accounting policies frr 60 suggesting companies provide additional disclosure commentary critical accounting policies frr 60 sec defined critical accounting policies ones important portrayal companys financial condition operating results require management make difficult subjective judgments often result need make estimates matters inherently uncertain judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate critical accounting policies include revenue recognition recognize revenue accordance sec staff accounting bulletin 101 revenue recognition financial statements sab 101 revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met hardware software maintenance revenues recognized ratably life contracts service revenues recognized time services rendered company provides engineering services customers contractual basis recognizes revenue using percentage completion method revenue related hotel operations recognized services performed inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held forecasted demand changes technology assessments require management judgments estimates valuation adjustments excess obsolete inventory may recorded based assessments concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company places cash investments marketable securities high credit quality financial instruments policy limits amount credit exposure one financial institution company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations adjusts credit limits based upon payment history customers current creditworthiness company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collections issues identified credit losses historically within expectations provisions established guarantee company continue experience credit loss rates past since accounts receivable concentrated relatively number customers significant change liquidity financial position one customers could material adverse impact collectability accounts receivables future operating results investments advances affiliated companies company several investments affiliated companies related areas companys strategic focus company accounts investments using equity method accounting assessing recoverability investments company must make certain assumptions judgments based changes companys overall business strategy financial condition affiliated companies market conditions industry economic environment entity operates adverse changes market conditions poor operating results affiliated companies could result losses inability recover carrying value investments thereby requiring impairment charge future intangible longlived assets company intangible longlived assets primarily related technology licenses capitalized software property plant equipment assessing recoverability assets company must make assumptions regarding estimated future cash flows expected period asset utilized changes technology customer demand estimates related assumptions change future company may required record impairment charges assets previously recorded results operations fiscal 2002 compared fiscal 2001 product revenue fiscal 2002 2775 million compared 3201 million fiscal 2001 decrease 426 million 13 decrease primarily due reduction sale medical instrumentation technology products 320 million 13 attributed lower demand companys cardiovascular patient monitoring systems medical imaging equipment decrease sale signal processing technology products 407 million 60 due primarily decline demand semiconductor automatic test equipment ate boards reductions product revenue offset increase sales security imaging technology products 300 million 15 million sales prior year due shipments companys exact systems spare parts components engineering revenue fiscal 2002 265 million compared 277 million fiscal 2001 decrease 4 change primarily due decrease demand services revenues 96 million 128 million fiscal 2002 2001 respectively represent revenue companys hotel operation decrease revenues mostly attributable current economic decline travel lodging industries product cost sales 1748 million fiscal 2002 compared 2064 million fiscal 2001 product cost sales percentage product revenue 63 fiscal 2002 compared 64 fiscal 2001 percentage decrease product cost sales primarily due product mix engineering cost sales 232 million fiscal 2002 fiscal 2001 engineering cost sales percentage engineering revenue increased 88 fiscal 2002 84 fiscal 2001 percentage increase primarily attributable unanticipated costs associated development health security imaging systems contracted projects costs sales 52 million 64 million companys hotel operation fiscal 2002 2001 respectively fiscal year 2002 company recorded asset impairment charges totaling 89 million pretax basis result continued decline economic business conditions telecommunications industry analogic decided terminate activities related anatel companys whollyowned telecommunications subsidiary company recorded pretax charge 19 million related impairment purchased intangibles longlived assets impairment charge equal amount assets carrying value exceeded present value estimated discounted cash flows additionally pretax charge 6 million related obsolete inventory well pretax charge 11 million related capitalized software recorded assets deemed unrecoverable fiscal 2001 company made decision reorganize anatel focus limited number products connection decision company recognized asset impairment charges 32 million fiscal 2001 attributable certain assets anatel company also decided discontinue sales certain older unprofitable product lines within semiconductor test equipment business order focus resources potential growth areas within business result company recorded pretax charge 9 million fiscal 2002 related impairment purchased intangibles longlived assets impairment charge equal amount assets carrying value exceeded present value estimated discounted cash flows additionally pretax charge 36 million related excess obsolete test equipment inventory well pretax charge 8 million related capitalized software recorded fiscal 2002 assets deemed unrecoverable company also incurred immaterial costs related involuntary terminations related activities entire amount charge recorded within cost sales section companys consolidated statements income inventory reserve established fiscal year 2002 fiscal year 2001 part activities noted totaled 57 million total 13 million inventory scrapped charged reserve fiscal 2002 research development expenses 391 million fiscal 2002 12 total revenue compared 396 million 11 total revenue fiscal 2001 research development expenses remained unchanged fiscal 2002 even though revenue decreased period company continues development health security imaging systems selling marketing expenses 331 million fiscal 2002 2001 although selling marketing expenses remained unchanged revenue declined company continues expand activities end user market primarily companys subsidiaries camtronics bk medical percentage selling marketing expenses total revenue increased 11 fiscal 2002 9 fiscal 2001 due lower revenue period general administrative expenses 293 million fiscal 2002 compared 328 million fiscal 2001 decrease 35 million primarily due companys cost reduction containment initiatives including reductions staff discretionary expenditures percentage total revenues general administrative expenses 9 fiscal 2002 2001 computer software costs 24 million 36 million capitalized fiscal 2002 2001 respectively amortization capitalized software costs amounted 18 million 16 million fiscal 2002 2001 respectively included product cost sales interest income net fiscal 2002 41 million compared 54 million fiscal 2001 decrease 13 million primarily result lower interest rates shortterm investments company recorded income related equity unconsolidated affiliates 6 million fiscal 2002 compared income 19 million fiscal 2001 decrease 13 million due loss recognized investment shenzen anke hightech co ltd fiscal 2002 effective tax rate fiscal 2002 21 compared 30 fiscal 2001 decrease due primarily higher percentage impact related benefit realized tax exempt interest lower dollar base pretax income compared 2001 net income fiscal 2002 33 million compared 152 million fiscal 2001 net income fiscal 2002 included asset impairment pretax charge 89 million related companys telecommunications subsidiary anatel certain assets companys test measurement division net income fiscal 2001 included asset impairment pretax charge 32 million related anatel basic earnings per share 025 fiscal 2002 compared 118 fiscal 2001 diluted earnings per share 025 fiscal 2002 compared 117 fiscal 2001 fiscal 2001 compared fiscal 2000 product revenue fiscal 2001 3201 million compared 2553 million fiscal 2000 increase 649 million 25 increase principally due increase sales medical instrumentation technology products 616 million 38 attributed increased demand fully featured midrange computed tomography ct systems digital radiography systems patient monitors advanced cardiovascular information management systems increase sales 125 million 22 signal processing technology products due demand companys high frequency automatic test equipment ate boards embedded multiprocessing equipment increase product revenue partially offset decrease sales security imaging technology products 92 million 86 due lower demand explosive assessment computed tomography exact systems engineering revenue fiscal 2001 277 million compared 233 million fiscal 2000 increase 19 increase 44 million primarily due increase funding projects developing imaging equipment revenues 128 million 130 million represent revenue companys hotel operation fiscal 2001 2000 respectively product cost sales 2064 million fiscal 2001 compared 1610 million fiscal 2000 product cost sales percentage product revenue 64 fiscal 2001 compared 63 fiscal 2000 increase primarily due higher manufacturing costs changes product mix engineering cost sales 232 million fiscal 2001 compared 174 million fiscal 2000 total cost engineering sales percentage engineering revenue increased 75 fiscal 2000 84 fiscal 2001 increase mainly attributable higher costs projects developing imaging equipment costs sales 64 million 62 million companys hotel operation fiscal 2001 2000 respectively asset impairment charges 32 million fiscal 2001 relates anatel writedown certain assets estimated net realizable value related voice internet protocol business anatel estimated fair value assets based various methodologies including review business outlook telecommunications market comparison current asset carrying value projected undiscounted cash flow rd expenses 396 million fiscal 2001 11 total revenue compared 365 million 13 total revenue fiscal 2000 increase 31 million due research development activities across companys product lines decline percentage 13 11 due higher revenue period selling marketing expenses 331 million fiscal 2001 compared 262 million fiscal 2000 increase 69 million 26 increase primarily due companys subsidiary camtronics increasing sales personnel marketing programs switching selling products directly end users prior practice selling oems 12 million increase due sky computer subsidiary offering total solution sales package remaining increase 20 million primarily associated additional selling marketing efforts support companys revenue growth percentage total revenues selling expenses remained unchanged 9 general administrative expenses 328 million fiscal 2001 compared 275 million fiscal 2000 percentage total revenues general administrative expenses 9 fiscal 2001 2000 increase 53 million primarily due higher personnel costs 35 million 18 million costs support companys growth computer software costs 36 million 30 million capitalized fiscal 2001 2000 respectively amortization capitalized software costs amounted 16 million 18 million fiscal 2001 2000 respectively included product cost sales interest income net fiscal 2001 54 million compared 57 million fiscal 2000 decrease primarily due 03 million interest income recorded fiscal 2000 real estate tax abatement company recorded net income equity unconsolidated subsidiaries 19 million fiscal 2001 compared losses 13 million fiscal 2000 improvement mainly due reduction losses investment enhanced ct technology llc 22 million loss fiscal 2000 18 million income fiscal 2001 addition company recognized loss 01 million fiscal 2001 investment shenzhen anke hightech co ltd compared gain fiscal 2000 09 million see note 7 notes consolidated financial statements expense 06 million fiscal 2001 compared 02 million fiscal 2000 increase expense mainly due write approximately 04 million reflect difference companys investment cost current market value restricted securities company received fiscal 2000 final distribution shares publicly traded company made limited partnership company invested effective tax rate decreased 30 fiscal 2001 compared 31 fiscal 2000 net income fiscal 2001 152 million compared 141 million fiscal 2000 net income fiscal 2001 includes asset impairment pretax charge 32 million related anatel basic earnings per share 118 compared 110 fiscal 2000 diluted earnings per share 117 compared 109 fiscal 2000 liquidity capital resources cash equivalents marketable securities totaled 1818 million 1229 million july 31 2002 2001 respectively increase 589 million primarily due 506 million cash advance received purchase longleadtime components 79 million remaining rampup funds infrastructure enhancements part exact agreement working capital 2135 million 2245 million july 31 2002 2001 respectively companys balance sheet reflects current ratio 29 1 july 31 2002 compared 61 1 july 31 2001 excluding cash impact exact agreement noted liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company faces exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact companys financial results companys primary exposure related local currency revenue operating expenses europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2002 due short maturities instruments company maintains bond investment portfolio various issuers types maturities portfolio classified balance sheet either cash equivalents marketable securities depending lengths time maturity original purchase cash equivalents include highly liquid investments maturities three months less time purchase investments maturities time purchase excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value companys investment portfolio company currently hedge interest rate exposures cash flow provided operations 940 million fiscal 2002 275 million fiscal 2001 149 million fiscal 2000 increase cash flows operations fiscal 2002 fiscal 2001 primarily resulted increase advance payments deferred revenues consisting primarily 506 million advance received purchase certain longleadtime components 79 million rampup monies remaining infrastructure enhancements rampup production increase manufacturing capacity related companys exact contract decrease accounts receivable 102 million due increased collections efforts partially offset increase inventory 75 million primarily raw materials increase cash flow operations fiscal 2001 2000 primarily due result increase operating income decrease working capital balances increase noncash items decrease working capital balances primarily due increase trade receivables fiscal 2001 related primarily higher sales decrease accounts payable net cash used investing activities 150 million fiscal 2002 compared 80 million fiscal 2001 128 million fiscal 2000 increase fiscal 2002 primarily due investments cedara 84 million companys investment cardioworks 20 million increased level additions property plant equipment primarily construction new facility companys danish subsidiary bk medical totaled 155 million partially offset return investment affiliated company maturities marketable securities net cash used financing activities 31 million fiscal 2002 28 million fiscal 2001 28 million fiscal 2000 primarily dividends paid shareholders companys contractual obligations july 31 2002 effect obligations expected liquidity cash flows future periods follows 1 mortgage capital lease contractual obligations include principal associated interest costs 2 lease costs associated haverhill facility funded rampup monies received company connection exact system order 3 commitments represent commitments suppliers production raw materials inventory components related exact system order company currently approximately 300 million revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2002 fiscal 2001 however company guaranteed provision credit facility principal bank debt owed cedara bank lender provision credit facility approximately 6300 company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements next 12 months impact inflation overall inflation material impact companys operations past three fiscal years new accounting pronouncements june 2001 financial accounting standards board fasb issued statement financial accounting standard sfas 141 business combinations sfas 141 sfas 141 requires business combinations accounted purchase method certain acquired intangible assets business combination recognized assets apart goodwill sfas 141 effective business combinations initiated june 30 2001 business combinations accounted purchase method date acquisition june 30 2001 company adopted sfas 141 fiscal year ended july 31 2002 june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 requires amortization goodwill replaced periodic tests goodwills impairment intangible assets goodwill amortized useful lives provisions sfas 142 effective fiscal years beginning december 15 2001 adopted company required august 1 2002 adoption standard expected material effect companys financial position results operations june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated retirement costs standard applies legal obligations associated retirement longlived assets result acquisition construction development andor normal use asset sfas 143 effective fiscal years beginning june 15 2002 adoption standard expected material effect companys financial position results operations august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 supersedes fasb 121 accounting impairment longlived assets long lived assets disposed sfas 144 applies longlived assets including discontinued operations consequently amends accounting principles board opinion 30 apb 30 reporting results operations reporting effects disposal segment business sfas 144 effective financial statements issued fiscal years beginning december 15 2001 thus company adopted requirement beginning august 1 2002 adoption standard expected material effect companys financial position results operations june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring principal difference sfas 146 eitf 943 relates requirements recognition liability cost associated exit disposal activity sfas 146 requires liability cost associated exit disposal activity recognized liability incurred eitf 943 liability exit cost defined eitf 943 recognized date entitys commitment exit plan therefore sfas 146 eliminates definition requirements recognition exit costs eitf 943 sfas 146 also establishes fair value objective initial measurement liability provisions sfas 146 effective exit disposal activities initiated december 31 2002 therefore adopted company january 1 2003 adoption standard expected material effect companys financial position results operations business environment risk factors forwardlooking statements annual report form 10k contains statements extent recitation historical facts constitute forwardlooking statements pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures involve risk uncertainties actual events results may differ significantly indicated forwardlooking statements result number important factors including discussed elsewhere herein risk factors carefully consider risks described making investment decision respect analogic common stock additional risks presently known us currently deem immaterial may also impair business risks could material negative effect business financial condition results operations significant portion revenue currently comes small number customers decrease revenue theses customers could harm operating results depend small number customers large portion business changes customers orders may significant impact operating results major customer significantly reduces amount business us would adverse impact operating results following table sets forth percentages net product engineering revenue three largest customers last three fiscal years percentage total net sales ten largest customers years although seeking broaden customer base continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition generate significant accounts receivable connection products sell services provide major customers although major customers large corporations one customers become insolvent otherwise unable pay services operating results financial condition could adversely affected competition existing new companies medical instrumentation technology industry could cause us experience downward pressure prices fewer customer orders reduced margins inability take advantage new business opportunities loss market share operate highly competitive industry subject competition based upon product design performance pricing quality services believe innovative engineering product reliability important factors growth try maintain competitive pricing products directly comparable products manufactured others many instances products conform exacting specifications carry higher price analogous products manufactured others competitors include divisions larger diversified organizations well several specialized companies greater resources larger staffs many oem customers potential oem customers capacity design manufacture products manufacture face competition research product development groups manufacturing operations current potential customers continually evaluate benefits internal research product development manufacturing versus outsourcing depend suppliers sole source components production would substantially curtailed suppliers able meet demands alternative sources available order raw materials components complete customers orders raw materials components ordered solesource suppliers although work customers suppliers minimize impact shortages raw materials components sometimes experience shortterm adverse effects due price fluctuations delayed shipments past industrywide shortages electronics components significant shortage raw materials components occur may delay shipments pay premium pricing would adversely affect operating results cases supply shortages particular components substantially curtail production products using components always able pass price increases customers accordingly raw material component price increases could adversely affect operating results also depend small number suppliers affiliated customers competitors others may small poorly financed companies many raw materials components use business unable continue purchase raw materials components suppliers operating results would adversely affected many costs fixed margins depend volume output facilities reduction volume adversely affect margins left excess inventory operating results adversely affected longlead times specialized product designs typically purchase components manufacture products customer orders anticipation customer orders based customer forecasts variety reasons decreased enduser demand products manufacturing customers may purchase products manufactured purchased components either event would attempt recoup materials manufacturing costs means returning components vendors disposing excess inventory channels requiring oem customers purchase otherwise compensate us excess inventory significant customer agreements give us ability require oem customers extent unsuccessful recouping material manufacturing costs would net sales adversely affected also operating results would disproportionately adversely affected moreover carrying excess inventory would reduce working capital available continue operate grow business uncertainties adverse trends affecting industry major customers may adversely affect operating results business depends primarily specific segment electronics industry medical instrumentation technology products subject rapid technological change pricing margin pressure industry historically cyclical subject significant downturns characterized diminished product demand rapid declines average selling prices production overcapacity addition changes government policy relating reimbursement purchase use medical capital equipment could also affect sales customers markets also subject economic cycles likely experience recessionary periods future economic conditions affecting industry general major customers particular may adversely affect operating results businesses outside medical instrumentation technology product sector subject greater technological cyclical pressures customers delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business products used number customers production medical devices subject high level regulatory oversight delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained may withdrawn modified medical devices cannot marketed united states without clearance approval fda medical devices sold united states must also manufactured compliance fda good manufacturing practices regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling states may also regulate manufacture sale use medical devices medical device products also subject approval regulation foreign regulatory safety agencies analogics business strategy involves pursuit acquisitions business combinations may difficult integrate disrupt business dilute stockholder value divert management attention part business strategy analogic subsidiaries may consummate additional acquisitions business combinations acquisitions typically accompanied number risks including difficulty integrating operations personnel acquired companies potential disruption analogics ongoing business distraction management expenses related acquisition potential unknown liabilities associated acquired businesses analogic successful completing acquisitions may pursue future analogic may incurred substantial expenses devoted significant management time resources seeking complete proposed acquisitions generate benefits addition future acquisitions analogic could use substantial portions available cash consideration acquisitions annual quarterly operating results subject fluctuations could affect market price common stock annual quarterly results may vary significantly depending various factors many beyond control may meet expectations securities analysts investors occurs price common stock would likely decline factors include variations timing volume customer orders relative manufacturing capacity introduction market acceptance customers new products changes demand customers existing products timing expenditures anticipation future orders effectiveness managing manufacturing processes changes competitive economic conditions generally customers markets changes cost availability components skilled labor foreign currency exposure case many technology companies typically ship significant portion products last month quarter result delay anticipated sales likely result deferral associated revenue beyond end particular quarter would significant effect operating results quarter addition operating expenses vary directly net sales difficult adjust short term result net sales particular quarter expectations could proportionately reduce operating expenses quarter therefore revenue shortfall would disproportionate adverse effect operating results quarter loss key personnel could hurt business industry experience technological expertise operate highly competitive industry depend services key senior executives technological experts loss services one several key employees inability attract train retain qualified skilled employees specifically engineering operations personnel could result loss customers otherwise inhibit ability operate grow business successfully unable maintain technological expertise research product development manufacturing processes able successfully compete believe future success depend upon ability provide research product development manufacturing services meet changing needs customers requires successfully anticipate respond technological changes design manufacturing processes costeffective timely manner result continually evaluate advantages feasibility new product design manufacturing processes cannot however assure development efforts successful one stockholder substantial interest analogic august 31 2002 bernard gordon charitable remainder unitrust owned approximately 31 analogics outstanding common stock bernard gordon chairman chief executive officer analogic julian soshnick vice president general counsel analogic serve trustees trust full power vote dispose shares held trust based ownership interest analogic ability exert substantial influence actions analogic item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis company’s financial condition results operations read conjunction consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains forwardlooking statements within meaning securities exchange act 1934 statements historical fact company makes document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements company differ projected results see “business environment risk factors” critical accounting policies judgments estimates us securities exchange commission “sec” issued financial reporting release 60 “cautionary advice regarding disclosure critical accounting policies” “frr 60” suggesting companies provide additional disclosure commentary critical accounting policies frr 60 sec defined critical accounting policies ones important portrayal company’s financial condition operating results require management make difficult subjective judgments often result need make estimates matters inherently uncertain judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate critical accounting policies include revenue recognition company recognizes majority revenue accordance sec staff accounting bulletin 101 “revenue recognition financial statements” “sab 101” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met hardware maintenance revenues recognized ratably life contracts business units sell software licenses company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence vsoe fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regards installation implementation remain fees fixed determinable collectibility reasonably assured customer acceptance applicable obtained software maintenance revenues recognized ratably life contracts service revenues recognized time services rendered company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fees monthly basis utilizing hours incurred date percentage total estimated hours complete project company sufficient basis measure progress towards completion revenue recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately revenue related hotel operations recognized services performed camtronics’ revenues derived primarily sale digital cardiac information systems system sales revenues consist following components computer software licenses computer hardware installation support sublicensed software addition camtronics generates revenues related system sales software support hardware maintenance training consulting professional services camtronics recognizes revenue accordance provisions sop 972 sop 972 requires revenue earned software arrangements involving multipleelements allocated element based fair values elements use residual method residual method revenue recognized multipleelement arrangement companyspecific objective evidence fair value exists undelivered elements arrangement determined price charged element sold separately ie professional services software support hardware maintenance hardware sublicensed software exist one delivered elements arrangement ie software solutions specifically camtronics determines fair value maintenance portion arrangement based renewal price maintenance charged clients professional services portion arrangement installation services based hourly rates camtronics charges services sold apart software license hardware sublicensed software based prices elements sold separately software evidence fair value cannot established undelivered elements license agreement entire amount revenue arrangement deferred elements delivered objective evidence fair value remaining undelivered element established inherent revenue recognition process significant management estimates judgments influence timing amount revenue recognition camtronics provides several models procurement digital cardiac information systems predominant model includes perpetual software license agreement projectrelated installation services professional consulting services computer hardware sublicensed software support camtronics provides installation services include projectscoping services conducting preinstallation audits detailed installation plans actual installation hardware components testing hardware software installed customer site installation services deemed essential functionality software license installation services fees recognized upon completion installation camtronics also provides professional consulting services include consulting activities fall outside scope standard installation services vary depending scope complexity requested client examples services may include additional database consulting system configuration project management interfacing existing systems network consulting professional consulting services generally deemed essential functionality software thus impact timing software license revenue recognition professional consulting service revenue recognized services performed hardware software maintenance fees marketed annual multiyear arrangements recognized revenue ratably contracted maintenance term deferred revenue comprised 1 license fee maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement fair value determined components yet delivered accepted customer deferred costs represent costs related revenues example costs goods sold services provided sales commission expenses inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held forecasted demand changes technology assessments require management judgments estimates valuation adjustments excess obsolete inventory may recorded based assessments reserve 10438 17182 recorded july 31 2002 respectively concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company places cash investments marketable securities high credit quality financial instruments policy limits amount credit exposure one financial institution company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customer’s financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collections issues identified credit losses historically within expectations provisions established guarantee company continue experience credit loss rates past since accounts receivable concentrated relatively number customers significant change liquidity financial position one customers could material adverse impact collectability accounts receivables future operating results warranty reserve company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligation affected product failure rates service delivery costs incurred correcting product failure actual product failure rates service costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results investments advances affiliated companies company several investments affiliated companies related areas company’s strategic focus company accounts investments using equity method accounting assessing recoverability investments company must make certain assumptions judgments based changes company’s overall business strategy financial condition affiliated companies market conditions industry economic environment entity operates adverse changes market conditions poor operating results affiliated companies could result losses inability recover carrying value investments thereby requiring impairment charge future goodwill intangible assets longlived assets intangible assets consist goodwill intellectual property licenses capitalized software longlived assets consist primarily property plant equipment intangible assets property plant equipment excluding goodwill amortized using straightline method estimated useful life carrying value goodwill intangible assets reviewed quarterly basis existence facts circumstances internally externally may suggest impairment factors company considers important could trigger impairment review include significant underperformance relative expected historical projected future operating results significant negative industry economic trends company determines whether impairment occurred based gross expected future cash flows measures amount impairment based related future discounted cash flows cash flow estimates used determine impairment contain management’s best estimates using appropriate customary assumptions projections time accordance sfas 142 “goodwill intangible assets” company ceased amortizing goodwill august 1 2002 annually review goodwill potential impairment well eventdriven basis using fair value approach income taxes part process preparing company’s financial statements company required estimate income taxes jurisdictions operates process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet company must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established company must include expense within tax provision statement operations event actual results differ estimates provision income taxes could materially impacted results operations fiscal 2003 compared fiscal 2002 product revenue fiscal 2003 4423 million compared 2701 million fiscal 2002 increase 1722 64 increase primarily due increase 1827 million sales imaging technology products offset reduction sales signal processing technology products amount 105 million due primarily lower demand embedded multiprocessing equipment increased sales amount 1706 million represents increased sales exact systems spare parts 156 million represents sales newly acquired subsidiary sound technology inc “sti” 200 million represents sales due increased demand company’s data acquisition systems 129 million represents sales increased demand company’s cardiovascular ultrasound imaging systems medical security imaging revenues partially offset decrease 340 million primarily due reduction sales midrange computed tomography “ct” medical systems previously supplied philips engineering revenue fiscal 2003 209 million compared 265 million fiscal 2002 decrease 21 decrease engineering revenue primarily due decrease customer funded projects developing medical security imaging equipment revenue 84 million 96 million fiscal 2003 2002 respectively represent revenue company’s hotel operation decrease revenues mostly result lower occupancy cost product sales 2562 million fiscal 2003 compared 1697 fiscal 2002 cost product sales percentage revenue 58 fiscal 2003 compared 63 fiscal 2002 decrease cost product sales percentage prior year primarily attributable increase sales security imaging technology products lower cost sales company’s products cost engineering sales 149 million fiscal 2003 compared 232 million fiscal 2002 total cost engineering sales percentage engineering revenue decreased 71 fiscal 2003 88 fiscal 2002 percentage decrease primarily attributable license revenue recognized fiscal 2003 associated cost costs sales 47 million 52 million company’s hotel operation fiscal 2003 2002 respectively research product development expenses 551 million fiscal 2003 12 total revenue compared 391 million fiscal 2002 13 total revenue increase research product development expenses 160 million due company continuing focus substantial resources developing new generations medial imaging equipment including innovative ct systems niche markets advanced digital xray systems subsystems general radiography mammography extended family multislice ct data acquisition systems medical security markets addition company developing securityimaging systems variety applications company initial stages testing prototypes automated ctbased portal screening systems scan carryon baggage airports “carryin” baggage public buildings parcels corporations delivery services addition company continues increase investment number development projects meet diverse evolving security needs united states abroad selling marketing expenses 349 million fiscal 2003 7 total revenue compared 325 million fiscal 2002 11 total revenue increase selling marketing expenses 24 million mainly attributable exchange rate differential bk medical subsidiary denmark general administration expenses 360 million fiscal 2003 8 total revenue compared 293 million fiscal 2002 10 total revenue increase 67 million primarily attributable increased salaries related payroll expenses approximately 13 million amortization approximately 21 million related acquired intangible assets approximately 13 million related incremental costs due acquisition sound technology inc vmi medical inc also included general administrative expenses provision bad debt approximately 24 million 16 million related shenzen anke hightech co ltd “sahco” approximately 07 million connection unsecured note unrelated party company deemed uncollectible computer software costs 35 million 24 million capitalized fiscal 2003 2002 respectively amortization capitalized software costs amounted 18 million fiscal years 2003 2002 included product cost sales interest income fiscal 2003 50 million compared 44 million fiscal 2002 increase 06 million primarily result higher invested cash balances partially offset lower affective interest rate short term investments company recorded loss 25 million related equity unconsolidated affiliates fiscal 2003 compared gain 06 million fiscal 2002 equity loss fiscal 2003 consists primarily losses 11 million 15 million reflecting company’s share losses sahco cedara software corporation respectively equity gain fiscal 2002 consists primarily gains 14 million 06 million reflecting company’s share gains enhanced ct technology llc cedara software corporation respectively partially offset equity loss 13 million reflecting company’s share losses sahco income 58 million fiscal 2003 compared 08 fiscal 2002 income fiscal 2003 includes 39 million currency exchange gain resulting weakening us dollars primarily due 18 million gain us dollar loans company’s danish subsidiary 21 million gain us dollar loans company’s canadian subsidiary 16 million gain sale building company owned peabody massachusetts related party effective tax rate fiscal 2003 363 compared 205 fiscal 2002 increase due primarily lower impact related benefit realized tax exempt interest extraterritorial income benefit higher pretax income compared 2002 net income fiscal 2003 495 million compared 30 million fiscal 2002 basic earnings per share 374 compared 023 fiscal 2002 diluted earnings per share 370 fiscal 2003 compared 023 fiscal 2002 increase net income prior year’s period primarily result increased revenue profit derived sale exact systems prior year income included pretax asset impairment charge 89 million related writedown certain assets company’s telecommunications subsidiary anatel company’s test measurement division fiscal 2002 compared fiscal 2001 product revenue fiscal 2002 2701 million compared 3117 million fiscal 2001 decrease 416 million 13 decrease primarily due reduction sale medical instrumentation technology products 310 million 13 attributed lower demand company’s cardiovascular patient monitoring systems medical imaging equipment decrease sale signal processing technology products 407 million 60 due primarily decline demand semiconductor automatic test equipment ate boards reductions product revenue offset increase sales security imaging technology products 300 million 15 million sales prior year due shipments company’s exact systems spare parts components engineering revenue fiscal 2002 265 million compared 277 million fiscal 2001 decrease 4 change primarily due decrease demand services revenues 96 million 128 million fiscal 2002 2001 respectively represent revenue company’s hotel operation decrease revenues mostly attributable current economic decline travel lodging industries product cost sales 1697 million fiscal 2002 compared 2015 million fiscal 2001 product cost sales percentage product revenue 63 fiscal 2002 compared 65 fiscal 2001 percentage decrease product cost sales primarily due product mix engineering cost sales 232 million fiscal 2002 fiscal 2001 engineering cost sales percentage engineering revenue increased 88 fiscal 2002 84 fiscal 2001 percentage increase primarily attributable unanticipated costs associated development health security imaging systems contracted projects costs sales 52 million 64 million company’s hotel operation fiscal 2002 2001 respectively fiscal year 2002 company recorded asset impairment charges totaling 89 million pretax basis result continued decline economic business conditions telecommunications industry analogic decided terminate activities related anatel company’s wholly owned telecommunications subsidiary company recorded pretax charge 19 million related impairment purchased intangibles longlived assets impairment charge equal amount assets’ carrying value exceeded present value estimated discounted cash flows additionally pretax charge 06 million related obsolete inventory well pretax charge 11 million related capitalized software recorded assets deemed unrecoverable fiscal 2001 company made decision reorganize anatel focus limited number products connection decision company recognized asset impairment charges 32 million fiscal 2001 attributable certain assets anatel company also decided discontinue sales certain older unprofitable product lines within semiconductor test equipment business order focus resources potential growth areas within business result company recorded pretax charge 09 million fiscal 2002 related impairment purchased intangibles longlived assets impairment charge equal amount assets’ carrying value exceeded present value estimated discounted cash flows additionally pretax charge 36 million related excess obsolete test equipment inventory well pretax charge 08 million related capitalized software recorded fiscal 2002 assets deemed unrecoverable company also incurred immaterial costs related involuntary terminations related activities entire amount charge recorded within cost sales section company’s consolidated statements income inventory reserve established fiscal year 2002 fiscal year 2001 part activities noted totaled 57 million total 13 million inventory scrapped charged reserve fiscal 2002 research development expenses 391 million fiscal 2002 13 total revenue compared 396 million 11 total revenue fiscal 2001 research development expenses remained unchanged fiscal 2002 even though revenue decreased period company continues development health security imaging systems selling marketing expenses 325 million fiscal 2002 compared 326 fiscal 2001 although selling marketing expenses remained unchanged revenue declined company continues expand activities end user market primarily company’s subsidiaries camtronics bk medical percentage selling marketing expenses total revenue increased 11 fiscal 2002 9 fiscal 2001 due lower revenue period general administrative expenses 293 million fiscal 2002 compared 328 million fiscal 2001 decrease 35 million primarily due company’s cost reduction containment initiatives including reductions staff discretionary expenditures percentage total revenues general administrative expenses 10 fiscal 2002 9 fiscal 2001 computer software costs 24 million 36 million capitalized fiscal 2002 2001 respectively amortization capitalized software costs amounted 18 million 16 million fiscal 2002 2001 respectively included product cost sales interest income fiscal 2002 44 million compared 56 million fiscal 2001 decrease 12 million primarily result lower interest rates shortterm investments company recorded income related equity unconsolidated affiliates 06 million fiscal 2002 compared income 19 million fiscal 2001 decrease 13 million due loss recognized investment shenzen anke hightech co ltd fiscal 2002 effective tax rate fiscal 2002 21 compared 29 fiscal 2001 decrease due primarily higher percentage impact related benefit realized tax exempt interest lower dollar base pretax income compared 2001 net income fiscal 2002 30 million compared 136 million fiscal 2001 net income fiscal 2002 included asset impairment pretax charge 89 million related writedown certain assets company’s telecommunications subsidiary anatel company’s test measurement division net income fiscal 2001 included asset impairment pretax charge 32 million related anatel basic earnings per share 023 fiscal 2002 compared 105 fiscal 2001 diluted earnings per share 023 fiscal 2002 compared 104 fiscal 2001 liquidity capital resources cash equivalents marketable securities totaled 1780 million 1818 million july 31 2003 2002 respectively working capital 2465 million 2142 million july 31 2003 2002 respectively company able maintain cash equivalents marketable securities 1780 million july 31 2003 due primarily positive cash flow resulting fiscal year 2003 net income 495 million depreciation expense 202 million offset reductions cash flow business acquisitions 128 million additions property plant equipment 164 million net operating assets liabilities 395 million company’s balance sheet reflects current ratio 38 1 july 31 2003 compared 29 1 july 31 2002 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company faces exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related local currency revenue operating expenses canada europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2003 due short maturities instruments company maintains bond investment portfolio various issuers types maturities portfolio classified balance sheet either cash equivalents marketable securities depending lengths time maturity original purchase cash equivalents include highly liquid investments maturities three months less time purchase investments maturities time purchase excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value company’s investment portfolio company currently hedge interest rate exposures cash flow provided operations 354 million fiscal 2003 948 million fiscal 2002 275 million fiscal 2001 decrease cash flows operations fiscal 2003 fiscal 2002 594 million primarily result decrease advance payments deferred revenues consisting primarily 506 million advance received purchase certain longleadtime components prior fiscal year related company’s exact contract decrease accounts receivable 92 million due increased collections efforts partially offset increase net income year increase cash flow operations fiscal 2002 2001 primarily result increase advance payments deferred revenues consisting primarily 506 million advance receivable purchase certain longleadtime components 79 million rampup monies related company’s exact contract net cash used investing activities 181 million fiscal 2003 compared 150 million fiscal 2002 80 million fiscal 2001 cash used fiscal 2003 primarily due investments sound technology inc 99 million vmi medical 11 million ftni 18 million photodetection systems inc 60 million partially offset 33 million proceeds sale property plant equipment primarily due 32 million sale building located peabody massachusetts net cash provided financing activities 08 million fiscal 2003 versus net cash used financing activities 31 million 28 million fiscal 2002 fiscal 2001 cash provided fiscal 2003 primarily due 55 million received issuance shares upon exercise stock options employee stock purchase plan partially offset 43 million dividends paid shareholders company’s contractual obligations july 31 2003 effect obligations expected liquidity cash flows future periods follows thousands 1 mortgage capital lease contractual obligations include principal associated interest costs 2 lease costs associated haverhill facility funded rampup monies previously received company connection exact system order 3 commitments represent commitments suppliers production raw materials inventory components related exact system order company currently approximately 300 million revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2003 fiscal 2002 however company guaranteed provision credit facility principal bank debt owed cedara bank lender provision credit facility approximately 107 million company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements far excess next 12 months impact inflation overall inflation material impact company’s operations past three fiscal years new accounting pronouncements june 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities” “sfas 146” sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force “eitf” issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” “eitf 943” principal difference sfas 146 eitf 943 relates requirements recognition liability cost associated exit disposal activity sfas 146 requires liability cost associated exit disposal activity recognized liability incurred eitf 943 liability exit cost defined eitf 943 recognized date entity’s commitment exit plan therefore sfas 146 eliminates definition requirements recognition exit costs eitf 943 sfas 146 also establishes fair value objective initial measurement liability provisions sfas 146 effective exit disposal activities initiated december 31 2002 adopted company january 1 2003 november 2002 eitf reached consensus issue 0021 “revenue arrangements multiple deliverables” “eitf 0021” eitf 0021 addresses revenue recognition arrangements encompassing multiple elements delivered different points time defining criteria must met elements considered separate unit accounting element determined separate unit accounting revenue element recognized time delivery eitf 0021 effective revenue arrangements entered fiscal periods beginning june 15 2003 company expect pronouncement material impact financial position results operations january 2003 financial accounting standards board “fasb” issued financial accounting standards board interpretation 46 “consolidation variable interest entities” “fin 46” fin 46 requires entity controlling financial interest variable interest entity assets liabilities results activities variable interest entity included consolidated financial statements entity fin 46 effective immediately new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior january 31 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 october 2003 fasb deferred effective date applying provision fin 46 first interim annual period ending december 15 2003 company still assessing impact financial position results operations april 30 2003 fasb issued statement 149 “amendment statement 133 derivative instruments hedging activities” “statement 149” statement 149 intended result consistent reporting contracts either freestanding derivative instruments subject statement 133 entirety hybrid instruments debt host contracts embedded derivative features addition statement 149 clarifies definition derivative providing guidance meaning initial net investments related derivatives statement 149 effective contracts entered modified june 30 2003 company expect pronouncement material impact financial position results operations may 15 2003 fasb issued statement 150 “accounting certain financial instruments characteristics liabilities equity” “statement 150” statement 150 establishes standards classifying measuring liabilities certain financial instruments embody obligations issuer characteristic liabilities equity statement 150 represents significant change practice accounting number financial instruments including mandatory redeemable equity instruments certain equity derivatives frequently used connection share repurchase programs company use instruments share repurchase program statement 150 effective financial instruments created modified may 31 2003 instruments september 1 2003 company expect pronouncement material impact financial position results operations business environment risk factors forwardlooking statements annual report form 10k contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures involve risk uncertainties actual events results may differ significantly indicated forwardlooking statements result number important factors including discussed elsewhere herein risk factors carefully consider risks described making investment decision respect analogic common stock additional risks presently known us currently deem immaterial may also impair business could material negative effect business financial condition results operations significant portion revenue currently comes small number customers decrease revenue customers could harm operating results depend small number customers large portion business changes customers’ orders may significant impact operating results major customer significantly reduces amount business us would adverse impact operating results following table sets forth percentages net product engineering revenue three largest customers last three fiscal years percentage total net sales ten largest customers years although seeking broaden customer base continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition generate significant accounts receivable connection products sell services provide major customers although major customers large corporations one customers become insolvent otherwise unable pay services operating results financial condition could adversely affected competition existing new companies medical security imaging technology industry could cause us experience downward pressure prices fewer customer orders reduced margins inability take advantage new business opportunities loss market share operate highly competitive industry subject competition based upon product design performance pricing quality services believe innovative engineering product reliability important factors growth try maintain competitive pricing products directly comparable products manufactured others many instances products conform exacting specifications carry higher price analogous products manufactured others competitors include divisions larger diversified organizations well several specialized companies greater resources larger staffs many oem customers potential oem customers capacity design manufacture products manufacture face competition research product development groups manufacturing operations current potential customers continually evaluate benefits internal research product development manufacturing versus outsourcing depend suppliers sole source components production would substantially curtailed suppliers able meet demands alternative sources available order raw materials components complete customers’ orders raw materials components ordered solesource suppliers although work customers suppliers minimize impact shortages raw materials components sometimes experience shortterm adverse effects due price fluctuations delayed shipments past industrywide shortages electronics components significant shortage raw materials components occur might delay shipments pay premium pricing could adversely affect operating results cases supply shortages particular components substantially curtail production products using components always able pass price increases customers accordingly raw material component price increases could adversely affect operating results also depend small number suppliers affiliated customers competitors others may small poorly financed companies many raw materials components use business unable continue purchase raw materials components suppliers operating results could adversely affected many costs fixed margins depend volume output facilities reduction volume could adversely affect margins left excess inventory operating results adversely affected long lead times specialized product designs typically purchase components manufacture products customer orders anticipation customer orders based customer forecasts variety reasons decreased enduser demand products manufacturing customers might purchase products manufactured purchased components either event would attempt recoup materials manufacturing costs means returning components vendors disposing excess inventory channels requiring oem customers purchase otherwise compensate us excess inventory significant customer agreements give us ability require oem customers extent unsuccessful recouping material manufacturing costs would net sales adversely affected also operating results would disproportionately adversely affected moreover carrying excess inventory would reduce working capital available continue operate grow business uncertainties adverse trends affecting industry major customers may adversely affect operating results business depends primarily specific segment electronics industry medical security imaging technology products subject rapid technological change pricing margin pressure industry historically cyclical subject significant downturns characterized diminished product demand rapid declines average selling prices production overcapacity addition changes government policy relating reimbursement purchase use medical security related capital equipment could also affect sales customers’ markets also subject economic cycles likely experience recessionary periods future economic conditions affecting industry general major customers particular might adversely affect operating results businesses outside medical instrumentation security technology product sectors subject greater technological cyclical pressures customers’ delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business products used number customers production medical devices subject high level regulatory oversight delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained may withdrawn modified medical devices cannot marketed united states without clearance approval fda medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling states may also regulate manufacture sale use medical devices medical device products also subject approval regulation foreign regulatory safety agencies business strategy involves pursuit acquisitions business combinations may difficult integrate disrupt business dilute stockholder value divert management attention part business strategy may consummate additional acquisitions business combinations acquisitions typically accompanied number risks including difficulty integrating operations personnel acquired companies potential disruption ongoing business distraction management expenses related acquisition potential unknown liabilities associated acquired businesses successful completing acquisitions may pursue future may incurred substantial expenses devoted significant management time resources seeking complete proposed acquisitions generate benefits us addition substantial portions available cash might utilized consideration acquisitions annual quarterly operating results subject fluctuations could affect market price common stock annual quarterly results may vary significantly depending various factors many beyond control may meet expectations securities analysts investors occurs price common stock would likely decline factors include • variations timing volume customer orders relative manufacturing capacity • introduction market acceptance customers’ new products • changes demand customers’ existing products • timing expenditures anticipation future orders • effectiveness managing manufacturing processes • changes competitive economic conditions generally customers’ markets • changes cost availability components skilled labor • foreign currency exposure • investor analyst perceptions events affecting company competitors andor industry case many technology companies typically ship significant portion products last month quarter result delay anticipated sales likely result deferral associated revenue beyond end particular quarter would significant effect operating results quarter addition operating expenses vary directly net sales difficult adjust short term result net sales particular quarter expectations could proportionately reduce operating expenses quarter therefore revenue shortfall would disproportionate adverse effect operating results quarter loss key personnel could hurt business industry experience technological expertise operate highly competitive industry depend services key senior executives technological experts loss services one several key employees inability attract train retain qualified skilled employees specifically engineering operations personnel could result loss customers otherwise inhibit ability operate grow business successfully unable maintain technological expertise research product development manufacturing processes able successfully compete believe future success depend upon ability provide research product development manufacturing services meet changing needs customers requires successfully anticipate respond technological changes design manufacturing processes costeffective timely manner result continually evaluate advantages feasibility new product design manufacturing processes cannot however certain development efforts successful one stockholder substantial interest analogic august 31 2003 bernard gordon charitable remainder unitrust owned approximately 17 analogic’s outstanding common stock bernard gordon chairman board directors executive chairman analogic julian soshnick vice president analogic serve trustees trust full power vote dispose shares held trust based ownership interest analogic ability exert substantial influence actions analogic item 7aitem 7 management’s discussion analysis financial condition results operations company restated financial statements fiscal years ended july 31 2002 july 31 2003 “restatement” financial information reported fiscal years annual report form 10k reflects restatement please see note 1 notes consolidated financial statements information regarding restatement following discussion provides analysis company’s financial condition results operations read conjunction consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains forwardlooking statements within meaning securities exchange act 1934 statements historical fact company makes document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements company differ projected results see “risk factors” critical accounting policies judgments estimates sec considers critical accounting policies ones important portrayal company’s financial condition operating results require management make difficult subjective judgments often result need make estimates matters inherently uncertain case company’s critical accounting policies judgments based historical experience terms existing contracts company’s observance trends industry information provided customers information available outside sources appropriate company’s critical accounting policies judgments estimates include revenue recognition accounts receivable company recognizes majority revenue accordance sec staff accounting bulletin 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met sales contracts generally provide customer accept title risk loss product leaves facilities shipping terms local laws allow passage title risk loss shipping point defer recognizing revenue title risk loss transfer customer company’s transactions sometimes involve multiple elements ie systems services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined verifiable objective evidence recognized time delivery maintenance service revenues recognized ratably life contracts business units sell software licenses company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence vsoe fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regards installation implementation remain fees fixed determinable collectibility reasonably assured customer acceptance applicable obtained hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term service revenues recognized ratably life contracts company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fees monthly basis utilizing hours incurred date percentage total estimated hours complete project company sufficient basis measure progress towards completion revenue recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately revenue related hotel operations recognized services performed inherent revenue recognition process significant management estimates judgments influence timing amount revenue recognition camtronics one company’s subsidiaries provides several models procurement digital cardiac information systems model management must make significant estimates judgments regarding revenue recognition predominant model includes perpetual software license agreement projectrelated installation services professional consulting services computer hardware sublicensed software support camtronics provides installation services include projectscoping services conducting preinstallation audits detailed installation plans actual installation hardware components testing hardware software installed customer site installation services deemed essential functionality software license installation service revenues recognized upon completion installation camtronics also provides professional consulting services include consulting activities fall outside scope standard installation services vary depending scope complexity requested client examples services include additional database consulting system configuration project management interfacing existing systems network consulting professional consulting services generally deemed essential functionality software camtronics vsoe consulting services timing software license revenue impacted however camtronics commonly performs consulting services company vsoe accordingly software license revenue deferred services completed vsoe exist professional consulting service revenue recognized services performed deferred revenue comprised 1 license fee maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement vendor specific objective evidence fair value determined components yet delivered accepted customer deferred costs represent costs related revenues example costs goods sold services provided sales commission expenses company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customer’s financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collections issues identified inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held forecasted demand changes technology assessments require management judgments estimates valuation adjustments excess obsolete inventory may recorded based assessments july 31 2004 2003 company valuation reserve balances equal 108 million 104 million respectively concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company places cash investments marketable securities high credit quality financial instruments policy limits amount credit exposure one financial institution company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collections issues identified credit losses historically within expectations provisions established guarantee company continue experience credit loss rates past since accounts receivable concentrated relatively number customers significant change liquidity financial position one customers could material adverse impact collectibility accounts receivable future operating results warranty reserve company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligation affected product failure rates service delivery costs incurred correct product failure actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months beginning date delivery investments advances affiliated companies company investments affiliated companies related areas company’s strategic focus company accounts investments using equity method accounting assessing recoverability investments company must make certain assumptions judgments based upon changes company’s overall business strategy financial condition affiliated companies market conditions industry economic environment entities operate adverse changes market conditions poor operating results affiliated companies could result losses inability recover carrying value investments thereby requiring impairment charge future goodwill intangible assets longlived assets intangible assets consist goodwill intellectual property licenses capitalized software longlived assets consist primarily property plant equipment intangible assets property plant equipment excluding goodwill amortized using straightline method estimated useful life carrying value goodwill intangible assets reviewed quarterly basis existence facts circumstances internally externally may suggest impairment factors company considers important could trigger impairment review include significant underperformance relative expected historical projected future operating results significant negative industry economic trends company determines whether impairment occurred based gross expected future cash flows measures amount impairment based related future discounted cash flows cash flow estimates used determine impairment contain management’s best estimates using appropriate customary assumptions projections time beginning fiscal 2003 company adopted sfas 142 “goodwill intangible assets” result company discontinued amortizing goodwill august 1 2002 adopted policy evaluate goodwill annual basis potential impairment first quarter fiscal year time events changes circumstances suggest carrying amount may recoverable estimated future cash flows income taxes company required estimate income taxes jurisdictions within operates process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet company must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established company must include expense within tax provision statement operations event actual results differ estimates provision income taxes results operations could materially impacted company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs results operations fiscal 2004 compared fiscal 2003 product revenue fiscal 2004 3271 million compared 4424 million fiscal 2003 decrease 1153 million 26 decrease product revenue primarily due reduction sales security technology products 1758 million resulting reduced sales exact systems spare parts company supplies l3 communications reduced sales security products partially offset increased sales 605 million 519 million medical technology products 23 increase prior year’s revenue 86 million primarily related embedded signalprocessing products increase medical technology products revenue due increase revenues medical imaging products 350 million primarily due increased sales ct systems dr systems patient monitors increase also attributable approximately 25 million revenue resulting payment received related multiyear multimillion dollar oem agreement involves annual minimum purchase commitment customer met 2004 increased camtronics revenues 113 million primarily due recognition fiscal 2004 prior period deferred revenue increased bk medical revenues 56 million resulting increased demand ultrasound systems engineering revenue fiscal 2004 201 million compared 209 million fiscal 2003 decrease 08 million 4 decrease engineering revenue primarily due reduction customer funded project digital xray systems partially offset license intellectual property 18 million sold company’s affiliate shenzhen anke hightech co ltd “sahco” revenue 83 million 84 million fiscal 2004 2003 respectively represents revenue company’s hotel operation product gross margin 1312 million fiscal 2004 compared 1861 million period last year product gross margin percentage product revenue 40 42 fiscal 2004 2003 respectively decrease product gross margin percentage prior year primarily attributable lower sales security technology products higher margins company’s products decrease partially offset benefit approximately 25 million margin guaranteed oem customer engineering gross margin 66 million fiscal 2004 compared 60 million fiscal 2003 engineering gross margin percentage engineering revenue 33 29 fiscal 2004 2003 respectively increase engineering gross margin percentage engineering revenue prior fiscal year primarily due sale license intellectual property company’s affiliate sahco 18 million corresponding cost partially offset additional costs incurred company connection work currently done behalf transportation security administration research product development expenses 587 million fiscal 2004 17 total revenue compared 551 million fiscal 2003 12 total revenue increase research product development expenses 36 million due company continuing focus resources developing new generations medical imaging equipment including innovative ct systems niche markets advanced digital xray systems subsystems general radiography mammography extended family multislice ct data acquisition systems medical security markets company testing prototypes automated ctbased portal screening system scan carryon baggage airports carryin baggage public buildings parcels corporations delivery services addition company continues increase investment number development projects security systems meet diverse evolving security needs united states abroad selling marketing expenses 370 million fiscal 2004 10 total revenue compared 349 million fiscal 2003 7 total revenue increase selling marketing expenses 21 million mainly attributable salaries related expenses company’s newly established subsidiary anexa increased commission expenses attributable year increase camtronics’ revenue second quarter fiscal 2004 anexa established company sell dr systems select end user markets united states general administrative expenses 392 million fiscal 2004 11 total revenue compared 350 million fiscal 2003 7 total revenue increase 42 million primarily attributable incentive bonus related payroll expenses approximately 10 million amortization acquired intangible assets 09 million incremental cost approximately 04 million related acquired subsidiaries sti vmi medical inc included period last year increase also due approximately 07 million related programs initiated company comply sarbanesoxley act 2002 approximately 08 million accounting legal expenses related restatement company’s financial statements fiscal years 2001 2002 first three quarters fiscal 2003 approximately 11 million additional facilities operating costs computer software costs 48 million 35 million capitalized fiscal 2004 2003 respectively amortization capitalized software costs amounted 18 million fiscal years 2004 2003 included product cost sales interest income fiscal 2004 37 million compared 50 million fiscal 2003 decrease 13 million primarily result lower effective interest rate short term investments lesser extent lower invested cash balances resulting primarily company internally funding new addition headquarters facility company recorded equity income 06 million related equity unconsolidated affiliates fiscal 2004 compared equity loss 35 million fiscal 2003 equity gain fiscal 2004 consists gain 12 million company’s share profit cedara software corporation offset loss 06 million company’s share losses sahco equity loss 35 million fiscal 2003 consists primarily losses 25 million 11 million reflecting company’s share losses cedara software corporation sahco respectively expense consisting primarily foreign currency exchange gains losses 02 million fiscal 2004 compared income 58 million fiscal 2003 income fiscal 2003 included 39 million currency exchange gain resulting weakening us dollar primarily due 18 million gain us dollar loans company’s danish subsidiary 21 million gain us dollar loans anrad company’s canadian subsidiary 16 million gain sale building company owned peabody massachusetts related party effective tax rate fiscal 2004 17 compared 36 fiscal 2003 decrease 19 primarily due relative increase estimated benefits tax exempt interest extraterritorial income exclusion research development credits result lower dollar base pretax income fiscal 2004 compared fiscal 2003 addition effective tax rate reflects benefit resulting release german valuation allowance reflecting net operating loss carryforwards management determined likely realized net income fiscal 2004 84 million compared 495 million fiscal 2003 basic earnings per share 062 fiscal 2004 compared 374 fiscal 2003 diluted earnings per share 062 fiscal 2004 compared 370 fiscal 2003 decrease net income prior year primarily result decreased revenue profit derived sale exact systems partially offset increased revenue profit medical technology products including deferred revenue profit recognized fiscal 2004 camtronics fiscal 2003 compared fiscal 2002 product revenue fiscal 2003 4424 million compared 2688 million fiscal 2002 increase 1736 million 65 increase primarily due increase 1716 million sales security technology products sales exact systems spare parts primarily l3 increase medical technology products revenues 125 million primarily offset decrease revenues 105 million attributable reduced demand embedded multiprocessing equipment increase medical technology product revenue result 86 million increased sales camtronics cardiovascular systems 57 million increased sales bk medical ultrasound systems offset decrease sales medical imaging products 18 million decrease sales medical imaging products due 156 million sales generated recently acquired subsidiary sound technology inc 166 million resulting increased demand data acquisition systems partially offset decrease 340 million primarily due reduction sales midrange computed tomography “ct” medical systems previously supplied philips engineering revenue fiscal 2003 209 million compared 265 million fiscal 2002 decrease 21 decrease engineering revenue primarily due decrease customer funded projects developing medical security equipment revenue 84 million 96 million fiscal 2003 2002 respectively represent revenue company’s hotel operation decrease revenues mostly result lower occupancy cost product sales 2563 million fiscal 2003 compared 1690 fiscal 2002 cost product sales percentage revenue 58 fiscal 2003 compared 63 fiscal 2002 decrease cost product sales percentage prior year primarily attributable increase sales security technology products lower cost sales company’s products cost engineering sales 149 million fiscal 2003 compared 232 million fiscal 2002 total cost engineering sales percentage engineering revenue decreased 71 fiscal 2003 88 fiscal 2002 percentage decrease primarily attributable license revenue recognized fiscal 2003 associated cost costs sales 47 million 52 million company’s hotel operation fiscal 2003 2002 respectively research product development expenses 551 million fiscal 2003 12 total revenue compared 391 million fiscal 2002 13 total revenue increase research product development expenses 160 million due company continuing focus substantial resources developing new generations medical imaging equipment including innovative ct systems niche markets advanced digital xray systems subsystems general radiography mammography extended family multislice ct data acquisition systems medical security markets addition company developing security systems variety applications company initial stages testing prototypes automated ctbased portal screening system scan carryon baggage airports “carryin” baggage public buildings parcels corporations delivery services addition company continues increase investment number development projects meet diverse evolving security need united states abroad selling marketing expenses 349 million fiscal 2003 7 total revenue compared 324 million fiscal 2002 11 total revenue increase selling marketing expense 25 million mainly attributable exchange rate differential bk medical subsidiary denmark general administration expenses 350 million fiscal 2003 7 total revenue compared 284 million fiscal 2002 9 total revenue increase 66 million primarily attributable increased salaries related payroll expenses approximately 13 million amortization approximately 21 million related acquired intangible assets approximately 13 million related incremental costs due acquisition sound technology inc vmi medical inc also included general administrative expenses provision bad debt approximately 24 million 16 million related certain old invoices sahco approximately 07 million unsecured note company deemed uncollectible computer software costs 35 million 24 million capitalized fiscal 2003 2002 respectively amortization capitalized software costs amounted 18 million fiscal 2003 2002 included product cost sales interest income fiscal 2003 50 million compared 44 million fiscal 2002 increase 06 million primarily result higher invested cash balances partially offset lower effective interest rate short term investments company recorded loss 35 million relates equity unconsolidated affiliates fiscal 2003 compared loss 02 million fiscal 2002 equity loss fiscal 2003 consists primarily losses 11 million 25 million reflecting company’s share losses sahco cedara software corporation respectively equity loss fiscal 2002 consists gain 14 million reflecting company’s share gains enhanced ct technology llc partially offset equity losses 13 million 02 million reflecting company’s share losses sahco cedara software corporation respectively income 58 million fiscal 2003 compared 08 fiscal 2002 income fiscal 2003 includes 39 million currency exchange gain resulting weakening us dollars primarily due 18 million gain us dollar loans company’s danish subsidiary 21 million gain us dollar loans anrad company’s canadian subsidiary 16 million gain sale building company owned peabody massachusetts related party effective tax rate fiscal 2003 36 compared 19 fiscal 2002 increase due primarily lower impact related benefit realized tax exempt interest extraterritorial income benefit higher pretax income compared 2002 net income fiscal 2003 495 million compared 27 million fiscal 2002 basic earnings per share 374 compared 020 fiscal 2002 diluted earnings per share 370 fiscal 2003 compared 020 fiscal 2002 increase net income prior year’s period primarily result increased revenue profit derived sale exact systems prior year’s income included pretax asset impairment charge 89 million related write certain assets company’s telecommunications subsidiary anatel company’s test measurement division liquidity capital resources cash equivalents marketable securities totaled 1766 million 1780 million july 31 2004 2003 respectively working capital 2459 million 2463 million july 31 2004 2003 respectively company’s balance sheet reflects current ratio 40 1 july 31 2004 compared 37 1 july 31 2003 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company faces exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related local currency revenue operating expenses canada europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2004 due short maturities instruments company maintains bond investment portfolio various issuers types maturities portfolio classified balance sheet either cash equivalents marketable securities depending lengths time maturity original purchase cash equivalents include highly liquid investments maturities three months less time purchase investments maturities time purchase excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value company’s investment portfolio company currently hedge interest rate exposures net cash provided operating activities 332 million fiscal 2004 354 million fiscal 2003 948 million fiscal 2002 decrease cash flows operations fiscal 2004 fiscal 2003 22 million primarily result decrease net income 412 million partially offset net improvement operating assets liabilities 400 million primarily advance payments related exact contract net cash used investing activities 152 million fiscal 2004 compared 181 million fiscal 2003 150 million fiscal 2002 decrease net cash used investment activities 29 million primarily due lower funds used acquisition businesses assets partially offset increase capital expenditures primarily company’s new addition headquarters facility net cash used financing activities 55 million 31 million fiscal years 2004 2002 respectively net cash provided financing activities 08 million fiscal 2003 net cash used financing activities fiscal 2004 consisted primarily payoff long term mortgage loan 39 million dividend payments 43 million partially offset cash received issuance stock pursuant exercise stock options employee stock purchase plan 39 million company’s contractual obligations july 31 2004 effect obligations expected liquidity cash flows future periods follows company currently approximately 235 million revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2004 fiscal 2003 company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months impact inflation overall inflation material impact company’s operations past three fiscal years new accounting pronouncements november 2002 eitf reached consensus issue 0021 “accounting revenue arrangements multiple deliverables” “eitf 0021” eitf 0021 addresses revenue recognition arrangements encompassing multiple elements delivered different points time defining criteria must met elements considered separate unit accounting element determined separate unit accounting revenue element recognized time delivery eitf 0021 effective revenue arrangements entered fiscal periods beginning june 15 2003 adoption eitf 0021 material effect company’s financial position results operations january 2003 financial accounting standards board issued financial accounting standards board interpretation 46 “fin 46” “consolidation variable interest entities” amended issuing fin 46r december 2003 fin 46r requires entity controlling financial interest variable interest entity assets liabilities results activities variable interest entity included consolidated financial statements entity fin 46 effective immediately new variable interest entities created acquired january 31 2003 company create acquire variable interest entities date adoption provisions fin 46r third quarter fiscal 2004 material effect financial position results operations december 2003 securities exchange commission issued staff accounting bulletin 104 “sab 104” “revenue recognition” sab 104 effective upon issuance supersedes staff accounting bulletin 101 “sab 101” “revenue recognition financial statements” sab 104’s primary purpose rescind accounting guidance sab 101 related multipleelement arrangements guidance superseded issuance eitf 0021 adoption sab 104 material effect company’s financial position results operations december 2004 fasb issued revision financial accounting standards 123 “fas 123r” fas 123r focused primarily accounting transactions company obtains employee services exchange stock options sharebased payments currently company grants stock options employees discloses pro forma effect compensation expense stock options fas 123r company required record compensation expense company’s results operations fas 123r effective beginning first fiscal reporting period begins june 15 2005 adoption fas 123r material effect company’s financial position results operations december 2004 fasb issued financial accounting standards 151 “fas 151” fas 151 clarifies accounting inventory abnormal amounts idle facility expense freight handling costs wasted materials existing gaap items idle facility expense excessive spoilage double freight rehandling costs may “so abnormal” require treatment current period charges rather recorded adjustments value inventory fas 151 requires items recognized currentperiod charges regardless whether meet criterion “so abnormal” addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions statement shall effective inventory costs incurred fiscal years beginning june 15 2005 earlier application permitted inventory costs incurred fiscal years beginning date statement issued adoption fas 151 expected material effect company’s financial position results operations risk factors forwardlooking statements annual report form 10k contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures involve risk uncertainties actual events results may differ significantly indicated forwardlooking statements result number important factors including discussed risk factors carefully consider risks described making investment decision respect analogic common stock additional risks presently known us currently deem immaterial may also impair business could material negative effect business financial condition results operations significant portion revenue currently comes small number customers decrease revenue customers could harm operating results depend small number customers large portion business changes customers’ orders may significant impact operating results major customer significantly reduces amount business us would adverse impact operating results following table sets forth percentages net product engineering revenue four largest customers last three fiscal years percentage total net sales ten largest customers years although seeking broaden customer base continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition generate significant accounts receivable connection products sell services provide major customers although major customers large corporations one customers become insolvent otherwise unable pay services operating results financial condition could adversely affected competition existing new companies medical security imaging technology industry could cause us experience downward pressure prices fewer customer orders reduced margins inability take advantage new business opportunities loss market share operate highly competitive industry subject competition based upon product design performance pricing quality services believe innovative engineering product reliability important factors growth try maintain competitive pricing products directly comparable products manufactured others many instances products conform exacting specifications carry higher price analogous products manufactured others competitors include divisions larger diversified organizations well several specialized companies greater resources larger staffs many oem customers potential oem customers capacity design manufacture internally products manufacture face competition research product development groups manufacturing operations current potential customers continually evaluate benefits internal research product development manufacturing versus outsourcing depend suppliers sole source components production would substantially curtailed suppliers able meet demands alternative sources available order raw materials components complete customers’ orders raw materials components ordered solesource suppliers although work customers suppliers minimize impact shortages raw materials components sometimes experience shortterm adverse effects due price fluctuations delayed shipments past industrywide shortages electronics components significant shortage raw materials components occur might delay shipments pay premium pricing could adversely affect operating results cases supply shortages particular components substantially curtail production products using components always able pass price increases customers accordingly raw material component price increases could adversely affect operating results also depend small number suppliers affiliated customers competitors others may small poorly financed companies many raw materials components use business unable continue purchase raw materials components suppliers operating results could adversely affected many costs fixed margins depend volume output facilities reduction volume could adversely affect margins left excess inventory operating results adversely affected long lead times specialized product designs typically purchase components manufacture products anticipation customer orders based customer forecasts variety reasons decreased enduser demand products manufacturing customers might purchase products manufactured purchased components either event would attempt recoup materials manufacturing costs means returning components vendors disposing excess inventory channels requiring oem customers purchase otherwise compensate us excess inventory significant customer agreements give us ability require oem customers extent unsuccessful recouping material manufacturing costs would net sales adversely affected also operating results would disproportionately adversely affected moreover carrying excess inventory would reduce working capital available continue operate grow business uncertainties adverse trends affecting industry major customers may adversely affect operating results business depends primarily two segments within electronics industry medical security technology products subject rapid technological change pricing margin pressure segments historically cyclical subject significant downturns characterized diminished product demand rapid declines average selling prices production overcapacity addition changes government policy relating reimbursement purchase use medical security related capital equipment could also affect sales customers’ markets also subject economic cycles likely experience recessionary periods future economic conditions affecting industry general major customers particular might adversely affect operating results businesses outside medical instrumentation security technology product sectors subject greater technological cyclical pressures customers’ delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business products used number customers production medical devices subject high level regulatory oversight delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained may withdrawn modified medical devices cannot marketed united states without clearance approval fda medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling states may also regulate manufacture sale use medical devices medical device products also subject approval regulation foreign regulatory safety agencies business strategy involves pursuit acquisitions business combinations may difficult integrate disrupt business dilute stockholder value divert management attention part business strategy may consummate acquisitions business combinations acquisitions typically accompanied number risks including difficulty integrating operations personnel acquired companies potential disruption ongoing business distraction management expenses related acquisition potential unknown liabilities associated acquired businesses successfully complete acquisitions pursue future may incur substantial expenses devote significant management time resources seeking complete proposed acquisitions generate benefits us addition substantial portions available cash might utilized consideration acquisitions annual quarterly operating results subject fluctuations could affect market price common stock annual quarterly results may vary significantly depending various factors many beyond control may meet expectations securities analysts investors occurs price common stock would likely decline factors include • variations timing volume customer orders relative manufacturing capacity • introduction market acceptance customers’ new products • changes demand customers’ existing products • timing expenditures anticipation future orders • effectiveness managing manufacturing processes • changes competitive economic conditions generally customers’ markets • changes cost availability components skilled labor • foreign currency exposure • investor analyst perceptions events affecting company competitors andor industry case many technology companies typically ship significant portion products last month quarter result delay anticipated sales likely result deferral associated revenue beyond end particular quarter would significant effect operating results quarter addition operating expenses vary directly net sales difficult adjust short term result net sales particular quarter expectations could proportionately reduce operating expenses quarter therefore revenue shortfall would disproportionate adverse effect operating results quarter loss key personnel could hurt business industry experience technological expertise operate highly competitive industry depend services key senior executives technological experts loss services one several key employees inability attract train retain qualified skilled employees specifically engineering operations personnel could result loss customers otherwise inhibit ability operate grow business successfully unable maintain technological expertise research product development manufacturing processes able successfully compete believe future success depend upon ability provide research product development manufacturing services meet changing needs customers requires successfully anticipate respond technological changes design manufacturing processes costeffective timely manner result continually evaluate advantages feasibility new product design manufacturing processes cannot however certain development efforts successful item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis company’s financial condition results operations read conjunction consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains forwardlooking statements within meaning securities exchange act 1934 “exchange act” statements historical fact company makes document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements company differ projected results see “risk factors” critical accounting policies judgments estimates sec considers critical accounting policies ones important portrayal company’s financial condition operating results require management make difficult subjective judgments often result need make estimates matters inherently uncertain case company’s critical accounting policies judgments based historical experience terms existing contracts company’s observance trends industry information provided customers information available outside sources appropriate company’s critical accounting policies judgments estimates include revenue recognition accounts receivable company recognizes majority revenue accordance sec staff accounting bulletin 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling costs cost sales company’s transactions sometimes involve multiple elements ie systems services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined verifiable objective evidence recognized time delivery arrangement undelivered element company ensures objective reliable evidence fair value undelivered element fair value determined based upon price charged element sold separately maintenance service revenues recognized ratably life contracts business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regards installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained allocate revenue first fair value undelivered elements allocate residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term relates services camtronics may also provide services vary depending scope complexity requested customer examples services include additional database consulting system configuration project management interfacing existing systems network consulting services generally deemed essential functionality software camtronics vsoe services timing software license revenue impacted company vsoe service revenue recognized services performed camtronics commonly performs services company vsoe accordingly software license revenue deferred services completed company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fee arrangement monthly basis utilizing costs incurred date percentage total estimated costs complete project company sufficient basis measure progress towards completion revenue recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised 1 license fee maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement vsoe fair value determined components yet delivered accepted customer deferred costs represent costs related revenues example costs goods sold services provided sales commission expenses revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collection issues identified inventories company values inventory lower cost market using firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand company’s products less estimates company experiences higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories may recorded future periods concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company maintains bond investment portfolio various types maturities high credit quality issuers cash equivalents required working capital purposes placed short term investments original maturities six months less company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collection issues identified credit losses historically within expectations provisions established guarantee company continue experience credit loss rates past since accounts receivable concentrated among relatively customers significant change liquidity financial position one customers could material adverse impact collectibility accounts receivable future operating results warranty reserve company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery investments advances affiliated companies company investments affiliated companies related areas company’s strategic focus investment companies company ability exercise significant influence accounted equity method company holds 50 less voting stock investments companies company ability exercise significant influence accounted cost method assessing recoverability investments company must make certain assumptions judgments based upon changes company’s overall business strategy financial condition affiliated companies market conditions industry economic environment entities operate adverse changes market conditions poor operating results affiliated companies could result losses inability recover carrying value investments thereby requiring impairment charge future goodwill intangible assets longlived assets intangible assets consist goodwill intellectual property licenses capitalized software longlived assets consist primarily property plant equipment assets reviewed impairment annually first quarter fiscal year whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations income taxes company required estimate income taxes jurisdictions within operates process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet company must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established company must include expense within tax provision statement operations event actual results differ estimates provision income taxes results operations could materially impacted company establishes liabilities possible assessments taxing authorities resulting known tax exposures including limited certain tax credits various federal state foreign tax matters company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs american jobs act 2004 creates temporary incentive us corporations repatriate accumulated income earned abroad providing 85 dividends received deduction certain dividends received controlled foreign corporations deduction subject number limitations based company’s analysis provision provide benefit company results operations fiscal 2005 compared fiscal 2004 product revenue fiscal 2005 3362 million compared 3271 million fiscal 2004 increase 91 million 3 increase product revenue primarily due increased sales security technology products 222 million 81 prior year due increased orders exact systems spare parts medical technology products sales increased 05 million prior year primarily due increased demand company’s data acquisition products 90 million computer tomography ct products 79 million magnetic resonance imaging mri systems subsystems 74 million partially offset lower sales digital radiography equipment 95 million cardiology equipment 133 million revenue increase security technology products medical technology products partially offset decrease 136 million corporate revenue primarily due lower demand embedded multiprocessing equipment 109 million primarily due loss one major customer components board products approximately 27 million engineering revenue fiscal 2005 192 million compared 201 million fiscal 2004 decrease 09 million decrease resulted primarily following activities specific fiscal 2004 reoccur fiscal 2005 certain customer funded projects approximately 15 million digital xray systems license sale 10 million company’s affiliate shenzhen anke hightech co ltd “sahco” approximately 18 million related oem funded project reduction resulting activities partially offset revenue generated additional funding approximately 34 million received transportation security administration “tsa” design develop continuous performance enhancements existing explosive detection systems revenue 92 million 83 million fiscal 2005 fiscal 2004 respectively represents revenue company’s hotel operation product gross margin 1336 million fiscal 2005 compared 1312 million fiscal 2004 product gross margin percentage product revenue unchanged approximately 40 fiscal 2005 2004 engineering gross margin 25 million fiscal 2005 compared 66 million fiscal 2004 engineering gross margin percentage engineering revenue 13 33 fiscal 2005 fiscal 2004 respectively decreases resulted primarily following activities specific fiscal year 2004 reoccur fiscal 2005 margin related certain customer funded projects approximately 05 million license sale 10 million company’s affiliate sahco associated cost approximately 09 million related oem funded project additionally fiscal 2005 company incurred approximately 24 million additional costs compared prior year excess value certain funded projects medical imaging technology products reduction gross margin partially offset approximately 05 million additional funds received completed funded project related costs research product development expenses 580 million fiscal 2005 16 total revenue compared 587 million fiscal 2004 17 total revenue decrease research product development expenses 7 million primarily due reduction salary related costs approximately 18 million camtronics sky result personnel reductions partially offset expenses incurred ongoing development new generations medical imaging equipment including innovative ct systems niche markets along new generation hybrid petcts extended family multislice ct data acquisition systems medical security markets addition company continues increase investment number development projects security systems meet diverse evolving security needs united states abroad selling marketing expenses 378 million fiscal 2005 compared 370 million fiscal 2004 10 total revenue periods increase selling marketing expenses 08 million primarily attributable salaries related expenses approximately 29 million anexa bk medical continue efforts increase penetration respective markets partially offset reduction sales marketing personnel related expenses approximately 23 million camtronics sky general administrative expenses 436 million fiscal 2005 12 total revenue compared 392 million fiscal 2004 11 total revenue increase 44 million primarily attributable 35 million programs comply internal control rules sarbanesoxley act 2002 14 million accounting legal expenses related restatement company’s financial statements first three quarters fiscal 2004 2003 partially offset 07 million lower depreciation expense asset impairment charges 66 million fiscal 2005 related company’s medical technology product segment company changed accounting method photodetection systems inc “pds” investment equity method cost method evaluated net realizable value investment resulting 22 million impairment charge also certain technologies 08 million abandoned due realignment research development activities additionally company revised approach pursuing certain software technologies pediatric market serviced camtronics resulting 36 million impairment charge software development costs 51 million 48 million capitalized fiscal 2005 fiscal 2004 respectively amortization capitalized software costs amounted 14 million 18 million fiscal 2005 fiscal 2004 respectively included product cost sales company’s consolidated statements operations interest income fiscal 2005 52 million compared 37 million fiscal 2004 increase 15 million primarily results higher effective interest rates short term investments higher invested cash balance primarily due proceeds company’s sale equity investment cedara 508 million interest expense fiscal 2005 approximately 01 million compared 03 million fiscal 2004 decrease 02 million primarily due company paying mortgage held property fiscal 2004 company recorded equity gain unconsolidated affiliated investments 03 million 06 million fiscal 2005 fiscal 2004 respectively equity gain fiscal 2005 consists gain 05 million company’s share profit sahco offset loss 02 million company’s share losses cedara equity gain 06 million fiscal 2004 consisted primarily gain 12 million company’s share profit cedara partially offset 05 million share losses sahco gain sale marketable securities approximately 438 million fiscal 2005 represents gain related company’s sale equity interest cedara effective tax rate fiscal 2005 33 compared 17 fiscal 2004 increase primarily due increase income resulting gain sale company’s equity interest cedara lesser extent 20 reduction extraterritorial income exclusion last seven months fiscal 2005 resulting phased repeal benefit increase rate partially offset 2 reduction danish statutory tax rate release 03 million tax reserves resulting settlement state income tax audits fiscal 2000 fiscal 2001 net income fiscal 2005 289 million compared 84 million fiscal 2004 basic earnings per share 213 fiscal 2005 compared 062 fiscal 2004 diluted earnings per share 212 fiscal 2005 compared 062 fiscal 2004 net income fiscal 2005 includes aftertax gain approximately 274 million 201 per basic diluted earnings per share related company’s sale equity interest cedara fiscal 2004 compared fiscal 2003 product revenue fiscal 2004 3271 million compared 4424 million fiscal 2003 decrease 1153 million 26 decrease product revenue primarily due reduction sales security technology products 1758 million resulting reduced sales exact systems spare parts company supplies l3 reduced sales security technology products partially offset increased sales 605 million 519 million medical technology products 23 increase prior year’s revenue 86 million primarily related embedded signalprocessing products increase medical technology products revenue due increase revenues medical imaging products 350 million primarily due increased sales ct systems 82 million dr systems 113 million patient monitors 74 million increase also attributable approximately 25 million revenue resulting payment received related multiyear multimillion dollar oem agreement involves annual minimum purchase commitment customer met 2004 increased camtronics revenues 113 million primarily due recognition fiscal 2004 prior period deferred revenue increased bk medical revenues 56 million resulting increased demand ultrasound systems engineering revenue fiscal 2004 201 million compared 209 million fiscal 2003 decrease 08 million 4 decrease engineering revenue primarily due reduction customer funded project digital xray systems partially offset license intellectual property 18 million sold company’s affiliate sahco revenue 83 million 84 million fiscal 2004 fiscal 2003 respectively represents revenue company’s hotel operation product gross margin 1312 million fiscal 2004 compared 1861 million fiscal 2003 product gross margin percentage product revenue 40 42 fiscal 2004 fiscal 2003 respectively decrease product gross margin percentage prior year primarily attributable lower sales security technology products higher margins company’s products decrease partially offset benefit approximately 25 million margin guaranteed oem customer engineering gross margin 66 million fiscal 2004 compared 60 million fiscal 2003 engineering gross margin percentage engineering revenue 33 29 fiscal 2004 fiscal 2003 respectively increase engineering gross margin percentage engineering revenue prior fiscal year primarily due sale license intellectual property sahco 18 million corresponding cost partially offset additional costs incurred company connection work currently done behalf tsa research product development expenses 587 million fiscal 2004 17 total revenue compared 551 million fiscal 2003 12 total revenue increase research product development expenses 36 million due company continuing focus resources developing new generations medical imaging equipment including innovative ct systems niche markets advanced digital xray systems subsystems general radiography mammography extended family multislice ct data acquisition systems medical security markets company testing prototypes automated ctbased portal screening system scan carryon baggage airports carryin baggage public buildings parcels corporations delivery services addition company continues increase investment number development projects security systems meet diverse evolving security needs united states abroad selling marketing expenses 370 million fiscal 2004 10 total revenue compared 349 million fiscal 2003 7 total revenue increase selling marketing expenses 21 million mainly attributable salaries related expenses company’s newly established subsidiary anexa increased commission expenses attributable year increase camtronics’ revenue second quarter fiscal 2004 anexa established company sell dr systems select end user markets united states general administrative expenses 392 million fiscal 2004 11 total revenue compared 350 million fiscal 2003 7 total revenue increase 42 million primarily attributable incentive bonus related payroll expenses approximately 10 million amortization acquired intangible assets 09 million incremental cost approximately 04 million related acquired subsidiaries sti vmi medical inc included period last year increase also due approximately 07 million related programs initiated company comply internal control rules sarbanesoxley act 2002 approximately 08 million accounting legal expenses related restatement company’s financial statements fiscal years 2001 2002 first three quarters fiscal 2003 approximately 11 million additional facilities operating costs software development costs 48 million 35 million capitalized fiscal 2004 fiscal 2003 respectively amortization capitalized software costs amounted 18 million fiscal years 2004 fiscal 2003 included product cost sales interest income fiscal 2004 37 million compared 50 million fiscal 2003 decrease 13 million primarily result lower effective interest rate short term investments lesser extent lower invested cash balances resulting primarily company internally funding new addition headquarters facility company recorded equity gain 06 million related equity unconsolidated affiliates fiscal 2004 compared equity loss 35 million fiscal 2003 equity gain fiscal 2004 consisted gain 12 million company’s share profit cedara offset loss 06 million company’s share losses sahco equity loss 35 million fiscal 2003 consisted primarily losses 25 million 11 million reflecting company’s share losses cedara sahco respectively expense consisting primarily foreign currency exchange gains losses 02 million fiscal 2004 compared income 58 million fiscal 2003 income fiscal 2003 included 39 million currency exchange gain resulting weakening us dollar primarily due 18 million gain us dollar loans company’s danish subsidiary 21 million gain us dollar loans anrad company’s canadian subsidiary 16 million gain sale building peabody massachusetts related party effective tax rate fiscal 2004 17 compared 36 fiscal 2003 decrease 19 primarily due relative increase estimated benefits tax exempt interest extraterritorial income exclusion research development credits result lower dollar base pretax income fiscal 2004 compared fiscal 2003 addition effective tax rate reflected benefit resulting release german valuation allowance reflecting net operating loss carryforwards management determined likely realized net income fiscal 2004 84 million compared 495 million fiscal 2003 basic earnings per share 062 fiscal 2004 compared 374 fiscal 2003 diluted earnings per share 062 fiscal 2004 compared 370 fiscal 2003 decrease net income prior year primarily result decreased revenue profit derived sale exact systems partially offset increased revenue profit medical technology products including deferred revenue profit recognized fiscal 2004 camtronics liquidity capital resources cash equivalents marketable securities totaled 2205 million 1766 million july 31 2005 july 31 2004 respectively working capital 2875 million 2459 million july 31 2005 july 31 2004 respectively company’s balance sheet reflects current ratio 40 1 july 31 2005 july 31 2004 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company faces exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2005 due short maturities instruments company maintains bond investment portfolio various issuers types maturities portfolio classified balance sheet either cash equivalents marketable securities depending lengths time maturity original purchase cash equivalents include highly liquid investments maturities three months less time purchase investments maturities time purchase excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value company’s investment portfolio company currently hedge interest rate exposures net cash provided operating activities 133 million fiscal 2005 332 million fiscal 2004 354 million fiscal 2003 cash flows generated operating activities fiscal 2005 primarily due advance payment 47 million related orders exact systems noncash impact asset impairment charges 66 million depreciation amortization 205 million net income 289 million partially offset net gain 438 million sale cedara investment fiscal 2005 cash provided operating activities decreased 199 million fiscal 2004 primarily due operating loss fiscal 2005 compared operating income fiscal 2004 inventory 700 million july 31 2005 increased 40 million 660 million july 31 2004 due general growth company’s medical systems business refundable deferred income taxes 149 million july 31 2005 increased 40 million 109 million july 31 2004 increase primarily result company’s utilization us treasury’s recently promulgated rules regarding tax return accounting methods revise method reporting deferred revenue writeoff intangible assets changes comprehensive income assets 56 million july 31 2005 increased 42 million 14 million july 31 2004 increase primarily due license maintenance agreement payment cedara 62 million partially offset approximately 12 million amortization related similar assets current liabilities 950 million july 31 2005 increased 128 million 822 million july 31 2004 increase primarily due increase 54 million accrued income taxes resulting gain sale company’s equity interest cedara increase 41 million advance payments primarily related certain orders received exact systems l3 increase 22 million deferred revenue shipments customers increases partially offset final payment note payable 07 million net cash provided investing activities 466 million fiscal 2005 compared cash used investing activities 152 million fiscal 2004 181 million fiscal 2003 cash provided investing activities fiscal 2005 primarily due proceeds sale cedara investment 508 million maturities marketable securities 143 million partially offset capital expenditures 111 million software development costs 51 million certain company’s products company’s investment pds 23 million investments advances affiliated companies 10 million july 31 2005 decreased 100 million year primarily due sale company’s investment cedara 82 million impairment charge 16 million company’s investment cardioworks capitalized software 125 million increased 30 million prior year primarily due capitalized software development costs company’s multislice medical ct systems subsystems partially offset asset impairment charge 05 million software development costs related another medical imaging project amortization capitalized software 14 million 18 million fiscal 2005 fiscal 2004 respectively net cash used financing activities 09 million 55 million fiscal 2005 fiscal 2004 respectively net cash provided financing activities 08 million fiscal 2003 net cash used financing activities fiscal 2005 consisted 44 million dividends paid stockholders 07 million final payment note payable partially offset cash received issuance stock pursuant company’s employee stock option stock purchase plans 42 million company’s contractual obligations july 31 2005 effect obligations expected liquidity cash flows future periods follows company currently approximately 235 million revolving credit facilities various banks available direct borrowings direct borrowings offbalance sheet arrangements fiscal 2005 fiscal 2004 company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months impact inflation overall inflation material impact company’s operations past three fiscal years new accounting pronouncements june 2005 financial accounting standards board “fasb” issued fas 154 “accounting changes error corrections” statement replaces apb opinion 20 “accounting changes” fas 3 “reporting accounting changes interim financial statements” statement applies voluntary changes accounting reporting changes accounting principles fas 154 requires retrospective application prior periods’ financial statements voluntary change accounting principles unless practical apb 20 previously required voluntary changes accounting principles recognized including net income period change cumulative effect changing new accounting principle fas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 earlier application permitted accounting changes errors made occurring fiscal years beginning may 31 2005 adoption fas 154 expected material impact company’s financial position results operations december 16 2004 fasb issued sfas 123 revised 2004 sharebased payment “sfas 123r” revision sfas 123 sfas 123r supersedes apb opinion 25 accounting stock issued employees “apb 25” amends sfas 95 statement cash flows generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees including grants employee stock options recognized income statement based fair values date grant pro forma disclosure longer alternative sfas 123r must adopted fiscal years beginning june 15 2005 company adopted sfas 123r august 1 2005 commencement first quarter fiscal 2006 company adopted “modified prospective” transition method awards granted modified settled date adoption measured accounted accordance sfas 123r unvested equityclassified awards granted prior effective date continue accounted accordance sfas 123 except amounts must recognized income statement permitted sfas 123 company currently accounts sharebased payments employees using intrinsic value method accordance apb 25 generally recognizes compensation cost employee stock options accordingly adoption sfas 123r’s fair value method significant impact company’s results operations although impact company’s overall financial position march 2005 sec issued staff accounting bulletin 107 sab 107 assist preparers simplifying implementation challenges sfas 123r particular sab 107 provides supplemental implementation guidance sfas 123r including guidance valuation methods classification compensation expense inventory capitalization sharebased compensation cost income tax effects disclosures management’s discussion analysis several issues company apply principles sab 107 conjunction adoption sfas 123r may 2005 fasb issued fasb staff positions fsp eitf 00191 “application eitf 0019 freestanding financial instruments originally issued employee compensation” fsp clarifies requirement deliver registered shares result liability classification freestanding financial instruments originally issued employee compensation adoption fsp eitf 00191 material impact company’s financial position results operation december 2004 fasb issued financial accounting standards 151 “inventory costs” “sfas 151” sfas 151 clarifies accounting inventory abnormal amounts idle facility expense freight handling costs wasted materials existing gaap items idle facility expense excessive spoilage double freight rehandling costs may “so abnormal” require treatment current period charges rather recorded adjustments value inventory sfas 151 requires items recognized currentperiod charges regardless whether meet criterion “so abnormal” addition sfas 151 requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions sfas 151 shall effective inventory costs incurred fiscal years beginning june 15 2005 earlier application permitted inventory costs incurred fiscal years beginning date sfas 151 issued adoption sfas 151 expected material impact company’s financial position results operations october 2004 american jobs creation act 2004 “ajca” passed ajca provides deduction income qualified domestic production activities phased 2005 though 2010 ajca also provides twoyear phaseout existing extraterritorial income exclusion foreign sales viewed inconsistent international trade protocols european union december 2004 fasb issued fasb staff position 1091 “application fasb statement 109 accounting income taxes tax deduction qualified production activities american jobs creation act 2004” “fsp 1091” fsp 1091 treats deduction “special deduction” described fasb statement 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed company’s tax return company currently evaluating impact ajca results operations financial position ajca also creates temporary incentive us corporations repatriate accumulated income earned abroad providing 85 dividends received deduction certain dividends received controlled foreign corporations deduction subject number limitations based company’s analysis provision ajca produce benefit company march 2004 fasb approved consensus reached emerging issues task force issue 0301 “the meaning otherthantemporary impairment application certain investment” “eitf 0301” eitf 0301 provides guidance determining investment considered impaired whether impairment temporary measurement impairment loss eitf 0301 also provides new disclosure requirements otherthantemporary impairments debt equity investments september 2004 fasb delayed notice effective date measurement recognition guidance contained eitf 0301 however disclosure requirements eitf 0301 currently effective adoption eitf 0301 expected material impact company’s financial position results operations risk factors forwardlooking statements annual report form 10k contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements including without limitation statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures involve risk uncertainties actual events results may differ significantly indicated forwardlooking statement result number important factors including discussed elsewhere herein risk factors carefully consider risks described making investment decision respect analogic common stock additional risks presently known us currently deem immaterial may also impair business could material negative effect business financial condition results operations significant portion revenue currently comes small number customers decrease revenue customers could harm operating results depend small number customers large portion business changes customers’ orders may significant impact operating results major customer significantly reduces amount business us would adverse impact operating results following table sets forth percentages net product engineering revenue five largest customers last three fiscal years percentage product engineering sales ten largest customers periods although seeking broaden customer base continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition generate significant accounts receivable connection products sell services provide major customers although major customers large corporations one customers become insolvent otherwise unable pay products services operating results financial condition could adversely affected competition existing new companies medical security imaging technology industry could cause us experience downward pressure prices fewer customer orders reduced margins inability take advantage new business opportunities loss market share operate highly competitive industry subject competition based upon product design performance pricing quality services believe innovative engineering product reliability important factors growth try maintain competitive pricing products directly comparable products manufactured others many instances products conform exacting specifications carry higher price analogous products manufactured others competitors include divisions larger diversified organizations well several specialized companies greater resources larger staffs many oem customers potential oem customers capacity design manufacture internally products manufacture face competition research product development groups manufacturing operations current potential customers continually evaluate benefits internal research product development manufacturing versus outsourcing depend suppliers sole source components production would substantially curtailed suppliers able meet demands alternative sources available order raw materials components complete customers’ orders raw materials components ordered solesource suppliers although work customers suppliers minimize impact shortages raw materials components sometimes experience shortterm adverse effects due price fluctuations delayed shipments past industrywide shortages electronics components significant shortage raw materials components occur might delay shipments pay premium pricing could adversely affect operating results cases supply shortages particular components substantially curtail production products using components always able pass price increases customers accordingly raw material component price increases could adversely affect operating results also depend small number suppliers affiliated customers competitors others may small poorly financed companies many raw materials components use business unable continue purchase raw materials components suppliers operating results could adversely affected many costs fixed margins depend volume output facilities reduction volume could adversely affect margins left excess inventory operating results adversely affected long lead times specialized product designs typically purchase components manufacture products anticipation customer orders based customer forecasts variety reasons decreased enduser demand products customers might purchase products manufactured purchased components either event would attempt recoup materials manufacturing costs means returning components vendors disposing excess inventory channels requiring oem customers purchase otherwise compensate us excess inventory significant customer agreements give us ability require oem customers extent unsuccessful recouping material manufacturing costs would net sales adversely affected also operating results would disproportionately adversely affected moreover carrying excess inventory would reduce working capital available continue operate grow business uncertainties adverse trends affecting industry major customers may adversely affect operating results business operates primarily within two major markets within electronics industry medical technology products security technology products subject rapid technological change pricing margin pressure markets historically cyclical subject significant downturns characterized diminished product demand rapid declines average selling prices production overcapacity addition changes government policy relating reimbursement purchase use medical security related capital equipment could also affect sales customers’ markets also subject economic cycles likely experience recessionary periods future economic conditions affecting industry general major customers particular might adversely affect operating results businesses subject greater technological cyclical pressures customers’ delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business products used number customers production medical devices subject high level regulatory oversight delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained might withdrawn modified medical devices cannot marketed united states without clearance fda medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling states may also regulate manufacture sale use medical devices medical devices also subject approval regulation foreign regulatory safety agencies business strategy involves pursuit acquisitions business combinations may difficult integrate disrupt business dilute stockholder value divert management attention part business strategy may consummate acquisitions business combinations acquisitions typically accompanied number risks including difficulty integrating operations personnel acquired companies potential disruption ongoing business distraction management expenses related acquisition potential unknown liabilities associated acquired businesses successfully complete acquisitions pursue future may incur substantial expenses devote significant management time resources seeking complete proposed acquisitions generate benefits us addition substantial portions available cash might utilized consideration acquisitions annual quarterly operating results subject fluctuations could affect market price common stock annual quarterly results may vary significantly depending various factors many beyond control may meet expectations securities analysts investors occurs price common stock would likely decline factors include • variations timing volume customer orders relative manufacturing capacity • introduction market acceptance customers’ new products • changes demand customers’ existing products • timing expenditures anticipation future orders • effectiveness managing manufacturing processes • changes competitive economic conditions generally customers’ markets • changes cost availability components skilled labor • foreign currency exposure • investor analyst perceptions events affecting company competitors andor industry case many technology companies typically ship significant portion products last month quarter result delay anticipated sales likely result deferral associated revenue beyond end particular quarter would significant effect operating results quarter addition operating expenses vary directly net sales difficult adjust short term result net sales particular quarter expectations could proportionately reduce operating expenses quarter therefore revenue shortfall would disproportionate adverse effect operating results quarter loss key personnel could hurt business industry experience technological expertise operate highly competitive industry depend services key senior executives technological experts loss services one several key employees inability attract train retain qualified skilled employees specifically engineering operations personnel could result loss customers otherwise inhibit ability operate grow business successfully unable maintain technological expertise research product development manufacturing processes able successfully compete believe future success depend upon ability provide research product development manufacturing services meet changing needs customers requires successfully anticipate respond technological changes design manufacturing processes costeffective timely manner result continually evaluate advantages feasibility new product design manufacturing processes cannot however certain development efforts successful item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis company’s financial condition results operations read conjunction consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains forwardlooking statements within meaning securities exchange act 1934 “exchange act” statements historical fact company makes document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements company differ projected results see “risk factors” item 1a summary analogic corporation engaged primarily design manufacture sale high technology high performance highprecision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products major markets within electronics industry medical technology products security technology products results continuing operations summarized following tables net sales continuing operations fiscal 2006 249 million 8 higher prior year higher revenue primarily seleniumbased xray digital flatpanel detectors higher demand company’s 64 slice data acquisition systems additional 30 units exact systems partially offset continued lower demand subsystems used mri scanners gross margin percentage decreased 33 primarily due asset impairment charges 58 million recorded fourth quarter fiscal 2006 inventory writedowns related medical ct development program lesser extent engineering margin loss result security contracts costs exceeding funded amounts total operating expenses fiscal 2006 42 million higher prior year increase primarily caused increase restructuring asset impairment charges 45 million related primarily strategic decision discontinue medical ct workstation research program well capitalized software writedowns related medical ct development program higher product development costs primarily development efforts number security medical imaging projects offset lower general administrative expenses due lower legal costs reduction implementation costs relating internal control systems diluted earnings per share continuing operations 033 254 fiscal 2006 fiscal 2005 respectively included fiscal 2006 earnings 149 million related impairment restructuring charges included fiscal 2005 pretax gain 438 million related sale cedara securities 30 million pretax related impaired assets september 2005 company restructured business operations whollyowned subsidiary sky decision restructure sky based continued lower expected sales fiscal 2006 company recorded restructuring costs 09 million severance 03 million capital assets impairment asset impairment 16 million inventory writedowns november 1 2005 company sold camtronics 400 million cash realized net cash 389 million transactional costs company recorded net gain sale camtronics 202 million net tax provision 89 million 146 per diluted share company sold camtronics operating segment better focus core lines business reported discontinued operation accordance sfas 144 “accounting impairment disposal longlived assets” periods presented restated accordingly reflect operations discontinued revenue business fiscal 2006 2005 115 million 381 million respectively results discontinued operations fiscal 2006 2005 gain 01 million net loss 58 million respectively discussion analysis results operation focuses continuing operations fiscal 2006 company recorded asset impairment restructuring charges 149 million 121 million recorded fourth quarter ended july 31 2006 fourth quarter company continued ongoing discussions oem customer company development agreement regarding medical ct program culminated dispute august 2006 result significant uncertainty existed respect viability ct medical development program realizability related assets therefore fourth quarter ended july 31 2006 company recorded asset impairment charges totalling 77 million 58 million writedown inventories 19 million write capitalized software also fourth quarter 2006 company discontinued efforts develop medical ct end user workstation resulting 38 million asset impairment charge addition 05 million restructuring excess inventory reserves related fiscal 2006 closure company’s sky computer subsidiary recorded results operations fiscal 2006 compared fiscal 2005 net revenue gross margin fiscal 2006 compared fiscal 2005 summarized tables product revenue product revenue fiscal 2006 3235 million compared 2982 million fiscal 2005 increase 253 million 8 increase product revenue primarily due sales medical technology products increased 192 million 8 prior year increase primarily due increased sales company’s data acquisition products 82 million digital radiography equipment 80 million ultrasound equipment 64 million partially offset continued lower demand company’s subsystems used mri scanners increased product revenue security technology products 83 million 17 prior year resulted sale additional 30 exact systems partially offset decrease spare part sales revenue increase medical technology products security technology products partially offset decrease 21 million corporate revenue primarily due lower demand embedded multiprocessing products company exits business product gross margin increased 89 million fiscal 2006 fiscal 2005 primarily due higher revenue product gross margin percentage decreased slightly 389 product revenue fiscal 2006 392 product revenue fiscal 2005 engineering revenue engineering revenue fiscal 2006 179 million compared 192 million fiscal 2005 decrease 13 million 7 decrease resulted primarily lower revenue security engineering funded projects approximately 25 million primarily due large funded project completed last year decrease partially offset increased funding certain customer funded projects medical technology products engineering gross margin decreased 46 million fiscal 2006 fiscal 2005 primarily due security products contract costs exceeding transportation security administration “tsa” funded amounts revenue 101 million 92 million fiscal 2006 fiscal 2005 respectively represents revenue company’s hotel operation increase primarily due higher occupancy rates operating expenses research product development expenses 518 million fiscal 2006 compared 505 million fiscal 2005 15 total revenue year increase research product development expenses 13 million primarily due approximately 24 million increased personnel related costs including expenses sharebased payments connection adoption sfas 123r increase required support product development focused number projects security systems well developing new generation medical imaging equipment extended family multislice ct data acquisition systems partially offsetting increase savings realized restructuring sky selling marketing expenses 292 million fiscal 2006 fiscal 2005 selling marketing expenses 8 total revenue fiscal 2006 compared 9 total revenue fiscal 2005 although selling marketing expenses remained basically unchanged fiscal 2006 versus fiscal 2005 fiscal 2006 includes 02 million sharebased payments adoption sfas 123r general administrative expenses 378 million fiscal 2006 11 total revenue compared 395 million fiscal 2005 12 total revenue decrease 17 million primarily attributable nonrecurring legal costs related camtronics’ review revenue recognition procedures lower expenses comply sec internal control rules compared prior year reductions partially offset expenses associated sharebased payments connection adoption sfas 123r general expenses restructuring asset impairment charges 75 million fiscal 2006 compared 30 million fiscal 2005 fiscal 2006 asset impairment charges related primarily medical ct development program 19 million discontinuance medical ct workstation development program 39 million severance costs certain writedowns capital assets restructuring sky 12 million fiscal 2005 restructuring asset impairment charges 30 million related photodetection systems inc “pds” based net realizable value company’s investment 22 million 8 million related realignment certain technologies research development activities impact adopting sfas 123r fiscal 2006 operating expenses approximately 33 million software development costs 11 million 35 million capitalized fiscal 2006 fiscal 2005 respectively amortization capitalized software costs amounted 12 million 9 million fiscal 2006 fiscal 2005 respectively included product cost sales company’s consolidated statements operations income expense interest income fiscal 2006 102 million compared 52 million fiscal 2005 increase 50 million primarily results higher effective interest rates short term investments higher invested cash balance primarily due proceeds company’s sale camtronics approximately 400 million company recorded equity loss unconsolidated affiliated investments 08 million compared equity gain 03 million fiscal 2006 fiscal 2005 respectively equity loss fiscal 2006 consists 05 million 03 million company’s share losses shenzhen anke hightech co ltd sahco pds respectively equity gain fiscal 2005 consists gain 05 million company’s share profit sahco partially offset loss 02 million company’s share losses cedara gain sale marketable securities 438 million fiscal 2005 represents gain related company’s sale equity interest cedara provision income taxes effective tax rate continuing operations fiscal 2006 benefit 11 compared expense 31 fiscal 2005 rate reduction primarily due reduced income tax benefit overseas operations tax reserve release 03 million internal revenue service irs refund also reducing rate addition third quarter fiscal 2006 company recorded provisiontoreturn adjustment provided period tax benefit 329 rate reduction offset part setting valuation allowance state income tax credits suspension federal research credit net income earnings per share net income earnings per share continuing operations fiscal 2006 fiscal 2005 follows net income continuing operations fiscal 2006 46 million compared 347 million fiscal 2005 basic earnings per share continuing operations 034 fiscal 2006 compared 255 fiscal 2005 diluted earnings per share continuing operations 033 fiscal 2006 compared 254 fiscal 2005 net income fiscal 2006 included charges 94 million 149 million pretax related asset impairments restructuring net income fiscal 2005 includes aftertax gain approximately 274 million 201 per diluted share related company’s sale equity interest cedara addition included fiscal 2005 net income charges 19 million 30 million pretax asset impairments fiscal 2005 compared fiscal 2004 net revenue gross margin fiscal 2005 compared fiscal 2004 summarized table product revenue product revenue fiscal 2005 2982 million compared 2758 million fiscal 2004 increase 224 million 8 increase product revenue primarily due increased sales security technology products 222 million 81 prior year due increased orders exact systems spare parts medical technology products sales increased 138 million prior year 6 primarily due increased demand company’s data acquisition products 90 million computer tomography ct products 79 million magnetic resonance imaging mri systems subsystems 74 million partially offset lower sales digital radiography equipment 95 million revenue increase security technology products medical technology products partially offset decrease 136 million corporate revenue principally due lower demand embedded multiprocessing equipment 109 million due loss one major customer lower demand components board products approximately 22 million product gross margin 1170 million fiscal 2005 compared 1092 million fiscal 2004 product gross margin percentage product revenue decreased slightly 396 fiscal 2004 392 fiscal 2005 engineering revenue engineering revenue fiscal 2005 192 million compared 201 million fiscal 2004 decrease 09 million fiscal 2004 company benefited certain nonrepeat customer funded projects including approximately 15 million digital xray systems license sale 10 million sahco approximately 18 million related oem funded project reduction resulting nonrepeat nature activities partially offset revenue generated additional funding approximately 34 million received tsa design develop continuous performance enhancements existing explosive detection systems engineering gross margin 25 million fiscal 2005 compared 66 million fiscal 2004 engineering gross margin percentage engineering revenue 131 328 fiscal 2005 fiscal 2004 respectively decreases primarily result increased contract loss provisions fiscal 2005 company incurred approximately 24 million additional costs compared prior year excess value certain funded projects medical imaging technology products revenue 92 million 83 million fiscal 2005 fiscal 2004 respectively represents revenue company’s hotel operation operating expenses research product development expenses 505 million fiscal 2005 15 total revenue compared 500 million fiscal 2004 16 total revenue increase research product development expenses 05 million primarily due expenses incurred ongoing development new generations medical imaging equipment including innovative ct systems niche markets along new generation hybrid petcts extended family multislice ct data acquisition systems medical security markets addition company continues increase investment number development projects security systems meet diverse evolving security needs united states abroad increase partially offset reduction personnel sky operations selling marketing expenses 292 million fiscal 2005 9 total revenue compared 266 million 9 total revenue fiscal 2004 increase selling marketing expenses 26 million primarily attributable salaries related expenses approximately 29 million anexa bk medical continues efforts increase penetration respective market partially offset reduction sales marketing personnel related expenses sky computers general administrative expenses 395 million fiscal 2005 compared 351 million fiscal 2004 12 total revenue periods increase 44 million primarily attributable 35 million programs comply internal control rules sarbanesoxley act 2002 14 million accounting legal expenses related restatement company’s financial statements first three quarters fiscal 2004 fiscal 2003 partially offset 07 million lower depreciation expense asset impairment charges 30 million fiscal 2005 related company’s medical technology product segment company changed accounting method pds investment equity method cost method evaluated net realizable value investment resulting 22 million impairment charge also certain technologies 08 million abandoned due realignment research development activities software development costs 35 million 36 million capitalized fiscal 2005 fiscal 2004 respectively amortization capitalized software costs amounted 09 million 13 million fiscal 2005 fiscal 2004 respectively included product cost sales company’s consolidated statements operations income expense interest income fiscal 2005 52 million compared 37 million fiscal 2004 increase 15 million primarily results higher effective interest rates short term investments higher invested cash balance primarily due proceeds company’s sale equity investment cedara 508 million interest expense fiscal 2005 decreased approximately 02 million compared fiscal 2004 decrease primarily due company paying mortgage held property fiscal 2004 company recorded equity gain unconsolidated affiliated investments 03 million 06 million fiscal 2005 fiscal 2004 respectively equity gain fiscal 2005 consists gain 05 million company’s share profit sahco offset loss 02 million company’s share losses cedara equity gain 06 million fiscal 2004 consisted primarily gain 12 million company’s share profit cedara partially offset 05 million share losses sahco gain sale marketable securities approximately 438 million fiscal 2005 represents gain related company’s sale equity interest cedara provision income taxes effective tax rate continuing operations fiscal 2005 31 compared 11 fiscal 2004 increase primarily due increase income resulting gain sale company’s equity interest cedara lesser extent 20 reduction extraterritorial income exclusion last seven months fiscal 2005 resulting phased repeal benefit increase rate partially offset 2 reduction danish statutory tax rate release 03 million tax reserves resulting settlement state income tax audits fiscal 2000 fiscal 2001 net income earnings per share net income earnings per share continuing operations fiscal 2005 fiscal 2004 follows net income continuing operations fiscal 2005 347 million compared 102 million fiscal 2004 basic earnings per share 255 fiscal 2005 compared 075 fiscal 2004 diluted earnings per share continuing operations 254 fiscal 2005 compared 075 fiscal 2004 net income fiscal 2005 included aftertax gain approximately 274 million 201 per basic diluted earnings per share related company’s sale equity interest cedara liquidity capital resources cash equivalents marketable securities totaled 2582 million 2205 million july 31 2006 july 31 2005 respectively working capital 3350 million 3000 million july 31 2006 july 31 2005 respectively company’s balance sheet reflected current ratio 70 1 july 31 2006 41 1 july 31 2005 liquidity provided principally funds provided operations funds provided sale camtronics november 2005 shortterm time deposits marketable securities available provide additional sources cash company faces exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2006 due short maturities instruments company maintains bond investment portfolio various issuers types maturities portfolio classified balance sheet either cash equivalents marketable securities depending lengths time maturity original purchase cash equivalents include highly liquid investments maturities three months less time purchase investments maturities time purchase excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value company’s investment portfolio company currently hedge interest rate exposures net cash provided operating activities continuing operations 125 million fiscal 2006 70 million fiscal 2005 303 million fiscal 2004 cash flows generated operating activities continuing operations fiscal 2006 primarily due net income 47 million noncash impact asset impairment charges 149 million depreciation amortization 164 million partially offset decrease operating assets liabilities 199 million decrease operating assets liabilities primarily due decrease advance payment 62 million related orders exact systems decrease accounts payable 35 million decrease 138 million accrued income taxes inventory 589 million july 31 2006 decreased 54 million 643 million july 31 2005 due primarily inventory impairment writedowns current refundable deferred income taxes longterm deferred income taxes 206 million july 31 2006 increased 71 million 135 million july 31 2005 increase primarily result tax benefits derived inventory writedowns deferred contact costs capitalized software depreciation assets 45 million july 31 2006 decreased 11 million 56 million july 31 2005 decrease primarily due license maintenance amortization current liabilities 559 million july 31 2006 decreased 407 million 966 million july 31 2005 decrease primarily due elimination 304 million liabilities discontinued operations decrease 60 million accrued income taxes decrease 50 million advanced payments deferred revenue primarily advance payments related certain orders received exact systems l3 net cash provided investing activities continuing operations 295 million fiscal 2006 491 million fiscal 2005 respectively net cash used investment activities continuing operations fiscal 2004 111 million cash provided investing activities continuing operations fiscal 2006 primarily due proceeds sale camtronics 389 million maturities marketable securities 63 million partially offset capital expenditures 137 million software development costs 11 million certain company’s products company’s investment pds 13 million capitalized software 27 million july 31 2006 decreased 58 million 85 million july 31 2005 decrease primarily due writeoff development costs related ct medical workstation related software interface program indefinitely suspended amortization capitalized software 11 million 09 million fiscal 2006 fiscal 2005 respectively net cash provided financing activities continuing operations 02 million fiscal 2006 compared cash used financing activities continuing operations 01 million 52 million fiscal 2005 fiscal 2004 respectively net cash provided financing activities continuing operations fiscal 2006 consisted 53 million dividends paid stockholders 39 million repurchase company’s shares common stock partially offset cash received issuance stock pursuant company’s employee stock option stock purchase plans 90 million company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements company’s contractual obligations july 31 2006 effect obligations expected liquidity cash flows future periods follows company currently approximately 237 million revolving credit facilities various banks available direct borrowings direct borrowings offbalance sheet arrangements fiscal 2006 fiscal 2005 impact inflation overall inflation material impact company’s operations past three fiscal years new accounting pronouncements june 2005 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 154 “accounting changes error corrections” statement replaces apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” statement applies voluntary changes accounting reporting changes accounting principles sfas 154 requires retrospective application prior periods’ financial statements voluntary change accounting principles unless practical apb 20 previously required voluntary changes accounting principles recognized including net income period change cumulative effect changing new accounting principle sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 earlier application permitted accounting changes errors made occurring fiscal years beginning may 31 2005 adoption sfas 154 material impact company’s financial position results operations november 2005 fasb issued fasb staff position fsp fas 1151 “the meaning otherthantemporary impairment application certain investments” fsp nullifies certain requirements issue 031 supersedes eitf topic d44 “recognition otherthantemporary impairment upon planned sale security whose cost exceeds fair value” fsp establishes steps required determining investment considered impaired whether impairment temporary measurement impairment loss fsp impairment shall assessed individual security level assessment whether investment shall assessed individual security level assessment whether investment impaired shall performed reporting period impairment determined temporary impairment loss recognized impairment loss equal difference investment’s cost fair value provisions fsp 1151 shall effective reporting periods beginning december 15 2005 adoption fsp 1151 material impact company’s financial position results operations june 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxes” interpretation fasb statement 109 “accounting income taxes” fin 48 requires managements perform twostep evaluation tax positions ensuring tax return positions meet “morelikely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns company still evaluating impact pronouncement fin 48 effective company’s fiscal year ending july 31 2008 september 2006 sec issued staff accounting bulletin 108 sab 108 sab 108 addresses effects prior year uncorrected misstatements considered quantifying misstatements current year financial statements sab 108 requires companies quantify misstatements using balance sheet income statement approach evaluate whether either approach results quantifying error material light relevant quantitative qualitative factors effect initial adoption material companies record effect cumulative effect adjustment beginning year retained earnings provisions sab 108 effective company’s interim reporting period beginning august 1 2007 company believe adoption sab 108 material impact financial position results operations september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 prescribes single definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date company believe adoption sfas 157 material impact financial condition results operations sfas 157 effective company’s interim reporting period beginning august 1 2008 september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” sfas 158 requires employer recognize statement financial position asset plan’s overfunded status liability plan’s underfunded status b measure plan’s assets obligations determine funded status end employer’s fiscal year limited exceptions c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income business entity changes net assets notforprofit organization requirement recognize funded status benefit plan disclosure requirements effective company fiscal year ending july 31 2007 requirement measure plan assets benefit obligations date fiscal yearend balance sheet effective company fiscal year ending july 31 2009 company still evaluating impact pronouncement critical accounting policies estimates management’s discussion analysis company’s financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america company’s critical accounting policies significant impact preparation condensed consolidated financial statements policies include estimates significant judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities company continues evaluate estimates judgments ongoing basis nature policies require management make difficult subjective judgments often result need make estimates matters inherently uncertain case company’s critical accounting policies estimates judgments based historical experience terms existing contracts company’s observance trends industry information provided customers information available outside sources appropriate company believes following accounting policies estimates require management make difficult judgments preparation company’s consolidated financial statements accordingly critical revenue recognition accounts receivable company recognizes majority revenue accordance sec staff accounting bulletin 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies customer invoiced shipping handling revenue shipping handling costs cost sales company’s transactions sometimes involve multiple elements ie systems services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined vendor objective evidence “voe” recognized time delivery arrangement includes undelivered elements essential functionality delivered elements company defers fair value undelivered elements residual revenue allocated delivered elements fair value determined based upon price charged element sold separately company fair value undelivered element recognizes revenue upon delivery undelivered element maintenance service revenues recognized ratably life contract business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regard installation implementation remain fees fixed determinable collectability probable customer acceptance applicable obtained company allocates revenue first fair value undelivered elements allocate residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fee arrangement monthly basis utilizing costs incurred date percentage total estimated costs complete project company sufficient basis measure progress towards completion revenue related costs deferred recognized upon completion contract total cost estimates exceed total revenues company accrues estimated losses immediately deferred revenue comprised 1 maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement vendor objective evidence “voe” fair value determined components yet delivered accepted customer revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified determined current quarter sale collectible recognition revenue sale deferred collection made stockbased compensation effective august 1 2005 company adopted provisions sfas 123r “sharebased payment” sfas 123r see note 3 notes consolidated financial statements sfas 123r company required record compensation cost sharebased payments granted date adoption based grant date fair value estimated accordance provisions sfas 123r unvested portion sharebased payments previously granted remain outstanding based grant date fair value estimated accordance original provisions sfas 123 company expenses sharebased compensation straightline method choice valuation technique approach utilized develop underlying assumptions technique involve significant judgments reflect management’s assessment accurate method valuing stock options company issues based historical experience knowledge current conditions beliefs could occur future given available information company’s judgments could change time additional information becomes available us facts underlying assumptions change time change judgments could material effect financial statements management believes estimates incorporate relevant information represent reasonable approximation light difficulties involved valuing nontraded stock options inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand company’s products less estimates company experiences higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company maintains bond investment portfolio various types maturities high credit quality issuers cash equivalents required working capital purposes placed short term investments original maturities three months less company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified credit losses historically within expectations provisions established guarantee company continue experience credit loss rates past since accounts receivable concentrated among relatively customers significant change liquidity financial position one customers could material adverse impact collectibility accounts receivable future operating results warranty reserve company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery investments advances affiliated companies company investments companies whose business relates company’s strategic focus investment companies company ability exercise significant influence accounted equity method company holds greater 20 50 less voting stock investments companies company ability exercise significant influence accounted cost method assessing recoverability investments company must make certain assumptions judgments based upon changes company’s overall business strategy financial condition affiliated companies market conditions industry economic environment entities operate adverse changes market conditions poor operating results affiliated companies could result losses inability recover carrying value investments thereby requiring impairment charge future intangible assets longlived assets intangible assets consist intellectual property licenses capitalized software longlived assets consist primarily property plant equipment assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations income taxes company required estimate income taxes jurisdictions within operates process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet company must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established company must include expense within tax provision statement operations event actual results differ estimates provision income taxes results operations could materially impacted company establishes liabilities possible assessments taxing authorities resulting known tax exposures including limited certain tax credits various federal state foreign tax matters company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis company’s financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact company makes document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements company differ projected results see “risk factors” item 1a company reports financial condition results operations fiscal year basis ending july 31 dollar amounts item 7 thousands except per share data summary company engaged design manufacture sale high performance data acquisition signal processing instruments sold primarily oems use advanced health security systems subsystems two major markets within electronics industry medical technology products security technology products medical technology products consists three reporting segments medical imaging products digital radiography products bk medical one analogic’s subsidiaries sells products name directly niche clinical ultrasound enduser markets following summary areas management believes important understanding results periods indicated summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document total net revenues increased 72727 21 413509 fiscal year 2008 340782 fiscal year 2007 due primarily increase product revenue medical imaging products digital radiography products bk medical security technology products 43478 10554 12178 9375 respectively increase medical imaging products includes 18300 copley acquired april 14 2008 increases income operations net income diluted net income per share fiscal year 2008 compared fiscal year 2007 due primarily increase product revenues also contributing increases 9705 asset impairment charge related writedown assets digital radiography systems business fiscal year 2007 compared voluntary retirement restructuring costs 4016 fiscal year 2008 increase partially offset decrease interest income fiscal year 2008 compared fiscal year 2007 due primarily lower effective interest rates lower invested cash balances also offsetting increase effective tax rate 33 fiscal year 2008 18 fiscal year 2007 january 30 2008 company entered shares purchase agreement ca pursuant company agreed sell ca 20 existing 45 equity interest sahco located people’s republic china aggregate cash consideration us 2000 upon conclusion transaction july 2008 analogic held 25 equity interest sahco company previously determined investment sahco impaired fiscal year 2006 company wrote residual net book value equity interest company recognized 2000 gain investment fiscal year 2008 received july 2008 april 14 2008 company acquired outstanding capital stock copley leading supplier gradient amplifiers mri precision motion control systems used computercontrolled automation systems acquisition enable company expand product offerings oem customers pursue new opportunities asia enhance position leading provider medical subsystems mri scanners copley’s growing profitable motion control business provides additional opportunities new avenue growth hightechnology automation market estimated purchase price net cash acquired approximately 74682 consisted 76875 cash paid upon closing 734 transaction costs primarily consisted fees incurred company financial advisory legal accounting services 1066 estimated working capital adjustment payments entire amount paid prior july 31 2008 current estimate 1000 due former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes net cash acquired 4993 connection acquisition copley company commenced integration activities resulted recognizing 1276 liabilities personnel related costs 150 idle facility space company expects pay liabilities associated personnel related costs idle facility space fiscal year 2009 approximately 50 payments made july 31 2008 may 2008 company notified approximately 32 employees various departments organization would terminated july 31 2008 costs associated terminations included severance personnel related costs 597 recorded restructuring cost fiscal year 2008 july 31 2008 309 597 remains unpaid expected paid next 12 months june 4 2008 company announced voluntary retirement program us employees retirements expected substantially completed september 30 2008 total costs 52 employees participated program including severance personnel related costs approximately 3419 recorded voluntary retirement cost fiscal year 2008 part program edmund f becker jr voluntarily retired employment company july 31 2008 reduction force implemented may 2008 voluntary retirement program expected save company approximately 5000 annual basis current staffing levels results operations fiscal year 2008 compared fiscal year 2007 net revenue gross margin fiscal year 2008 compared fiscal year 2007 summarized tables product revenue gross margin product revenue fiscal year 2008 increased 75585 24 fiscal year 2007 due primarily increase product revenue segments follows • medical imaging products revenue increased 43478 24 due primarily shipments newly developed data management systems oem customer development completed company fourth quarter fiscal year 2007 also contributing increase revenue medical imaging products continued strong demand data acquisition systems acquisition copley third quarter fiscal year 2008 accounted 18300 product revenue fiscal year 2008 • digital radiography products revenue increased 10554 65 due primarily shipments newly developed mammography detector oem customer development completed company fourth quarter fiscal year 2007 • bk medical products revenue increased 12178 15 due primarily favorable change foreign currency exchange rate accounted 7088 increase • security technology products revenue increased 9375 27 due primarily increase exact system sales 63 units fiscal year 2008 52 units fiscal year 2007 product gross margin increased 381 fiscal year 2008 compared 357 fiscal year 2007 increase due primarily asset impairment charge 8625 related writedown assets digital radiography systems business fiscal year 2007 information asset impairment charge 8625 see “fiscal year 2007 compared fiscal year 2006 results operations” asset impairment charge discussion page 25 form 10k also contributing increase improved product margins bk medical due primarily higher mix sales directly end users versus distributors provide higher margins increase manufacturing efficiency security technology products due higher production volumes reduction manufacturing employees fourth quarter fiscal year 2007 increases partially offset 1216 amortization expense fiscal year 2008 backlog intangible assets related acquisition copley april 14 2008 engineering revenue gross margin engineering revenue fiscal year 2008 decreased 3093 18 fiscal year 2007 decrease due primarily fewer customer funded engineering projects medical imaging products fiscal year 2008 compared fiscal year 2007 engineering gross loss fiscal year 2008 391 compared gross margin 1446 fiscal year 2007 decline 1837 127 decrease due primarily gross margin 2794 three security technology products projects fiscal year 2007 gross margins fiscal year 2007 partially offset costs excess contract revenues medical imaging products projects 1706 gross loss 391 fiscal year 2008 due primarily costs excess contract revenues 766 patient monitoring instrument projects partially offset total 434 gross margin several security technology products revenue 10914 10679 fiscal years 2008 2007 respectively represents revenue hotel operations increase due primarily increase room rates operating expenses operating expenses increased 11897 104 fiscal year 2008 compared fiscal year 2007 shown research product development expenses increased 1992 fiscal year 2008 fiscal year 2007 increase expenses due primarily reduced customer funding engineering development projects medical imaging products fiscal year 2008 compared fiscal year 2007 well acquisition copley third quarter fiscal year 2008 accounted 1971 research development fiscal year 2008 increases partially offset reduction headcount security technology products engineers end fiscal year 2007 selling marketing expenses increased 4462 fiscal year 2008 fiscal year 2007 increase due primarily increase foreign currency exchange rate bk medical accounted increase 1974 well increase bonus costs sales commissions cost bk medical 362 also contributing increase acquisition copley accounted 1548 selling marketing expenses fiscal year 2008 529 amortization expense intangible assets related acquisition increases partially offset reduction 1476 expenses related digital radiography products anexa ceased selling marketing efforts products first quarter fiscal year 2008 general administrative expenses increased 2507 fiscal year 2008 fiscal year 2007 increase due primarily increases bonus profit sharing costs sharebased compensation expense executive transition costs excluding copley 1926 1323 1053 respectively also contributing increase foreign currency exchange rate bk medical accounted increase 758 increases partially offset decrease 1101 amortization expense intangible assets related acquisition sti due intangible assets becoming fully amortized first quarter fiscal year 2008 also partially offsetting increases receivable collections 275 sahco reserved allowance doubtful accounts prior period voluntary retirement restructuring costs 4016 fiscal year 2008 consisted primarily severance personnel related costs 3419 597 company’s voluntary retirement program involuntary terminations respectively took place fourth quarter fiscal year 2008 asset impairment charges 0 fiscal year 2008 compared 1080 fiscal year 2007 fiscal year 2007 company recorded asset impairment charge 1080 related digital radiography systems business included charge 696 related capitalized software still development 384 related assets income expense interest income net 7935 fiscal year 2008 compared 12755 fiscal year 2007 decrease due primarily lower invested cash balances lower effective interest rates due primarily company’s 60000 common stock repurchase fourth quarter fiscal year 2007 fiscal year 2007 company recorded equity loss unconsolidated affiliates 667 related losses photodetection systems inc “pds” period gain sale investments fiscal year 2008 due primarily 2000 sale 20 company’s 45 equity interest sahco remaining interest 25 fiscal year 2007 includes 4036 dividend income gain sale company’s 17 ownership interest bir income net 715 226 fiscal years 2008 2007 respectively income fiscal year 2008 consisted primarily 555 company received insurance company reimbursement legal fees incurred relation indemnification matter related company’s sale camtronics november 2005 income fiscal year 2007 consisted primarily gain 205 sale assets wholly owned subsidiary anasky limited “anasky” formerly known sky computers inc income fiscal year 2008 also included foreign currency exchange gains realized company’s canadian danish subsidiaries fiscal year 2007 included foreign currency exchange losses us dollar weakened foreign currencies provision income taxes effective tax rate fiscal years 2008 2007 provision 33 18 respectively effective tax rate fiscal year 2008 included benefits 3 1 foreign operations us domestic production deduction respectively well benefit 1 us research experimentation credit expired december 31 2007 benefits offset 3 provision due increase tax reserves lower rate fiscal year 2007 due primarily benefit 4 conjunction closure anasky business benefit 5 due release tax reserves resulting expiration statutes limitation prior year tax filings internal revenue service “irs” refund 313 fiscal year 2007 rate also included reinstatement us research experimentation credit january 1 2006 reduction danish tax rate 28 25 net income diluted net income per share net income diluted net income continuing operations per share fiscal year 2008 fiscal year 2007 follows net income 23486 fiscal year 2008 compared net income 15380 fiscal year 2007 basic diluted net income per share fiscal year 2008 178 177 respectively compared basic diluted net income per share 111 110 respectively fiscal year 2007 net income fiscal years 2008 2007 included pretax charges 4016 9705 respectively related voluntary retirement restructuring costs asset impairments net income fiscal year 2008 also includes gain 2000 sale 20 company’s 45 equity interest sahco remaining interest 25 net income fiscal year 2007 also includes dividend income gain sale company’s 17 ownership interest bir totaling 4036 fiscal year 2007 compared fiscal year 2006 net revenue gross margin fiscal year 2007 compared fiscal year 2006 summarized tables product revenue gross margin product revenue fiscal year 2007 decreased 10565 3 fiscal year 2006 due primarily security technology products revenue 34582 fiscal year 2007 compared 58087 fiscal year 2006 decline 23505 40 decrease security technology products revenue due primarily decline shipments exact systems 52 units fiscal year 2007 107 units fiscal year 2006 due decline orders addition revenue digital radiography products declined 7407 31 fiscal year 2007 compared fiscal year 2006 decline digital radiography products sales consistent company’s business outlook first quarter fiscal year 2007 led asset impairment charge 9705 discussed section “asset impairment charges” november 1 2006 sale certain assets liabilities anasky revenue fiscal year 2007 compared 4868 fiscal year 2006 also contributed product revenue decrease decreases partially offset increased sales medical imaging products bk medical products 11924 7 6718 9 respectively fiscal year 2007 compared fiscal year 2006 increase medical imaging products revenue driven strong demand 16slice 64slice data acquisition systems ct subsystems mri subsystems increase bk medical revenues due primarily foreign currency exchange rates product gross margin decreased 357 fiscal year 2007 366 fiscal year 2006 decrease due primarily increase asset writedowns 1264 fiscal year 2007 compared fiscal year 2006 discussed section “asset impairment charges” also contributing decrease product gross margin reduced manufacturing efficiency security technology products caused lower production volumes decreases partially offset efficiencies resulting increased volume certain medical technology products 16slice 64slice data acquisition systems ct subsystems well improved margins ultrasound products result favorable product distribution channel price mix continued product cost reductions engineering revenue gross margin engineering revenue decreased 677 4 fiscal year 2007 compared fiscal year 2006 decrease due primarily 1900 funding company received fiscal year 2006 completed digital radiography products project costs expensed prior periods due uncertainty recovery decrease partially offset increase 1673 medical technology products projects 7570 fiscal year 2006 9243 fiscal year 2007 due completion data management system project oem customer resulted revenue 1688 completed contract method engineering revenue security technology products remained relatively constant 5972 fiscal year 2007 compared 6224 fiscal year 2006 engineering gross margin fiscal year 2007 1446 compared loss 2104 fiscal year 2006 increase 3550 increase due primarily gross margin 2000 two contracts tsa related security technology products fiscal year 2007 increase additionally due company completing work security technology products project resulted gross margin 793 completed contract method increases partially offset costs excess contract revenue 1706 medical technology products projects loss 2104 fiscal year 2006 made primarily costs excess contract revenues medical technology products security technology products projects includes approximately 4061 three us government projects costs excess contract revenues partially offset 1900 additional funds received completed project costs previously expensed prior periods due uncertainty recovery revenue 10679 10100 fiscal years 2007 2006 respectively represents revenue hotel operations increase due primarily higher occupancy rates increase room rates asset impairment charges asset impairment charges included costs sales increased 1264 7361 fiscal year 2006 8625 fiscal year 2007 7361 asset impairment charges incurred fiscal year 2006 related writedown 5772 related certain inventories ct medical program due uncertainty arose respect viability program based discussions oem customer also included 7361 writedown 1179 related anasky inventory result company’s decision restructure anasky fiscal year 2006 based continued lowerthanexpected sales quarter ended july 31 2006 company decided close business operations anasky based continued lowerthanexpected sales resulted additional writedown 410 inventory november 1 2006 company sold certain assets anasky obligation service previously sold products purchase price 405 includes 225 cash paid closing 150 cash paid closing additional inventory assumption 30 liabilities company recorded gain 205 sale fiscal year 2007 result continuing losses business outlook digital radiography systems business fiscal year 2007 company recorded asset impairment charges 9705 associated writedown digital radiography systems business assets estimated net realizable values group 9705 asset impairment charges 8625 recorded cost sales 1080 recorded operating expenses 8625 asset impairment charge recorded cost sales included 4144 related inventory 4191 related software license 290 related assets august 2007 company notified customers anexa sales marketing new anexa products would cease immediately new enduser customers analogic would continue service support products currently existing customers operating expenses operating expenses declined 11494 9 fiscal year 2007 compared fiscal year 2006 shown research product development expenses decreased 4835 fiscal year 2006 fiscal year 2007 decrease related primarily less spending engineering development materials decline sharebased compensation expense 531 closure anasky’s business operations last year research development spending 983 fiscal year 2006 implemented cost saving initiatives selling marketing expenses increased 824 fiscal year 2006 fiscal year 2007 increase due primarily increases sales incentive bonuses consulting costs 496 511 respectively general administrative expenses decreased 1048 fiscal year 2006 fiscal year 2007 decrease related primarily 687 closure anasky’s business operations last year decline sharebased compensation expense 1107 sarbanesoxley act compliance costs audit fees 2122 fiscal year 2006 fiscal year 2007 decreases partially offset real estate tax abatement credit received fiscal year 2006 reduced spending period increase bonus profit sharing costs 1129 fiscal year 2006 fiscal year 2007 voluntary retirement restructuring costs fiscal year 2006 906 related termination approximately 40 anasky employees engaged product development sales administrative activities fiscal year 2006 company decided close business operations anasky based continued lower expected sales restructuring asset impairment charges 1080 fiscal year 2007 compared 6609 fiscal year 2006 fiscal year 2007 company recorded asset impairment charge 1080 related digital radiography systems business included charge 696 related capitalized software still development 384 related assets fiscal year 2006 includes charge 6609 made following four items 5808 asset impairment charge related primarily discontinuance medical ct workstation development program 216 impairment charge recorded investment pds based company’s review otherthantemporary impairment 275 impairment charge recorded company’s investment sahco based review otherthantemporary impairment 310 writedown capital assets anasky income expense interest income net 12755 fiscal year 2007 compared 10155 fiscal year 2006 increase due primarily higher invested cash balances higher effective interest rates company recorded equity loss unconsolidated affiliates 667 related pds fiscal year 2007 compared equity loss 787 fiscal year 2006 455 related sahco 332 related pds gain sale investments fiscal year 2007 includes dividend income gain sale company’s 17 ownership interest bir totaling 4036 fiscal year 2007 income 226 14 fiscal years 2007 2006 respectively increase income predominantly due foreign currency exchange gains realized company’s canadian danish subsidiaries addition fiscal year 2007 company recorded gain 205 sale anasky assets offset recovery 197 bad debt writeoff prior year fiscal year 2006 provision income taxes effective tax rate fiscal years 2007 2006 provision 18 benefit 11 respectively effective tax rate fiscal year 2007 includes benefit 4 conjunction closure anasky business benefit 5 due release tax reserves resulting expiration statutes limitations prior year tax filings internal revenue service “irs” refund 313 fiscal year 2007 rate also includes reinstatement us research experimentation credit january 1 2006 reduction danish tax rate 28 25 lower rate fiscal year 2006 due primarily reduced income tax benefit foreign operations due lower foreign tax rate also contributing reduced rate fiscal year 2006 rate tax reserve release 332 irs refund provisiontoreturn adjustment third quarter fiscal year 2006 provided outofperiod tax benefit 329 net income diluted income continuing operations per share net income diluted net income continuing operations per share fiscal year 2007 fiscal year 2006 follows net income continuing operations 15380 fiscal year 2007 compared net income continuing operations 4600 fiscal year 2006 basic diluted income per share continuing operations fiscal year 2007 111 110 respectively compared basic diluted income per share continuing operations 034 033 respectively fiscal year 2006 net income fiscal years 2007 2006 included pretax charges 9705 14876 respectively related asset impairments restructuring net income fiscal year 2007 also includes dividend income gain sale company’s 17 ownership interest bir totaling 4036 liquidity capital resources cash equivalents marketable securities totaled 186442 228545 july 31 2008 july 31 2007 respectively working capital 287260 300114 july 31 2008 july 31 2007 respectively company’s balance sheet reflected decline current ratio 49 1 july 31 2008 compared 56 1 july 31 2007 due primarily acquisition copley third quarter fiscal year 2008 estimated purchase price net cash acquired 74682 liquidity provided principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash july 31 2008 company holds 69213 cash equivalents marketable securities government sponsored entities federal home loan bank 43650 liquidated normal course subsequent balance sheet date company periodically reviews investment portfolio determine investments impaired due changes credit risk potential valuation concerns company believes cash equivalents marketable securities appropriately valued july 31 2008 aware market events date would impact valuation could change future new developments arise credit markets company faces exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2008 due short maturities instruments cash equivalents totaled 173912 july 31 2008 consisted entirely highly liquid investments maturities three months less time purchase heldtomaturity marketable securities maturities time purchase excess three months totaled 12530 july 31 2008 stated amortized cost approximates fair value net cash provided operating activities continuing operations 47810 fiscal year 2008 34221 fiscal year 2007 12516 fiscal year 2006 cash flows generated operating activities continuing operations fiscal year 2008 due primarily net income 23486 noncash impact voluntary retirement restructuring costs 4016 depreciation amortization 15620 sharebased compensation expense 3384 provision deferred income taxes 5836 amounts partially offset gain sale investments totaling 2084 net change operating assets liabilities net acquired business 1856 net changes operating assets liabilities net acquired business 1856 fiscal year 2008 due primarily increase inventories 5391 increase refundable income taxes 2202 decrease accrued liabilities 1972 decrease advanced payments deferred revenue 1556 changes partially offset decrease accounts receivable 7798 increase accrued income taxes 831 increase inventories fiscal year 2008 5391 due primarily increased production volumes increase refundable income taxes 2202 fiscal year 2008 due primarily increase expected federal state tax refunds decrease accrued liabilities fiscal year 2008 1972 due primarily decline warranty costs loss accruals engineering decrease advance payments deferred revenue fiscal year 2008 1556 due primarily recognition approximately 2148 revenue deferred july 31 2007 final element contract without fair value delivered february 2008 decrease accounts receivable fiscal year 2008 7798 due primarily collections us increase accrued income taxes 831 fiscal year 2008 due primarily increase uncertain tax positions net cash used investing activities 99050 1587 fiscal years 2008 2007 respectively compared net cash provided investing activities 29452 fiscal year 2006 cash used investing activities fiscal year 2008 due primarily purchase shortterm heldtomaturity marketable securities acquisition copley net cash acquired capital expenditures 131223 73682 14688 respectively partially offset maturities availableforsale heldtomaturity marketable securities 120693 net cash used financing activities 2376 60001 fiscal years 2008 2007 respectively compared cash provided financing activities 248 fiscal year 2006 net cash used financing activities fiscal year 2008 consisted 5340 dividends paid stockholders partially offset cash received issuance stock pursuant company’s employee stock option employee stock purchase nonemployee director stock plans 2598 company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements company’s contractual obligations july 31 2008 effect obligations expected liquidity cash flows future periods follows july 31 2008 total liabilities associated uncertain tax positions fasb interpretation “fin” 48 “accounting uncertainty income taxes” 7840 result company’s adoption fin 48 due complexity associated company’s tax uncertainties cannot make reasonably reliable estimate period expects settle noncurrent liabilities associated uncertain tax positions therefore amounts included contractual obligations table company currently approximately 24800 revolving credit facilities various banks available direct borrowings direct borrowings offbalance sheet arrangements fiscal year 2008 fiscal year 2007 new accounting pronouncements september 2006 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 157 “fair value measurements” sfas 157 prescribes single definition fair value price received asset sold paid transfer liability orderly transaction market participants measurement date sfas 157 effective company’s interim reporting period beginning august 1 2008 february 2008 fasb issued staff position 1 partially deferred effective date sfas 157 one year certain nonfinancial assets nonfinancial liabilities 2 removed certain leasing transactions scope sfas 157 company currently evaluating potential impact adoption sfas 157 consolidated financial position results operations cash flows february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment sfas 115” new statement allows entities choose specified election dates measure eligible financial assets liabilities fair value otherwise required measured fair value company elects fair value option eligible item changes item’s fair value subsequent reporting periods must recognized current earnings sfas 159 effective fiscal years beginning november 15 2007 company’s fiscal year ending july 31 2009 company currently evaluating potential impact adoption sfas 159 consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations” sfas 141r requires acquiring entity business combination record assets acquired liabilities assumed respective acquisition date fair values changes recognition assets acquired liabilities assumed arising contingencies changes recognition measurement contingent consideration requires expensing acquisitionrelated costs incurred sfas 141r also requires additional disclosure information surrounding business combination users entity’s financial statements fully understand nature financial impact business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company’s fiscal year ending july 31 2010 entity may apply date provisions sfas 141r impact company party business combination july 31 2009 december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners statement effective company beginning august 1 2009 company currently evaluating potential impact adoption sfas 160 consolidated financial position results operations cash flows april 2008 fasb issued fasb staff position “fsp” fas 1423 “determining useful life intangible assets” fsp fas 1423 amends factors entity consider developing renewal extension assumptions used determining useful lives recognized intangible assets fsp fas 1423 effective fiscal years beginning december 15 2008 company believe adoption fsp fas 1423 material impact consolidated results operations financial position cash flows may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” provide framework selecting accounting principles used preparing financial statements presented conformity us generally accepted accounting principles gaap nongovernmental entities prior issuance sfas 162 gaap hierarchy defined american institute certified public accountants’ aicpa statement auditing standards sas 69 “the meaning present fairly conformity generally accepted accounting principles” issuance sfas 162 gaap hierarchy nongovernmental entities move auditing literature accounting literature sfas 162 effective 60 days following sec’s approval public company accounting oversight board pcaob amendments au section 411 “the meaning present fairly conformity generally accepted accounting principles” company currently evaluating potential impact sfas 162 financial position results operations june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” classifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities requires included computation earnings per share pursuant twoclass method described sfas 128 “earnings per share” staff position effective financial statements issued fiscal years beginning december 15 2008 interim periods within years priorperiod earnings per share data presented adjusted retrospectively including interim financial statements summaries earnings selected financial data conform provisions staff position early application permitted company currently evaluating effect adoption fsp eitf 0361 financial position results operations cash flows critical accounting policies estimates management’s discussion analysis company’s financial condition results operations based company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america company’s critical accounting policies significant impact preparation consolidated financial statements policies include estimates significant judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities company continues evaluate estimates judgments ongoing basis nature policies require management make difficult subjective judgments often result need make estimates matters inherently uncertain case company’s critical accounting policies estimates judgments based historical experience terms existing contracts company’s observance trends industry information provided customers information available outside sources appropriate company believes following accounting policies estimates require management make difficult judgments preparation company’s consolidated financial statements accordingly critical revenue recognition accounts receivable company recognizes product revenue accordance sec staff accounting bulletin 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification company’s transactions sometimes involve multiple elements ie products services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined vendor objective evidence “voe” recognized time delivery arrangement includes undelivered elements essential functionality delivered elements company defers fair value undelivered elements residual revenue allocated delivered elements fair value determined based upon price charged element sold separately sufficient evidence fair value undelivered elements revenue allocated delivered elements total consideration received deferred delivery elements objective reliable evidence fair value available maintenance service revenues recognized ratably life contract business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position “sop” 972 “software revenue recognition” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regard installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained company allocates revenue first fair value undelivered elements allocates residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term company provides engineering services customers contractual basis recognizes revenue using percentage completion method company generally estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis appropriate company sufficient basis measure progress towards completion revenue related costs deferred recognized upon completion contract total cost estimates exceed total revenues company accrues estimated losses immediately deferred revenue comprised 1 maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement voe vsoe fair value available components yet delivered accepted customer revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified sharebased compensation effective august 1 2005 company adopted provisions sfas 123r “sharebased payment see note 3 notes consolidated financial statements sfas 123r company required record compensation cost sharebased payments granted date adoption based grant date fair value estimated accordance provisions sfas 123r unvested portion sharebased payments previously granted remain outstanding based grant date fair value estimated accordance original provisions sfas 123 company estimates fair value stock options using blackscholes optionpricing model fair value company’s restricted stock awards based quoted market price common stock company recognizes associated sharebased compensation straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures choice valuation technique approach utilized develop underlying assumptions technique involve significant judgments reflect management’s assessment accurate method valuing stock options company issues based company’s historical experience knowledge current conditions beliefs could occur future given available information company’s judgments could change time additional information becomes available facts underlying assumptions change time change company’s judgments could material effect financial statements management believes estimates incorporate relevant information represent reasonable approximation light difficulties involved valuing nontraded stock options inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand company’s products less estimates company experiences higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory valuation provisions subsequently reversed inventory used disposed concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company maintains limited bond investment portfolio various types maturities highcreditquality issuers cash equivalents required working capital purposes placed shortterm investments government agency discounted notes original maturities three months less company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified credit losses historically within expectations provisions established guarantee company continue experience credit loss rates past since accounts receivable concentrated among relatively customers significant change liquidity financial position one customers could material adverse impact collectibility accounts receivable future operating results warranty reserve company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery investments advances affiliated companies company investments companies whose business relates company’s strategic focus investments companies company ability exercise significant influence accounted equity method company’s ownership interest ranges 20 50 investments companies company ability exercise significant influence accounted cost method assessing recoverability investments company must make certain assumptions judgments based upon changes company’s overall business strategy financial condition affiliated companies market conditions industry economic environment entities operate business combinations company applies purchase accounting method account business combinations requires extensive use accounting estimates judgments allocate purchase price fair market value assets liabilities purchased excess value classified goodwill assets finite lives useful lives assigned intangibles values amortized remaining life company reviews intangible assets related useful lives events changes circumstances indicate carrying value assets may recoverable company may conduct frequent impairment assessments certain conditions exist including change competitive landscape internal decisions pursue new different technology strategies loss significant customer significant change market place including changes prices paid company’s products changes size market company’s products impairment results carrying value asset exceeds sum future undiscounted cash flows expected result use disposition asset amount impairment would determined comparing carrying value fair value asset fair value generally determined calculating present value estimated future cash flows using appropriate discount rate projection future cash flows selection discount rate require significant management judgment key variables management must estimate include sales volume prices inflation product costs capital expenditures sales marketing costs developed technology patents technology deployed company also must estimate likelihood pursuing particular strategy level expected market adoption company perform annual reviews second quarter fiscal year impairment goodwill related acquisition copley future acquisitions whenever events changes circumstances indicate carrying value may recoverable goodwill may considered impaired company determines carrying value reporting unit including goodwill exceeds reporting unit’s fair value assessing impairment goodwill requires company make assumptions judgments regarding fair value net assets reporting units company estimates fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compares values estimated overall market capitalization intangible assets longlived assets intangible assets consist intellectual property licenses capitalized software certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology longlived assets consist primarily property plant equipment assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations income taxes company required estimate income taxes jurisdictions within operates process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet company must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established company must include expense within tax provision statement operations event actual results differ estimates provision income taxes results operations could materially impacted company establishes liabilities possible assessments taxing authorities resulting known tax exposures including limited certain tax credits various federal state foreign tax matters company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures make document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results see “risk factors” item 1a discussion primary risks uncertainties known us time management’s discussion analysis presented six sections follows • business overview • fiscal year 2010 overview • results operations • liquidity capital resources • critical accounting policies • new accounting pronouncements report financial condition results operations fiscal year basis ending july 31 dollar amounts item 7 thousands except per share data business overview analogic high technology company designs manufactures advanced medical imaging security systems subsystems sold oems end users primarily healthcare airport security markets incorporated commonwealth massachusetts november 1967 recognized worldwide advancing stateoftheart technology areas medical ct mri digital mammography specialized ultrasound eds airport security oem customers incorporate technology systems turn sell various medical security applications also sell ultrasound products directly specialized clinical enduser markets direct worldwide sales force brand name bk medical operate primarily within two major markets medical technology security technology medical technology consists three reporting segments ct mri digital radiography specialized ultrasound significant portion products sold oems whose purchasing dynamics impact reported sales oems purchase ct mri digital radiography products generally incorporate products components systems turn sold end users primarily hospitals medical clinics security technology business major oem customer purchases resells products end users including domestic foreign airports well us transportation security administration “tsa” security technology oem customers’ purchasing dynamics affected level government funding expansion airport terminals fluctuations airline passenger volume fiscal year 2010 overview following summary matters management believes important understanding results operations periods indicated summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document increase net revenue income operations net income diluted net income per share fiscal year 2010 compared fiscal year 2009 primarily reflected improvement hospital spending capital equipment drove increased demand medical technology business impact new innovative products medical technology security technology diligent focus cost containment operational efficiency enabled positive recovery downturn fiscal year 2009 cash equivalents marketable securities 169254 160293 july 31 2010 2009 respectively interest earned cash equivalents past 12 month continued impacted global decline interest rates historically invested primarily us government backed securities bonds certificates deposit interest rates instruments declined significantly last year following table sets forth overview cash flows fiscal years 2010 2009 fiscal year 2010 cash operating activities improved notably fiscal year 2009 due primarily significant increase income operations 25180 higher revenues operating margins net cash provided investing activities fiscal year 2010 due primarily maturity 40438 shortterm heldtomaturity marketable securities partially offset property plant equipment additions 9407 investment affiliate 1920 net cash used financing activities fiscal year 2010 due primarily 5044 dividends paid stockholders results operations fiscal year 2010 compared fiscal year 2009 net revenue product revenue product revenue fiscal year 2010 compared fiscal year 2009 summarized table ct mri increase product revenue ct mri segment fiscal year 2010 versus prior year due primarily increases demand oem customers result improvement hospital spending capital equipment well impact new products introduced fiscal year 2010 digital radiography increase product revenue digital radiography products fiscal year 2010 versus prior year due primarily increased shipments mammography detectors oem customers outside united states july 31 2010 major oem customer mammography detectors yet received clearance united states food drug administration market system incorporates seleniumbased detector united states specialized ultrasound increase specialized ultrasound product revenue fiscal year 2010 versus prior year due primarily increases demand new product lines flex focus pro focus ultraview ultrasound scanners introduced late second third quarters fiscal year 2009 respectively improvement hospital spending capital equipment general expansion direct sales force security technology decrease product revenue security technology fiscal year 2010 versus prior year due primarily fluctuating demand oem customer result changing requirements procurement procedures united states tsa decrease offset large part increase sales spare parts accessories initial revenues introduction new highspeed explosives detection system certified tsa fiscal year 2010 engineering revenue engineering revenue fiscal year 2010 compared fiscal year 2009 summarized table ct mri decrease ct mri engineering revenue fiscal year 2010 versus prior year due primarily timing completed milestones projects various oem customers digital radiography decrease digital radiography engineering revenue fiscal year 2010 versus prior year due primarily timing completed milestones project oem customer fiscal year 2010 compared prior year security technology increase security technology engineering revenue fiscal year 2010 versus prior year due primarily engineering project began december 2009 oem customer partially offset decrease engineering revenue time materials project oem customer transition highspeed examiner xlb explosive detection system prototype manufacturable product revenue fiscal year 2010 compared fiscal year 2009 summarized table decreases fiscal year 2010 versus prior year comparable period due primarily lower occupancy decline room rates hotel due lower business personal travel result continuing economic pressures consumer market gross margin product gross margin product gross margin fiscal year 2010 compared fiscal year 2009 summarized table product gross margin percentage increased fiscal year 2010 versus prior year due primarily lower labor costs result restructuring improved manufacturing efficiency result higher production throughput improved component pricing vendors engineering gross margin engineering gross margin fiscal year 2010 compared fiscal year 2009 summarized table increases engineering gross margin fiscal year 2010 versus prior year comparable period due primarily improved pricing nonrecurring engineering projects undertaken oem customers partially offset costs excess revenues ct mri business projects incurred gross loss engineering revenue fiscal year 2009 primarily result write deferred engineering costs 365 due settlement agreement reached cas medical systems inc “cas” august 2009 costs incurred excess revenue certain customer funded ct mri projects operating expenses operating expenses decreased 295 02 fiscal year 2010 compared fiscal year 2009 shown research product development expenses increased 3874 fiscal year 2010 versus prior year due primarily increase performancebased variable cash sharebased compensation expense 2545 result improved operating results increases partially offset realizing benefit workforce reductions took place fiscal year 2009 selling marketing expenses increased 333 fiscal year 2010 versus prior year due primarily increase performancebased variable cash sharebased compensation expense 300 result improved operating results also contributing increase increased sales commissions 374 due increased sales specialized ultrasound products expansion direct sales force increases partially offset realizing benefit workforce reductions took place fiscal year 2009 general administrative expenses increased 1427 fiscal year 2010 versus prior year due primarily increase performancebased variable cash sharebased compensation expense 4185 result improved operating results increases partially offset realizing benefit workforce reductions took place fiscal year 2009 1160 contingent professional fees related income tax refunds related interest 8389 received irs state massachusetts fiscal year 2009 811 related settlement agreement reached cas august 2009 restructuring voluntary retirement charges decreased 5929 fiscal year 2010 versus prior year fiscal year 2010 amount includes severance personnelrelated costs 764 involuntary terminations 420 facility exit costs primarily related office facility canton offset part reversal prior year severance related benefit expenses 494 due change estimated severance benefits changes employee population expected receive benefits fiscal year 2009 amount includes severance personnel related costs 5561 involuntary terminations 1058 facility exit costs primarily related vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility income expense decrease net interest income fiscal year 2010 versus prior year due primarily decline interest rates gain sale investments fiscal year 2009 due receipt escrow proceeds 838 fiscal year 2009 relating sale 17 ownership interest another company fiscal year 2007 net expense fiscal years 2010 2009 consisted predominantly foreign currency exchange losses canadian danish british subsidiaries provision benefit income taxes fiscal year 2010 effective tax rate 26 compared us statutory rate 35 due primarily lower foreign tax rates discrete benefits approximately 1750 due primarily reversal tax reserves result expiration statute limitations fiscal years 2004 2006 fiscal year 2010 settlement foreign domestic tax audits also contributing reduced effective tax rate federal research experimentation credits fiscal year 2009 benefit income taxes due primarily irs refunds 8143 received fiscal year 2009 refunds included 1262 interest carryback loss research development credits fiscal year 2004 additional research development tax credits timing items claimed amended income tax returns fiscal years 2001 2006 recognized 2701 refunds related interest within stockholders’ equity fiscal year 2008 impact refunds related interest reduction unrecognized tax benefits approximately 3280 1356 recorded tax benefit fiscal year 2009 also contributing benefit income taxes fiscal year 2009 1820 reversal valuation allowance belgium net operating loss carryforwards management determined likely recognized reversal 920 tax reserves due expiration statutes limitations benefits partially offset additional provisions agreed federal state adjustments typical taxes owed related operations period net income diluted net income per share net income diluted net income per share fiscal years 2010 2009 follows increase net income diluted net income per share fiscal year 2010 versus prior year due primarily increases sales volumes gross margins driven increased demand medical technology business also contributing increases lower restructuring charges fiscal year 2010 versus prior year comparable period increases partially offset decrease interest income increase performancebased variable cash sharebased compensation expense result improved operating results lower income tax benefits fiscal year 2009 compared fiscal year 2008 net revenue product revenue product revenue fiscal year 2009 compared fiscal year 2008 summarized table ct mri decrease product revenue ct mri fiscal year 2009 versus prior year due primarily decline demand data acquisition systems detectors ct subsystems reflects impact deficit reduction act global economic slowdown decrease partially offset fullyear impact net revenue copley business acquired april 2008 accounted 62490 18300 product revenue fiscal year 2009 2008 respectively digital radiography increase product revenue digital radiography fiscal year 2009 versus prior year due primarily increase shipments mammography detectors oem customer partially offset winding nonmammography product sales another oem customer expect business transition primarily sale mammography detectors fiscal year 2010 specialized ultrasound decrease specialized ultrasound product revenue fiscal year 2009 versus prior year due primarily unfavorable changes foreign currency exchange rate decline demand due global economic slowdown also contributing decrease customer order delays anticipation introduction two new ultrasound product lines one introduced late second quarter fiscal year 2009 introduced late third quarter fiscal year 2009 security technology decrease product revenue security technology fiscal year 2009 versus prior year due primarily decrease sales spare parts accessories approximately 5500 decrease partially offset baggage scanners shipped fiscal year 2009 compared fiscal year 2008 engineering revenue engineering revenue fiscal year 2009 compared fiscal year 2008 summarized table ct mri increase ct mri engineering revenue fiscal year 2009 versus prior year due primarily increase activity customer funded engineering projects large oem customers continued fund new product development despite current market conditions digital radiography decrease digital radiography engineering revenue fiscal year 2009 versus prior year due primarily less activity funded engineering project oem customer security technology increase security technology engineering revenue fiscal year 2009 versus prior year due primarily engineering revenue time materials project tsa transition examiner xlb prototype product manufactured increase partially offset completion project fiscal year 2008 accounted completed contract method generated revenue 2417 fiscal year 2008 revenue fiscal year 2009 compared fiscal year 2008 summarized table decrease fiscal year 2009 versus prior year due primarily lower occupancy decline room rates hotel due lower business personal travel result economic slowdown gross margin product gross margin product gross margin fiscal year 2009 compared fiscal year 2008 summarized table product gross margin percentage decreased fiscal year 2009 versus prior year due primarily decline gross margin ct mri offset part growth higher margin specialized ultrasound sales percentage total net revenue decline ct mri gross margin percentage due primarily pricing reductions ct mri reduced manufacturing efficiency caused lower production volumes higher mix lower margin copley products decline ct mri gross margin percentage partially offset increase product gross margin percentage digital radiography due primarily higher volume improved manufacturing yields engineering gross margin engineering gross margin fiscal year 2009 compared fiscal year 2008 summarized table incurred gross loss engineering revenue fiscal year 2009 primarily result write deferred engineering costs 365 due settlement agreement reached cas august 2009 gross loss engineering revenue fiscal year 2009 prior year due primarily costs incurred excess revenue certain customer funded ct mri projects operating expenses operating expenses increased 2594 2 fiscal year 2009 compared fiscal year 2008 shown research product development expenses decreased 3671 fiscal year 2009 versus prior year decrease due primarily increase customer funded engineering projects whose costs recorded engineering cost sales also contributing decrease reductions workforce late fiscal year 2008 fiscal year 2009 align cost structure market conditions well lower performancebased incentive compensation expenses decreases partially offset acquisition copley april 2008 accounted research product development expenses 6923 1971 fiscal years 2009 2008 respectively selling marketing expenses increased 2792 fiscal year 2009 versus prior year increase due primarily acquisition copley april 2008 accounted selling marketing expenses 3706 1548 fiscal years 2009 2008 respectively increase partially offset reductions workforce late fiscal year 2008 fiscal year 2009 align cost structure market conditions well lower performancebased incentive compensation expenses general administrative expenses increased 870 fiscal year 2009 versus prior year increase due primarily fullyear impact general administrative expenses copley acquired april 2008 copley accounted general administrative expenses 2699 866 fiscal years 2009 2008 respectively also contributing increase 811 related settlement agreement reached cas august 2009 1160 contingent professional fees related income tax refunds related interest 8389 received irs state massachusetts fiscal year 2009 increases partially offset reductions workforce late fiscal year 2008 fiscal year 2009 align cost structure market conditions well lower performancebased incentive compensation expenses restructuring voluntary retirement charges increased 2603 fiscal year 2009 versus prior year fiscal year 2009 amount includes severance personnel related costs 5561 involuntary terminations 1058 facility exit costs primarily related vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility fiscal year 2008 amount includes severance personnel related costs 3419 voluntary retirement program severance personnel related costs 597 involuntary terminations income expense decrease net interest income fiscal year 2009 versus prior year due primarily lower invested cash balances result acquisition copley 25022 common stock repurchase first second quarters fiscal year 2009 decline interest rates gain sale investments fiscal year 2009 due receipt escrow proceeds 838 fiscal year 2009 relating sale 17 ownership interest another company fiscal year 2007 fiscal year 2008 includes 2000 sale 20 45 equity interest china based company remaining interest 25 receipt escrow proceeds 84 fiscal year 2008 relating sale 17 ownership interest another company fiscal year 2007 net income loss fiscal year 2009 consisted predominantly foreign currency exchange losses canadian danish british subsidiaries net income fiscal year 2008 consisted primarily 555 received insurance company reimbursement legal fees incurred relation indemnification matter related sale wholly owned subsidiary camtronics fiscal year 2006 provision income taxes fiscal year 2009 benefit income taxes due primarily irs refunds 8143 received fiscal year 2009 refunds included 1262 interest carryback loss research development credits fiscal year 2004 additional research development tax credits timing items claimed amended income tax returns fiscal years 2001 2006 recognized 2701 refunds related interest within stockholders’ equity fiscal year 2008 impact refunds related interest reduction unrecognized tax benefits approximately 3280 1356 recorded tax benefit fiscal year 2009 also contributing benefit income taxes fiscal year 2009 1820 reversal valuation allowance belgium net operating loss carryforwards management determined likely recognized reversal 920 tax reserves due expiration statutes limitations benefits partially offset additional provisions agreed federal state adjustments typical taxes owed related operations period fiscal year 2008 effective tax rate varied statutory tax rate primarily result mix income attributable foreign versus domestic jurisdictions effective tax rate fiscal year 2008 included benefits 3 1 foreign operations us domestic production deduction respectively well benefit 1 us research experimentation credit expired december 31 2007 benefits offset 3 provision due increase tax reserves net income diluted net income per share net income diluted net income per share fiscal year 2009 fiscal year 2008 follows decrease net income diluted net income per share fiscal year 2009 versus prior year due primarily declines sales volumes gross margins interest income well increase amount restructuring charges fiscal year 2009 versus prior year comparable period factors partially offset benefit income taxes decline weighted average shares outstanding due common stock repurchase program completed second quarter fiscal year 2009 liquidity capital resources key liquidity capital resources information summarized table increase working capital july 31 2009 july 31 2010 due primarily increases cash equivalents marketable securities accounts receivable inventories 8961 13006 7435 respectively reflecting increased sales volumes increased customer demand fiscal year 2010 periodically review investment portfolio determine investments impaired due changes credit risk potential valuation concerns believe cash equivalents appropriately valued july 31 2010 aware market events would impact valuation could change future new developments arise credit markets face exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures change time business practices evolve could material adverse impact financial results primary exposure related fluctuations us dollar local currencies subsidiaries canada europe investment international subsidiaries sensitive fluctuations currency exchange rates effect change currency exchange rates net investment international subsidiaries reflected “accumulated comprehensive income” component stockholders’ equity 10 depreciation july 31 2010 2009 functional currencies relative us dollar would result reduction stockholders’ equity approximately 700 1200 respectively carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2010 due short maturities instruments cash equivalents totaled 169254 july 31 2010 consisted entirely highly liquid investments maturities three months less time purchase cash flows following table summarizes sources uses cash periods indicated cash flows generated operating activities fiscal year 2010 primarily reflects pretax earnings 21144 included depreciation amortization expenses 17569 noncash sharebased compensation expense 5791 impact operating earnings cash flows partially offset increases accounts receivables inventories assets 13006 7435 2489 respectively net decrease refundable incomes taxes 2831 increases accounts payable accrued income taxes 3021 2387 respectively accounts receivable increased primarily due growth unbilled receivables engineering projects throughout fiscal year 2010 increased revenue fourth quarter fiscal year 2010 compared fourth quarter fiscal year 2009 inventories increased due primarily increase customer demand production volumes part associated transition certain manufacturing activities recently established subsidiary shanghai china increase assets due primarily advance paid part technology development arrangement expected repaid next nine months according development plan includes milestones increases deferred engineering costs decrease refundable income taxes due primarily income tax refunds received fiscal year 2010 increase accounts payable due primarily timing vendor payments increase inventories due increased customer demand production volumes increase accrued income taxes due increase income earned fiscal year 2010 compared fiscal year 2009 net cash provided investing activities fiscal year 2010 due primarily maturity 40438 shortterm heldtomaturity marketable securities partially offset property plant equipment additions 9407 investment affiliate 1920 net cash used financing activities fiscal year 2010 consisted primarily 5044 dividends paid stockholders believe balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2010 effect obligations expected liquidity cash flows future periods follows july 31 2010 total liabilities associated uncertain tax positions 6586 due complexity associated tax uncertainties cannot make reasonably reliable estimate period expect settle noncurrent liabilities associated uncertain tax positions therefore amounts included contractual obligations table currently approximately 22500 revolving credit facilities banks available direct borrowings revolving credit facility agreements contain number covenants including covenant requiring us maintain tangible net worth defined revolving credit facility agreement less 255000 end fiscal quarter compliance covenant july 31 2010 tangible net worth approximately 364000 july 31 2010 direct borrowings offbalance sheet arrangements recent accounting pronouncements recently adopted hierarchy generally accepted accounting principles june 2009 financial accounting standards board “fasb” released fasb accounting standards codification™ hierarchy generally accepted accounting principles “codification” effective financial statements issued interim annual periods ending september 15 2009 codification change accounting principles generally accepted united states america “gaap” significantly change way accounting literature organized combining authoritative standards comprehensive topically organized database existing accounting standards documents superseded accounting literature included codification considered nonauthoritative guidance issued sec adopted provisions guidance quarter ended october 31 2009 impact financial position results operations cash flows business combinations noncontrolling interests effective august 1 2009 adopted fasb guidance requires acquiring entity business combination record assets acquired liabilities assumed respective acquisition date fair values changes recognition assets acquired liabilities assumed arising contingencies changes recognition measurement contingent consideration requires expensing acquisitionrelated costs incurred guidance also requires additional disclosure information surrounding business combination users entity’s financial statements fully understand nature financial impact business combination guidance applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 fiscal year 2010 effective august 1 2009 adopted fasb guidance establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated guidance also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners guidance effective beginning first annual reporting period began december 15 2008 adoption guidance material impact financial position results operations cash flows effective august 1 2009 adopted fasb guidance amending factors considered developing renewal extension assumptions used determine useful life recognized intangible asset requiring enhanced related disclosures guidance improves consistency useful life recognized intangible asset period expected cash flows used measure fair value asset guidance must applied prospectively intangible assets acquired subsequent fiscal years beginning december 15 2008 although future transactions involving intangible assets may affected guidance impact financial position results operations cash flows fiscal year 2010 effective august 1 2009 adopted fasb guidance amends clarifies initial recognition measurement subsequent measurement accounting related disclosures assets liabilities arising contingencies business combination impact adoption consolidated financial statements largely depend size nature business combinations fair value effective august 1 2009 adopted fasb guidance requiring disclosures fair value financial instruments interim annual reporting periods effective interim reporting periods ending june 15 2009 adoption material impact financial position results operations cash flows earnings per share effective august 1 2009 adopted fasb guidance classifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities requires included computation earnings per share pursuant twoclass method guidance effective financial statements issued fiscal years beginning december 15 2008 interim periods within years priorperiod earnings per share data presented adjusted retrospectively including interim financial statements summaries earnings selected financial data conform guidance early application permitted adoption guidance material impact financial position results operations cash flows revenue recognition october 2009 fasb issued amendment eliminates residual method allocation multipledeliverable revenue arrangements requires arrangement consideration allocated inception arrangement deliverables using relative selling price method amendment also establishes selling price hierarchy determining selling price deliverable includes 1 vendor specific objective evidence “vsoe” available 2 thirdparty evidence “tpe” vsoe available 3 estimated selling price “esp” neither vsoe tpe available additionally amendment expands disclosure requirements related vendor’s multipledeliverable revenue arrangements amendment effective us august 1 2010 however elected early adopt permitted amendment prospectively applied provisions amendment revenue arrangements entered materially modified july 31 2009 adoption amendment material impact financial position results operations cash flows see note 1 notes audited consolidated financial statements discussion october 2009 fasb issued amendment amends accounting model revenue arrangements include tangible products software elements tangible products containing software nonsoftware components function together deliver tangible product’s essential functionality longer within scope software revenue guidance amendment effective us august 1 2010 however elected early adopt permitted amendment prospectively applied provisions amendment revenue arrangements entered materially modified july 31 2009 adoption amendment material impact financial position results operations cash flows yet effective special purpose entities june 2009 fasb issued guidance eliminates concept qualified specialpurpose entity related guidance creates stringent conditions reporting transfer portion financial asset sale clarifies saleaccounting criteria changes initial measurement transferor’s interest transferred financial assets guidance effective beginning first annual reporting period begins november 15 2009 expect adoption guidance material impact financial position results operations cash flows june 2009 fasb issued guidance requires former qualified specialpurpose entities evaluated consolidation changes approach determining variable interest entity’s “vie” primary beneficiary requires companies frequently reassess whether must consolidate vies guidance effective beginning first annual reporting period begins november 15 2009 expect adoption guidance material impact financial position results operations cash flows revenue recognition march 2010 fasb issued guidance related revenue recognition applies arrangements milestones relating research development deliverables guidance provides criteria must met recognize consideration contingent upon achievement substantive milestone entirety period milestone achieved guidance effective us august 1 2010 expected material impact financial position results operations cash flows critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies see note 1 summary business operations significant accounting policies notes consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition policywe provide engineering services customers contractual basis generally recognize revenue using percentage completion method generally estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately judgments uncertaintiesour revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed effect actual results differ assumptionswe made material changes accounting methodology used determine estimated costs completion projects past three fiscal years actual results consistent estimates assumptions may exposed losses gains could material allocation consideration multiple element revenue arrangements policywe allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vsoe exists otherwise tpe neither vsoe tpe selling price exists unit accounting use esp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available esp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use esp allocation arrangement consideration objective esp determine price would transact product service sold us standalone basis judgments uncertaintiesour determination esp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold effect actual results differ assumptionsthere risk difference esp actual selling price since actual selling price exist deliverables arrangements inventory reserves policywe value inventory lower cost inventory fair market value establishment inventory reserves management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory reserves based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional reserves existing inventories might recorded future periods recorded inventory valuation reserves subsequently reversed inventory used disposed judgments uncertaintiesour inventory reserves involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence effect actual results differ assumptionswe made material changes accounting methodology use establish inventory reserves past three fiscal years estimates regarding customer demand inaccurate changes technology affect demand certain products unforeseen manner may exposed losses could material 10 difference actual reserves july 31 2010 would affected net earnings approximately 256 fiscal year 2010 sharebased compensation policywe sharebased compensation plans include stock options unvested restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value company’s restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned judgments uncertaintiesoptionpricing models generally accepted valuation techniques require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving company personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize effect actual results differ assumptionswe made material changes accounting methodology use determine sharebased compensation expense past three fiscal years actual results consistent estimates assumptions particularly used determining accrual percentage performancebased nonvested restricted stock awards may exposed changes sharebased compensation expense could material 10 change sharebased compensation expense year ended july 31 2010 would affected net earnings approximately 579 fiscal year 2010 warranty reserves policywe estimate costs product warranties based specific warranty claims historical data engineering estimates applicable judgments uncertaintiesour warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable effect actual results differ assumptionswe made material changes accounting methodology use establish warranty reserves past three fiscal years actual product failure rates service delivery costs differ estimates revisions estimated warranty liability would required revisions could adversely affect operating results 10 change warranty reserve july 31 2010 would affected net earnings approximately 610 fiscal year 2010 purchase price allocation business combinations policywe apply purchase accounting method account business combinations requires extensive use accounting estimates judgments assign purchase price fair value assets liabilities purchased excess value classified goodwill assets finite lives useful lives assigned intangibles values amortized remaining life judgments uncertaintiesour purchase price allocation methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies effect actual results differ assumptionsduring last three fiscal years completed one significant acquisition copley april 2008 74032 including transaction costs see note 3 business combination notes consolidated financial statements included annual report form 10k complete purchase price allocation actual results consistent estimates assumptions accelerated amortization intangible assets finite lives impairment charges intangible assets goodwill could required impairment goodwill indefinite lived intangible assets policywe evaluate goodwill indefinite lived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing internal valuation analyses consider market approach income approach goodwill relief royalty approach indefinite lived intangible assets market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows relief royalty approach fair value indefinite lived intangible asset based tax royalty rate discount rate applied future forecasted sales second quarter fiscal years 2010 2009 completed annual impairment testing goodwill indefinite lived intangible assets using methodologies described herein determined impairment carrying values goodwill indefinite lived intangible assets related acquisition copley july 31 2010 1849 7607 respectively judgments uncertaintiesthe valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations effect actual results differ assumptionsif actual results consistent estimates assumptions may exposed impairment charge could material 10 change calculation reporting unit’s fair value december 31 2009 would effect net earnings fiscal year 2010 income tax contingencies policyour income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available fiscal year 2008 adopted guidance requires management perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions taken expect take income tax returns judgments uncertaintiesour liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions effect actual results differ assumptionsalthough believe judgments estimates discussed herein reasonable actual results could differ may exposed losses gains could material extent prevail matters liability established required pay amounts excess established liability effective income tax rate given financial statement period could materially affected unfavorable tax settlement generally would require use cash result increase effective income tax rate period resolution favorable tax settlement would recognized reduction effective income tax rate period resolution deferred tax valuation allowances policywe required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established must include expense within tax provision statement operations judgments uncertaintiesour effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies effect actual results differ assumptionswe made material changes accounting methodology use establish deferred tax asset valuation allowances past three fiscal years event actual results differ estimates assumptions use determining effective tax rate provision income taxes results operations could materially impacted item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures make document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results see “risk factors” item 1a discussion primary risks uncertainties known us time management’s discussion analysis presented six sections follows • business overview • fiscal year 2011 overview • results operations • liquidity capital resources • critical accounting policies • new accounting pronouncements report financial condition results operations fiscal year basis ending july 31 dollar amounts item 7 thousands except per share data business overview analogic high technology company designs manufactures advanced medical imaging security systems subsystems sold oems end users primarily healthcare airport security markets incorporated commonwealth massachusetts november 1967 recognized worldwide advancing stateoftheart technology areas medical ct ultrasound mri digital mammography automated explosive detection systems airport security oem customers incorporate technology systems turn sell various medical security applications also sell ultrasound products directly clinical enduser markets direct worldwide sales force brand name bk medical operate primarily within two major markets medical technology security technology medical technology consists two reporting segments medical imaging ultrasound security technology single reporting segment significant portion products sold oems whose purchasing dynamics impact reported sales oems purchase medical imaging products generally incorporate products components systems turn sold end users primarily hospitals medical clinics security technology business major oem customer purchases resells products end users including domestic foreign airports well us transportation security administration “tsa” security technology oem customers’ purchasing dynamics affected level government funding expansion airport terminals fluctuations airline passenger volume fiscal year 2011 overview following table sets forth percentage total net revenue reporting segment fiscal years 2011 2010 periods presented revised accordingly reflect new reporting segments following summary metrics management believes important understanding results operations periods indicated summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document total net revenue increased 58782 14 fiscal year 2011 compared fiscal year 2010 due primarily increase net revenue 51872 medical imaging segment medical technology business increased demand new existing products gross profit increased 25066 172963 fiscal 2011 operating expenses increased 25650 due primarily declines rd funding customers increases restructuring charges sales channel expenses increase noncash share based compensation costs primarily associated increased accrual performance based awards result improving company financial performance net income diluted net income per share benefited lower tax rate fiscal year 2011 primarily result full year benefit federal research experimentation credit tax benefit 536 reinstatement federal research experimentation credit back january 1 2010 lower foreign tax rates compared us statutory rate 35 discrete benefit 599 reversal tax reserves result expiration statute limitations fiscal year 2007 settlements various taxing authorities first quarter fiscal year 2011 sold hotel business realized net proceeds 10467 transaction costs recorded gain sale hotel business 924 net tax provision 505 007 per diluted share fiscal year 2011 hotel business previously reported segment reported discontinued operation periods presented revised accordingly reflect operations discontinued revenue net income loss hotel business fiscal years 2011 2010 2009 follows cash equivalents marketable securities 169656 169254 july 31 2011 2010 respectively interest earned cash equivalents past 12 month continued impacted global decline interest rates historically invested cash equivalents primarily us government backed securities bonds certificates deposit interest rates instruments remained low last year july 31 2011 investment portfolio primarily consisted demand deposits highly rated banks financial institutions following table sets forth overview cash flows fiscal years 2011 2010 fiscal year 2011 generated 31867 cash operating activities continuing operations compared 26349 prior year increase due primarily increase sales volumes partially offset increased operating expenses net cash used continuing operations investing activities fiscal year 2011 due primarily capital spending 22502 includes construction manufacturing facility shanghai china capital spending partially offset 10467 proceeds sale hotel business net cash used financing activities fiscal year 2011 primarily reflected 15187 used repurchase common stock results operations fiscal year 2011 compared fiscal year 2010 net revenue product revenue product revenue fiscal year 2011 compared fiscal year 2010 summarized table medical imaging increases fiscal year 2011 versus prior year driven primarily growth ct product line well growth digital mammography mri ultrasound product lines growth ct mri product lines driven primarily higher sales volume new existing products growth digital mammography product line due primarily increased sales volumes large oem customer growth ultrasound probe product line due primarily acquisition oem ultrasound transducer probe business contributed approximately 6500 product revenue fiscal year 2011 ultrasound increase fiscal year 2011 versus prior year due primarily increased sales volume flex focus platform products notable growth 10 us market fiscal year 2010 security technology decreases product revenues fiscal year 2011 versus prior year due primarily sales fewer baggage scanners demand customer negatively impacted timing bridge orders tsa process moving new procurement process product mix engineering revenue engineering revenue fiscal year 2011 compared fiscal year 2010 summarized table medical imaging engineering revenue fiscal year 2011 remained relatively consistent fiscal year 2010 security technology increase fiscal year 2011 versus prior year due primarily amount work performed significant engineering development project began december 2009 oem customer gross margin product gross margin product gross margin fiscal year 2011 compared fiscal year 2010 summarized table product gross margin percentage increased fiscal year 2011 versus prior year due primarily improved manufacturing efficiency medical imaging segment medical technology business higher production throughput growing volume along improved component pricing vendors manufacturing transition costs related restructuring ultrasound segment well lower mix higher margin ultrasound security technology sales partially offset medical imaging segment’s gross margin improvements engineering gross margin engineering gross margin fiscal year 2011 compared fiscal year 2010 summarized table increases engineering gross margin fiscal year 2011 versus prior year due primarily mix engineering projects worked fiscal year 2011 compared prior year operating expenses operating expenses increased 25650 20 fiscal year 2011 compared fiscal year 2010 shown research product development expenses related projects funded customers expenses increased 13975 fiscal year 2011 versus prior year due primarily increase self funded development projects associated new product introduction advanced development also contributing growth increase sharebased compensation expense 1623 fiscal year 2011 versus prior year primarily associated increased accrual performance based awards result improving company financial performance selling marketing expenses increased 4620 fiscal year 2011 versus prior year due primarily increase selling resources ultrasound segment expanded sales force product offerings existing adjacent markets general administrative expenses remained relatively consistent increasing 679 fiscal year 2011 versus prior year including sharebased compensation expense increased 1646 fiscal year 2011 versus prior year primarily associated increased accrual performance based awards result improving company financial performance increase sharebased compensation offset net tax bargain purchase gain 1042 related acquisition oem ultrasound transducer probe business november 2010 restructuring charges fiscal year 2011 includes severance personnel related costs plan reduce headcount 155 employees worldwide expect restructuring result annual expense savings approximately 11500 portion fund strategic growth initiatives restructuring charges fiscal year 2010 included severance personnel related costs termination 17 employees worldwide income expense net expense fiscal years 2011 2010 consisted predominantly foreign currency exchange losses canadian danish british subsidiaries provision benefit income taxes fiscal year 2011 effective tax rate 21 compared us statutory rate 35 due primarily full year benefit federal research experimentation credit discrete tax benefit 536 reinstatement federal research experimentation credit back january 1 2010 lower foreign tax rates compared us statutory rate 35 discrete benefit 599 reversal tax reserves result expiration statute limitations fiscal year 2007 settlements various taxing authorities addition taxes 621 related bargain purchase gain acquisition oem ultrasound transducer probe business recorded operating expenses quarter ended january 31 2011 fiscal year 2010 effective tax rate 26 compared us statutory rate 35 due primarily lower foreign tax rates discrete benefits approximately 1750 due primarily reversal tax reserves result expiration statute limitations fiscal years ended july 31 2004 2006 “fiscal year 2004” “fiscal year 2006” respectively” fiscal year 2010 settlement foreign domestic tax audits also contributing reduced effective tax rate federal research experimentation credits discontinued operations discontinued operations fiscal year 2011 compared fiscal year 2010 summarized table first quarter fiscal year 2011 sold hotel business increase income discontinued operations net tax fiscal year 2011 versus prior year due primarily increased occupancy higher room rates hotel due primarily improving economy three months ended october 31 2010 compared fiscal year 2010 income continuing operations diluted net income per share continuing operations income continuing operations diluted net income per share continuing operations fiscal years 2011 2010 follows increases income continuing operations diluted net income per share continuing operations fiscal year 2011 versus prior year due primarily increased sales volumes gross margin partially offset increased operating expenses fiscal year 2010 compared fiscal year 2009 net revenue product revenue product revenue fiscal year 2010 compared fiscal year 2009 summarized table medical imaging increase product revenue medical imaging segment fiscal year 2010 versus prior year due primarily increases demand oem customers result improvement hospital spending capital equipment well impact new products introduced fiscal year 2010 also contributing increase product revenue increased shipments mammography detectors oem customers outside united states ultrasound increase ultrasound product revenue fiscal year 2010 versus prior year due primarily increases demand new product lines flex focus pro focus ultraview ultrasound scanners introduced late second third quarters fiscal year 2009 respectively improvement hospital spending capital equipment general expansion direct sales force security technology decrease product revenue security technology fiscal year 2010 versus prior year due primarily fluctuating demand oem customer result changing requirements procurement procedures united states tsa decrease offset large part increase sales spare parts accessories initial revenues introduction new highspeed explosives detection system certified tsa fiscal year 2010 engineering revenue engineering revenue fiscal year 2010 compared fiscal year 2009 summarized table medical imaging decrease medical imaging engineering revenue fiscal year 2010 versus prior year due primarily timing completed milestones projects various oem customers security technology increase security technology engineering revenue fiscal year 2010 versus prior year due primarily engineering project began december 2009 oem customer partially offset decrease engineering revenue time materials project oem customer transition highspeed xlb explosive detection system prototype manufacturable product gross margin product gross margin product gross margin fiscal year 2010 compared fiscal year 2009 summarized table product gross margin percentage increased fiscal year 2010 versus prior year due primarily lower labor costs result restructuring improved manufacturing efficiency result higher production throughput improved component pricing vendors engineering gross margin engineering gross margin fiscal year 2010 compared fiscal year 2009 summarized table increases engineering gross margin fiscal year 2010 versus prior year due primarily improved pricing nonrecurring engineering projects undertaken oem customers partially offset costs excess revenues medical imaging business projects incurred gross loss engineering revenue fiscal year 2009 primarily result write deferred engineering costs 365 due settlement agreement reached cas medical systems inc “cas” august 2009 costs incurred excess revenue certain customer funded medical imaging projects operating expenses operating expenses decreased 524 04 fiscal year 2010 compared fiscal year 2009 shown research product development expenses increased 3874 fiscal year 2010 versus prior year due primarily increase performancebased variable cash sharebased compensation expense 2545 result improved operating results increases partially offset realizing benefit workforce reductions took place fiscal year 2009 selling marketing expenses increased 252 fiscal year 2010 versus prior year due primarily increase performancebased variable cash sharebased compensation expense 303 result improved operating results also contributing increase increased sales commissions 374 due increased sales ultrasound products expansion direct sales force increases partially offset realizing benefit workforce reductions took place fiscal year 2009 general administrative expenses increased 1279 fiscal year 2010 versus prior year due primarily increase performancebased variable cash sharebased compensation expense 4185 result improved operating results increases partially offset realizing benefit workforce reductions took place fiscal year 2009 1160 contingent professional fees related income tax refunds related interest 8389 received irs state massachusetts fiscal year 2009 811 related settlement agreement reached cas august 2009 restructuring charges decreased 5929 fiscal year 2010 versus prior year fiscal year 2010 amount includes severance personnelrelated costs 764 involuntary terminations 420 facility exit costs primarily related office facility canton offset part reversal prior year severance related benefit expenses 494 due change estimated severance benefits changes employee population expected receive benefits fiscal year 2009 amount includes severance personnel related costs 5561 involuntary terminations 1058 facility exit costs primarily related vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility income expense decrease net interest income fiscal year 2010 versus prior year due primarily decline interest rates gain sale investments fiscal year 2009 due receipt escrow proceeds 838 fiscal year 2009 relating sale 17 ownership interest another company fiscal year 2007 net expense fiscal years 2010 2009 consisted predominantly foreign currency exchange losses canadian danish british subsidiaries provision benefit income taxes fiscal year 2010 effective tax rate 26 compared us statutory rate 35 due primarily lower foreign tax rates discrete benefits approximately 1750 due primarily reversal tax reserves result expiration statute limitations fiscal years 2004 2006 fiscal year 2010 settlement foreign domestic tax audits also contributing reduced effective tax rate federal research experimentation credits fiscal year 2009 benefit income taxes due primarily irs refunds 8143 received fiscal year 2009 refunds included 1262 interest carryback loss research development credits fiscal year 2004 additional research development tax credits timing items claimed amended income tax returns fiscal years 2001 2006 recognized 2701 refunds related interest within stockholders’ equity fiscal year 2008 impact refunds related interest reduction unrecognized tax benefits approximately 3280 1356 recorded tax benefit fiscal year 2009 also contributing benefit income taxes fiscal year 2009 1820 reversal valuation allowance belgium net operating loss carryforwards management determined likely recognized reversal 920 tax reserves due expiration statutes limitations benefits partially offset additional provisions agreed federal state adjustments typical taxes owed related operations period income loss discontinued operations net tax discontinued operations revenue fiscal year 2010 compared fiscal year 2009 summarized table decreases fiscal year 2010 versus prior year due primarily lower occupancy decline room rates hotel due lower business personal travel result continuing economic pressures consumer market income continuing operations diluted net income per share continuing operations net income diluted net income per share fiscal years 2010 2009 follows increase net income diluted net income per share fiscal year 2010 versus prior year due primarily increases sales volumes gross margins driven increased demand medical technology business also contributing increases lower restructuring charges fiscal year 2010 versus prior year increases partially offset decrease interest income increase performancebased variable cash sharebased compensation expense result improved operating results lower income tax benefits liquidity capital resources key liquidity capital resources information summarized table increase working capital july 31 2010 july 31 2011 due primarily increases inventories accounts receivable 17439 14318 respectively reflecting increased customer demand increased sales volumes fiscal year 2011 well stocking associated consolidation manufacturing operations establishing shanghai manufacturing facility increases partially offset increases account payable due primarily timing vendor payments periodically review investment portfolio determine investments impaired due changes credit risk potential valuation concerns believe cash equivalents appropriately valued july 31 2011 aware market events would impact valuation could change future new developments arise credit markets face exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures change time business practices evolve could material adverse impact financial results primary exposure related fluctuations us dollar local currencies subsidiaries canada europe china investment international subsidiaries sensitive fluctuations currency exchange rates effect change currency exchange rates net investment international subsidiaries reflected “accumulated comprehensive income” component stockholders’ equity 10 depreciation july 31 2011 2010 functional currencies relative us dollar would result reduction stockholders’ equity approximately 1458 700 respectively carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2011 due short maturities instruments cash equivalents totaled 169656 july 31 2011 consisted entirely highly liquid investments maturities three months less time purchase cash flows following table summarizes sources uses cash periods indicated cash flows generated operating activities continuing operations fiscal year 2011 primarily reflects pretax earnings continuing operations 20932 included depreciation amortization expenses 17918 noncash sharebased compensation expense 9638 positive impact operating earnings cash flows excluding noncash acquisitionrelated bargain purchase gain 1042 partially offset increases inventories accounts receivable 17439 14318 respectively net increases accounts payable accrued liabilities 11925 4039 respectively well decrease assets 2578 increase inventories 17439 due primarily demand related inventory increases planned increases ultrasound medical imaging inventories associated shift production denmark united states china increase accounts receivable 14318 due primarily growth net revenue well increase unbilled receivables 5578 engineering projects due timing completing milestones increase accounts payable 11925 due primarily timing vendor payments increased inventory purchases increase accrued liabilities 4039 due primarily restructuring charges 7066 partially offset payments made restructuring charges net cash used continuing operations investing activities fiscal year 2011 due primarily purchases property plant equipment 22502 approximately 6200 relates construction manufacturing facility shanghai china uses cash partially offset net proceeds 10467 sale hotel business net cash used financing activities fiscal year 2011 primarily reflected 15187 used repurchase common stock 5154 dividends paid stockholders believe balances cash equivalents cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2011 effect obligations expected liquidity cash flows future periods follows july 31 2011 total liabilities associated uncertain tax positions 7431 due complexity associated tax uncertainties cannot make reasonably reliable estimate period expect settle noncurrent liabilities associated uncertain tax positions therefore amounts included contractual obligations table currently approximately 24400 revolving credit facilities banks available direct borrowings revolving credit facility agreements contain number covenants including covenant requiring us maintain tangible net worth defined revolving credit facility agreement less 255000 end fiscal quarter compliance covenant covenants july 31 2011 tangible net worth approximately 383000 july 31 2011 direct borrowings offbalance sheet arrangements company expects spend approximately 8800 july 31 2011 complete construction new shanghai china facility impact investigation regarding danish subsidiary investigating transactions involving danish subsidiary bk medical certain foreign distributors respect raised questions concerning compliance law including danish law united states foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government united states department justice securities exchange commission concluded transactions identified date properly accounted reported financial statements material respects terminated employment certain bk medical employees involved transactions decided wind relationship certain bk medical distributors evaluating relationship certain bk medical distributors involved transactions replacing employees distributors could adverse impact bk medical’s distributor sales replacements place productive revenue sales bk medical distributors decided wind relationship represented less 1 total fiscal year 2011 revenue sales bk medical distributors involved identified transactions including distributors decided wind relationship represented approximately 15 total fiscal year 2011 revenue recent accounting pronouncements recently adopted special purpose entities june 2009 financial accounting standards board “fasb” issued guidance eliminates concept qualified specialpurpose entity related guidance creates stringent conditions reporting transfer portion financial asset sale clarifies saleaccounting criteria changes initial measurement transferor’s interest transferred financial assets guidance effective us august 1 2010 material impact financial position results operations cash flows june 2009 fasb issued guidance requires former qualified specialpurpose entities evaluated consolidation changes approach determining variable interest entity’s “vie” primary beneficiary requires companies frequently reassess whether must consolidate vies guidance effective us august 1 2010 material impact financial position results operations cash flows revenue recognition march 2010 fasb issued guidance related revenue recognition applies arrangements milestones relating research development deliverables guidance provides criteria must met recognize consideration contingent upon achievement substantive milestone entirety period milestone achieved guidance effective us august 1 2010 material impact financial position results operations cash flows yet effective impairment testing december 2010 fasb issued amendment guidance goodwill impairment testing amendment modifies step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists making determination entity consider whether adverse qualitative factors indicating impairment may exist guidance effective us august 1 2011 expected material impact financial position results operations cash flows business combinations noncontrolling interests december 2010 fasb issued guidance specifying public entity presents comparative financial statements entity acquirer disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period also expands supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings guidance effective us prospectively material business combinations acquisition date august 1 2011 fair value measurements may 2011 fasb issued update accounting fair value measurement provide consistent definition fair value ensure fair value measurement disclosure requirements similar us gaap international financial reporting standards “ifrs” update changes certain fair value measurement principles enhances disclosure requirements fair value measurements update extend use fair value accounting provides guidance applied use already required permitted standards within us gaap ifrs update effective interim annual periods beginning december 15 2011 applied prospectively early adoption prohibited guidance effective us august 1 2012 currently evaluating impact new accounting update financial position results operations cash flows presentation comprehensive income june 2011 fasb issued update accounting comprehensive income increase prominence items reported comprehensive income facilitate convergence us gaap ifrs update requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements update change items must reported comprehensive income item comprehensive income must reclassified net income update affect earnings per share calculated presented update effective interim annual periods beginning december 15 2011 applied retrospectively early adoption permitted guidance effective us august 1 2012 expected material impact financial position results operations cash flows critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies see note 1 summary business operations significant accounting policies notes consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition policywe provide engineering services customers contractual basis generally recognize revenue using percentage completion method generally estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately judgments uncertaintiesour revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed effect actual results differ assumptionswe made material changes accounting methodology used determine estimated costs completion projects past three fiscal years actual results consistent estimates assumptions may exposed losses gains could material allocation consideration multiple element revenue arrangements policywe allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vendor specific objective evidence “vsoe” exists otherwise third party evidence “tpe” neither vsoe tpe selling price exists unit accounting use estimated selling price “esp” generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available esp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use esp allocation arrangement consideration objective esp determine price would transact product service sold us standalone basis judgments uncertaintiesour determination esp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold effect actual results differ assumptionsthere limited risk changes assumptions would result material impact reported financial results arrangements significant company inventory reserves policywe value inventory lower cost inventory fair market value establishment inventory reserves management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory reserves based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional reserves existing inventories might recorded future periods recorded inventory valuation reserves subsequently reversed inventory used disposed judgments uncertaintiesour inventory reserves involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence effect actual results differ assumptionswe made material changes accounting methodology use establish inventory reserves past three fiscal years estimates regarding customer demand inaccurate changes technology affect demand certain products unforeseen manner may exposed losses could material 10 difference actual reserves july 31 2011 would affected net earnings approximately 286 fiscal year 2011 sharebased compensation policywe sharebased compensation plans include stock options unvested restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value company’s restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date looking projected nongaap earnings per share future periods part plan related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned judgments uncertaintiesoptionpricing models generally accepted valuation techniques require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving company personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize effect actual results differ assumptionswe made material changes accounting methodology use determine sharebased compensation expense past three fiscal years actual results consistent estimates assumptions particularly used determining accrual percentage performancebased nonvested restricted stock awards may exposed changes sharebased compensation expense could material 10 change sharebased compensation expense year ended july 31 2011 would affected net earnings approximately 964 fiscal year 2011 warranty reserves policywe estimate costs product warranties based specific warranty claims historical data engineering estimates applicable judgments uncertaintiesour warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable effect actual results differ assumptionswe made material changes accounting methodology use establish warranty reserves past three fiscal years actual product failure rates service delivery costs differ estimates revisions estimated warranty liability would required revisions could adversely affect operating results 10 change warranty reserve july 31 2011 would affected net earnings approximately 517 fiscal year 2011 purchase price allocation business combinations policywe apply purchase accounting method account business combinations requires extensive use accounting estimates judgments assign purchase price fair value assets liabilities purchased excess value classified goodwill assets finite lives useful lives assigned intangibles values amortized remaining life judgments uncertaintiesour purchase price allocation methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies effect actual results differ assumptionsif actual results consistent estimates assumptions impairment charges could result intangible assets goodwill impairment goodwill indefinite lived intangible assets policywe evaluate goodwill indefinite lived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing internal valuation analyses consider market approach income approach goodwill relief royalty approach indefinite lived intangible assets market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows relief royalty approach fair value indefinite lived intangible asset based tax royalty rate discount rate applied future forecasted sales second quarter fiscal year 2011 completed annual impairment testing goodwill indefinite lived intangible assets using methodologies described herein determined impairment carrying values goodwill indefinite lived intangible assets related acquisitions july 31 2011 1849 7607 respectively judgments uncertaintiesthe valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations effect actual results differ assumptionsif actual results consistent estimates assumptions may exposed impairment charge could material 10 change calculation reporting units fair value december 31 2010 would still yield fair value reporting units excess carrying value reporting units assets income tax contingencies policyour income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available judgments uncertaintiesour liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions effect actual results differ assumptionsalthough believe judgments estimates discussed herein reasonable actual results could differ may exposed losses gains could material extent prevail matters liability established required pay amounts excess established liability effective income tax rate given financial statement period could materially affected unfavorable tax settlement generally would require use cash result increase effective income tax rate period resolution favorable tax settlement would recognized reduction effective income tax rate period resolution deferred tax valuation allowances policywe required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established must include expense within tax provision statement operations judgments uncertaintiesour effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies effect actual results differ assumptionswe made material changes accounting methodology use establish deferred tax asset valuation allowances past three fiscal years event actual results differ estimates assumptions use determining effective tax rate provision income taxes results operations could materially impacted item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends rd expenses trends capital expenditures make document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results see “risk factors” item 1a discussion primary risks uncertainties known us time management’s discussion analysis presented six sections follows • business overview • fiscal year 2012 overview • results operations • liquidity capital resources • critical accounting policies • new accounting pronouncements report financial condition results operations fiscal year basis ending july 31 dollar amounts item 7 thousands except per share data business overview analogic high technology company designs manufactures advanced medical imaging security systems subsystems sold original equipment manufacturers oems end users primarily healthcare airport security markets incorporated commonwealth massachusetts november 1967 recognized worldwide advancing stateoftheart technology areas medical computed tomography ct ultrasound magnetic resonance imaging mri digital mammography ctbased automated explosive detection systems airport security oem customers incorporate technology systems turn sell various medical security applications also sell ultrasound products directly clinical enduser markets direct worldwide sales force brand name bk medical business strategically aligned three business segmentsmedical imaging ultrasound security technology end fiscal year 2011 combined oem ultrasound transducer business previously reported medical imaging segment bk medical direct ultrasound systems business ultrasound segment one management team combined business reported ultrasound segment consistent principal executive officer began monitoring business first quarter fiscal year 2012 periods presented revised accordingly reflect new reporting segments significant portion products sold oems whose purchasing dynamics impact reported sales oems purchase medical imaging products generally incorporate products components systems turn sold end users primarily hospitals medical clinics security technology segment oem customers purchase resell products end users including domestic foreign airports well tsa us customers’ purchasing dynamics affected level government funding expansion airport terminals fluctuations airline passenger volume fiscal year 2012 overview following table sets forth percentage total net revenue reporting segment fiscal years 2012 2011 periods presented revised accordingly reflect new reporting segments following summary metrics consolidated statement operations management believes important understanding results operations periods indicated summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document fiscal year 2012 total net revenue increased 9 compared prior year due primarily growth revenue security ultrasound segments 24 17 respectively gross margin remained relatively consistent fiscal year 2012 versus prior year due gross margin increases ultrasound security technology segments partially offset gross margin decline medical imaging segment income operations increased fiscal year 2012 prior year comparable period due primarily increased gross profit increase sales volumes headcount reductions made fiscal year 2011 also contributing increase reduction internally funded research product development expenses restructuring charges partially offset increase selling general administrative expenses fiscal year 2012 received refund 12007 result completion irs audit us federal income tax returns fiscal years ended july 31 2003 2005 2008 refund largely result us federal research experimentation credits carryover fiscal years ended july 31 1991 2000 audited returns recorded tax benefit refund including related interest audited consolidated statement operations 10025 fiscal year 2012 tax benefit refund interest partially offset related contingent professional fees 2714 recorded general administrative expenses within income operations audited consolidated statement operations fiscal year 2012 connection conclusion irs audit also recorded reversal remeasurement related tax reserves 2308 audited consolidated statement operations fiscal year 2012 addition positive impact growth income operations tax benefit 10025 income continuing operations diluted net income per share continuing operations fiscal year 2012 favorably impacted gain 2500 sale remaining 25 ownership interest chinabased affiliate first quarter fiscal year 2011 sold hotel business realized net proceeds 10467 transaction costs recorded gain sale hotel business 924 net tax provision 505 007 per diluted share fiscal year 2011 hotel business reported discontinued operation revenues net income loss hotel business fiscal years 2011 2010 follows cash equivalents marketable securities 187011 169656 july 31 2012 2011 respectively july 31 2012 investment portfolio primarily consisted demand deposits highly rated banks financial institutions following table sets forth overview cash flows fiscal years 2012 2011 see note 1 notes consolidated financial statements included annual report form 10k information regarding certain items fiscal year 2011 audited consolidated statement cash flows reclassified conform current period presentation fiscal year 2012 generated 73710 cash provided continuing operations operating activities compared 30228 prior year increase due primarily increase sales volume improved operating efficiency fiscal year 2012 compared prior year comparable period well income tax refund related interest received fiscal year 2012 12007 net cash used continuing operations investing activities fiscal year 2012 due primarily capital spending 30606 includes construction manufacturing facility shanghai china purchase new facility state college pennsylvania prior year cash used continuing operations investing activities due primarily capital spending 22430 included construction shanghai china manufacturing facility partially offset proceeds sale hotel business 10467 transaction costs net cash used financing activities fiscal years 2012 2011 primarily reflected cash used repurchase common stock 23260 15187 respectively results operations fiscal year 2012 compared fiscal year 2011 net revenue product revenue product revenue fiscal year 2012 compared fiscal year 2011 summarized table medical imaging increase fiscal year 2012 versus prior year primarily reflects growth mri digital mammography product lines driven higher sales volume existing products increase offset fewer shipments ct product line due primarily customer ordering patterns lower sales motion control products reflecting decline semiconductor market sale subsidiary motion control business fourth quarter fiscal year 2011 ultrasound increase fiscal year 2012 versus prior year due primarily increased sales flex focus platform products us expanded sales force internationally direct sales force distributor network also contributing increase acquisition oem ultrasound transducer business second quarter fiscal year 2011 security technology increase fiscal year 2012 versus prior year due primarily increased sales baggage scanners driven demand new high speed small footprint systems well growth demand medium speed systems engineering revenue engineering revenue fiscal year 2012 compared fiscal year 2011 summarized table medical imaging increase fiscal year 2012 versus prior year due primarily increased work customer funded engineering projects timing project milestones completed security technology decrease fiscal year 2012 versus prior year due primarily timing work performed significant development project large oem customer gross margin product gross margin product gross margin fiscal year 2012 compared fiscal year 2011 summarized table product gross margin increased fiscal year 2012 versus prior year due primarily improved gross margin ultrasound security technology segments partially offset decline gross margin medical imaging segment improvement ultrasound segment driven cost savings following consolidation manufacturing operations end fiscal year 2011 growth overall sales volume well increase shipments highermargin premium systems improvement security technology segment driven favorable product mix higher sales volume medical imaging segment decline driven vendor component quality issues digital mammography business unfavorable product mix engineering gross margin engineering gross margin fiscal year 2012 compared fiscal year 2011 summarized table decreases engineering gross profit engineering gross margin fiscal year 2012 versus prior year due primarily mix engineering projects worked security technology segment fiscal year 2012 compared prior year also contributing decrease gross margin increase sharebased cashbased incentive compensation improved operating results operating expenses operating expenses increased 994 less 1 fiscal year 2012 compared fiscal year 2011 shown research product development costs included operating expenses related projects funded customers expenses decreased 5895 fiscal year 2012 versus prior year due primarily cost savings work force reductions made throughout fiscal year 2011 well decreases consulting material costs less investment internally funded research product development projects selling marketing expenses increased 2825 fiscal year 2012 versus prior year due primarily new product launches increased trade show activity ultrasound segment general administrative expenses increased 11130 fiscal year 2012 versus prior year due primarily impact contingent consulting fees 2714 fiscal year 2012 related income tax refund related interest received period well increased sharebased cashbased incentive compensation costs 3530 improved operating results also contributing increase inquiry costs 1288 fiscal year 2012 related distributor matter bk medical favorable impact fiscal year 2011 acquisition bargain purchase gain included general administrative expenses 1042 increases partially offset 386 amortization intangible assets inventory fair value adjustment associated acquisition restructuring charges fiscal year 2011 included severance personnel related costs plan reduce headcount 155 employees worldwide expect restructuring result annual expense savings approximately 11500 portion fund strategic growth initiatives income expense gain sale investments fiscal year 2012 due 2500 sale 25 equity interest chinabased affiliate book value investment written 0 fiscal year ended july 31 2006 refer fiscal year 2006 net income expense fiscal years 2012 2011 consisted predominantly foreign currency exchange gains losses foreign subsidiaries denmark canada also contributing fiscal year 2012 income approximately 350 resolution obligations fit former facility provision income taxes effective income tax rate continuing operations based upon income year composition income different countries adjustments applicable quarterly periods potential tax consequences benefits resolutions tax audits tax contingencies effective tax rate fiscal year 2012 3 due primarily discrete benefit 10025 receipt irs tax refund including related interest reversal remeasurement related tax reserves 2308 decrease effective rate fiscal year 2012 partially offset unfavorable impact expiration federal research experimentation credit december 31 2011 next four quarters statute limitations fiscal years ended july 31 2009 july 31 2006 may expire us federal state income taxes foreign subsidiaries respectively reasonably expected net unrecognized benefits including interest approximately 900 may recognized fiscal year 2011 effective tax rate 21 compared us statutory rate 35 due primarily full year benefit federal research experimentation credit discrete tax benefit 536 reinstatement federal research experimentation credit back january 1 2010 lower foreign tax rates compared us statutory rate 35 discrete benefit 599 reversal tax reserves result expiration statute limitations fiscal year ended july 31 2007 refer fiscal year 2007 settlements various taxing authorities addition taxes 621 related bargain purchase gain acquisition oem ultrasound transducer probe business recorded operating expenses fiscal year 2011 income continuing operations diluted net income per share continuing operations income continuing operations diluted net income per share continuing operations fiscal years 2012 2011 follows increase income continuing operations diluted net income per share continuing operations fiscal year 2012 versus prior year due primarily cost savings following consolidation manufacturing operations operational headcount reductions fiscal year 2011 also contributing increase gross profit increase sales volume fiscal year 2012 declines research product development costs restructuring charges income tax benefit refund related interest fiscal year 2012 gain sale equity interest fiscal year 2012 items partially offset increases selling marketing general administrative expenses discontinued operations discontinued operations fiscal year 2012 compared fiscal year 2011 summarized table first quarter fiscal year 2011 sold hotel business fiscal year 2011 compared fiscal year 2010 net revenue product revenue product revenue fiscal year 2011 compared fiscal year 2010 summarized table medical imaging increase fiscal year 2011 versus prior year driven primarily growth ct product line well growth digital mammography mri product lines growth ct mri product lines driven primarily higher sales volume new existing products growth digital mammography product line due primarily increased sales volumes large oem customer ultrasound increase fiscal year 2011 versus prior year due primarily increased sales volume flex focus platform products notable growth 10 us market fiscal year 2010 growth oem ultrasound transducer probe business growth ultrasound probe product line due primarily acquisition oem ultrasound transducer probe business contributed approximately 6500 product revenue fiscal year 2011 security technology decreases product revenues fiscal year 2011 versus prior year due primarily sales fewer baggage scanners demand customer negatively impacted timing bridge orders tsa process moving new procurement process product mix engineering revenue engineering revenue fiscal year 2011 compared fiscal year 2010 summarized table medical imaging engineering revenue fiscal year 2011 remained relatively consistent fiscal year 2010 security technology increase fiscal year 2011 versus prior year due primarily amount work performed significant engineering development project began december 2009 oem customer gross margin product gross margin product gross margin fiscal year 2011 compared fiscal year 2010 summarized table product gross margin percentage increased fiscal year 2011 versus prior year due primarily improved manufacturing efficiency medical imaging segment higher production throughput growing volume along improved component pricing vendors manufacturing transition costs related restructuring ultrasound segment well lower mix higher margin ultrasound security technology sales partially offset medical imaging segment’s gross margin improvements engineering gross margin engineering gross margin fiscal year 2011 compared fiscal year 2010 summarized table increase engineering gross margin fiscal year 2011 versus prior year due primarily mix engineering projects worked fiscal year 2011 compared prior year operating expenses operating expenses increased 25650 20 fiscal year 2011 compared fiscal year 2010 shown research product development expenses related projects funded customers expenses increased 13975 fiscal year 2011 versus prior year due primarily increase selffunded development projects associated new product introduction advanced development also contributing growth increase sharebased compensation expense 1623 fiscal year 2011 versus prior year primarily associated increased accrual performance based awards result improving company financial performance selling marketing expenses increased 4620 fiscal year 2011 versus prior year due primarily increase selling resources ultrasound segment expanded sales force product offerings existing adjacent markets general administrative expenses remained relatively consistent increasing 679 fiscal year 2011 versus prior year including sharebased compensation expense increased 1646 fiscal year 2011 versus prior year primarily associated increased accrual performance based awards result improving company financial performance increase sharebased compensation offset net tax bargain purchase gain 1042 related acquisition oem ultrasound transducer probe business november 2010 restructuring charges fiscal year 2011 includes severance personnel related costs plan reduce headcount 155 employees worldwide restructuring charges fiscal year 2010 included severance personnel related costs termination 17 employees worldwide income expense net expense fiscal years 2011 2010 consisted predominantly foreign currency exchange losses canadian danish british subsidiaries provision income taxes fiscal year 2011 effective tax rate 21 compared us statutory rate 35 due primarily full year benefit federal research experimentation credit discrete tax benefit 536 reinstatement federal research experimentation credit back january 1 2010 lower foreign tax rates compared us statutory rate 35 discrete benefit 599 reversal tax reserves result expiration statute limitations fiscal year 2007 settlements various taxing authorities addition taxes 621 related bargain purchase gain acquisition oem ultrasound transducer probe business recorded operating expenses quarter ended january 31 2011 fiscal year 2010 effective tax rate 26 compared us statutory rate 35 due primarily lower foreign tax rates discrete benefits approximately 1750 due primarily reversal tax reserves result expiration statute limitations fiscal years ended july 31 2004 2006 fiscal year 2010 settlement foreign domestic tax audits also contributing reduced effective tax rate federal research experimentation credits income continuing operations diluted net income per share continuing operations income continuing operations diluted net income per share continuing operations fiscal years 2011 2010 follows increases income continuing operations diluted net income per share continuing operations fiscal year 2011 versus prior year due primarily increased sales volumes gross margin partially offset increased operating expenses discontinued operations discontinued operations fiscal year 2011 compared fiscal year 2010 summarized table first quarter fiscal year 2011 sold hotel business increase income discontinued operations net tax fiscal year 2011 versus prior year due primarily increased occupancy higher room rates hotel due primarily improving economy three months ended october 31 2010 compared fiscal year 2010 liquidity capital resources key liquidity capital resources information summarized table increase working capital july 31 2011 july 31 2012 due primarily increases cash accounts receivable 17355 8258 respectively reflecting increased customer demand related sales volumes fiscal year 2012 increases partially offset increases advance payments deferred revenue accrued income taxes accrued liabilities 5471 3850 3948 respectively increase advance payments deferred revenue due primarily timing milestone payments engineering products medical imaging security technology segments increase accrued income taxes due primarily increase current tax liability due expired rd tax credits higher profits income taxes fiscal year 2012 compared fiscal year 2011 increase accrued liabilities due primarily increased accrued incentive compensation result stronger financial performance fiscal year 2012 compared fiscal year 2011 cash equivalents july 31 2012 primarily consisted demand deposits highly rated banks financial institutions periodically review investment portfolio determine investments impaired due changes credit risk potential valuation concerns believe cash equivalents appropriately valued july 31 2012 july 31 2011 aware market events would impact valuation could change future new developments arise credit markets carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2012 due short maturities instruments cash flows following table summarizes sources uses cash periods indicated cash flows provided continuing operations operating activities fiscal year 2012 primarily reflects pretax earnings continuing operations 44199 included noncash charges depreciation amortization 17775 sharebased compensation expense 13396 also contributing increase tax refund 12007 increases advance payments deferred revenue accrued income taxes accrued liabilities 5471 3850 3948 respectively positive impact operating earnings cash flows partially offset increases accounts receivables inventories 8258 4765 respectively increase advance payments deferred revenue primarily due timing milestone payments engineering products medical imaging security technology segments increase accrued income taxes primarily due increased pretax earnings continuing operations fourth quarter fiscal year 2012 compared fourth quarter fiscal year 2011 increase accrued liabilities primarily due increase accrued cashbased incentive compensation due improved operating results increase accounts receivable due primarily increased revenue fourth quarter fiscal year 2012 compared fourth quarter fiscal year 2011 increase inventories primarily due increased demand across segments cash flows provided continuing operations operating activities fiscal year 2011 primarily reflects pretax earnings continuing operations 20932 included depreciation amortization expenses 17798 noncash sharebased compensation expense 9638 positive impact operating earnings cash flows excluding noncash acquisitionrelated bargain purchase gain 1042 partially offset increases inventories accounts receivable 16821 17099 respectively net increases accounts payable accrued liabilities 12490 4078 respectively well decrease assets 2578 increase inventories 16821 due primarily demandrelated inventory increases planned increases ultrasound medical imaging inventories associated shift production denmark united states china increase accounts receivable 17099 due primarily growth net revenue well increase unbilled receivables 5578 engineering projects due timing completing milestones increase accounts payable 12490 due primarily timing vendor payments increased inventory purchases increase accrued liabilities 4078 due primarily restructuring charges 7066 partially offset payments made restructuring charges net cash used continuing operations investing activities fiscal year 2012 due primarily purchases property plant equipment 30606 approximately 15629 relates construction manufacturing facility shanghai china purchase facility state college pennsylvania capital spending partially offset proceeds 2500 received sale 25 equity interest chinabased affiliate fiscal year 2012 net cash used continuing operations investing activities fiscal year 2011 due primarily purchases property plant equipment 22430 approximately 6200 relates construction manufacturing facility shanghai china uses cash partially offset net proceeds 10467 sale hotel business net cash used financing activities fiscal year 2012 primarily reflected 23260 used repurchase common stock 4980 dividends paid stockholders net cash used financing activities fiscal year 2011 primarily reflected 15187 used repurchase common stock 5154 dividends paid stockholders believe balances cash equivalents cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2012 effect obligations expected liquidity cash flows future periods follows july 31 2012 total liabilities associated uncertain tax positions 5565 due complexity associated tax uncertainties cannot make reasonably reliable estimate period expect settle noncurrent liabilities associated uncertain tax positions therefore amounts included contractual obligations table october 11 2011 entered 100 million fiveyear revolving credit agreement refer credit agreement financial institutions identified therein lenders included sovereign bank td bank na hsbc bank usa national association credit agreement guaranteed material domestic subsidiaries designated us time required credit agreement supported pledge 65 capital stock equity equivalents principal international subsidiary credit facility require amortization principal may reduced repaid maturity whole part option without penalty credit agreement replaces 20000 credit facility sovereign bank renewed annually since 2001 terminated connection new facility borrowings credit agreement may used general corporate purposes including permitted acquisitions amount facility increased specified circumstances 150000 aggregate sole borrower credit agreement interest rates borrowings credit facility range 125 200 libor rate elect libor rate 000 100 defined base rate highest 1 prime rate 2 federal funds rate plus 050 3 onemonth libor plus 1 case based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters ebitda greater 275100 time • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2012 leverage ratio 0006 interest coverage ratio infinite attributable interest expense full compliance financial operating covenants failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control analogic corporation defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility incurred approximately 500 transactions costs expensed fiveyear life credit facility currently also approximately 4300 revolving credit facilities banks available direct borrowings borrowing outstanding credit facilities july 31 2012 2011 impact investigation regarding danish subsidiary previously disclosed annual report form 10k fiscal year ended july 31 2011 identified transactions involving danish subsidiary bk medical certain foreign distributors respect raised questions concerning compliance law including danish law united states foreign corrupt practices act business policies voluntarily disclosed matter danish government doj sec cooperating inquiry doj sec unable estimate potential penalties andor sanctions might assessed connection matter concluded identified transactions properly accounted reported financial statements material respects terminated employment bk medical employees involved transactions wound process winding relationship bk medical distributors involved transactions replacing employees distributors could adverse impact bk medical’s distributor sales replacements place productive revenue sales bk medical distributors decided wind bk medical’s relationship represented less 1 total revenue fiscal year 2011 less 13 total revenue fiscal year 2012 fiscal year 2012 incurred employee termination costs approximately 400 inquiryrelated costs approximately 1288 connection matter recent accounting pronouncements recently adopted impairment testing december 2010 financing accounting standards board fasb issued guidance modifying step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists guidance effective us august 1 2011 material impact financial position results operations cash flows september 2011 fasb issued accounting standards update provides subject certain conditions option perform qualitative rather quantitative assessment determine whether likely fair value reporting unit less carrying amount guidance effective us august 1 2011 material impact financial position results operations cash flows business combinations noncontrolling interests december 2010 fasb issued guidance specifying public entity presents comparative financial statements entity acquirer disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period also expands supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings guidance effective us prospectively material business combinations acquisition date august 1 2011 fair value measurements may 2011 fasb issued update accounting fair value measurement provide consistent definition fair value ensure fair value measurement disclosure requirements similar us gaap international financial reporting standards ifrs update changes certain fair value measurement principles enhances disclosure requirements fair value measurements update extend use fair value accounting provides guidance applied use already required permitted standards within us gaap ifrs update effective interim annual periods beginning december 15 2011 applied prospectively early adoption prohibited guidance effective us february 1 2012 impact financial position results operations cash flows yet effective presentation comprehensive income june 2011 fasb issued update accounting comprehensive income increase prominence items reported comprehensive income facilitate convergence us gaap ifrs update requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements update change items must reported comprehensive income item comprehensive income must reclassified net income update affect earnings per share calculated presented update effective annual periods beginning december 15 2011 annual interim periods thereafter update applied retrospectively early adoption permitted subsequently december 2011 fasb issued guidance defers changes relate presentation reclassification adjustments guidance effective us august 1 2012 material impact financial position results operations cash flows testing indefinitelived intangible assets impairment july 2012 fasb issued update regarding testing indefinitelived intangible assets impairment update gives entity option first assess qualitative factors determine whether existence events circumstances indicates likely indefinitelived intangible asset impaired assessing totality events circumstances entity concludes likely indefinitelived intangible asset impaired entity required take action however entity concludes otherwise required determine fair value indefinitelived intangible asset perform quantitative impairment test comparing fair value carrying amount entity also option bypass qualitative assessment indefinitelived intangible asset period proceed directly performing quantitative impairment test entity able resume performing qualitative assessment subsequent period guidance effective us august 1 2013 expected material impact financial position results operations cash flows critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies see note 1 summary business operations significant accounting policies notes consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition policywe provide engineering services customers contractual basis generally recognize revenue using percentage completion method generally estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately judgments uncertaintiesour revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed effect actual results differ assumptionswhen actual results consistent estimates assumptions estimates revised recognize gain loss consolidated statement operations variances could material impact consolidated statement operations financial position allocation consideration multiple element revenue arrangements policywe allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vendor specific objective evidence vsoe exists otherwise third party evidence tpe neither vsoe tpe selling price exists unit accounting use estimated selling price esp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available esp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use esp allocation arrangement consideration objective esp determine price would transact product service sold us standalone basis judgments uncertaintiesour determination esp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold effect actual results differ assumptionsif esp accurate revenue allocated deliverable multiple element arrangement could inaccurate resulting potential revenue recognition wrong periods inventory policywe value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed judgments uncertaintiesour inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence effect actual results differ assumptionsif estimates regarding customer demand inaccurate changes technology affect demand certain products unforeseen manner may exposed losses could material additional writedowns would result charge cost goods sold adjust inventory estimate net realizable value sharebased compensation policywe sharebased compensation plans include stock options restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value company’s restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned judgments uncertaintiesoptionpricing models generally accepted valuation techniques value restricted stock awards market conditions require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving future company financial targets personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize effect actual results differ assumptionsif actual results consistent estimates assumptions particularly used determining percentage performancebased nonvested restricted stock awards expected earned may exposed changes sharebased compensation expense could material warranty reserves policywe estimate costs product warranties based specific warranty claims historical data engineering estimates applicable judgments uncertaintiesour warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable effect actual results differ assumptionsif actual product failure rates service delivery costs differ estimates revisions estimated warranty liability would required revisions could adversely affect operating results derivative instruments hedging activities policywe recognize derivative instruments either assets liabilities fair value consolidated balance sheets changes fair value derivatives recorded period current earnings accumulated comprehensive income loss depending whether derivative designated part hedge transaction classify cash flows instruments category cash flows hedged items hold issue derivative instruments trading speculative purposes judgments uncertaintieswe assess inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows fair values hedged items also assess hedge ineffectiveness quarterly basis record gain loss related ineffective portion current earnings determine forecasted transaction longer probable occurring discontinue hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings effect actual results differ assumptionsif determine forecasted transaction longer probable occurring discontinue hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings purchase price allocation business combinations policywe apply purchase accounting method account business combinations requires extensive use accounting estimates judgments assign purchase price fair value assets liabilities purchased excess value classified goodwill assets finite lives useful lives assigned intangibles values amortized remaining life judgments uncertaintiesour purchase price allocation methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies effect actual results differ assumptionsif actual results consistent estimates assumptions accelerated amortization intangible assets finite lives impairment charges intangible assets goodwill could required impairment goodwill indefinite lived intangible assets policywe evaluate goodwill indefinite lived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing internal valuation analyses consider market approach income approach goodwill relief royalty approach indefinite lived intangible assets market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows relief royalty approach fair value indefinite lived intangible asset based tax royalty rate discount rate applied future forecasted sales second quarter fiscal year 2012 completed annual impairment testing goodwill indefinite lived intangible assets using methodologies described herein determined impairment carrying values goodwill indefinite lived intangible assets related acquisitions july 31 2012 1849 7607 respectively judgments uncertaintiesthe valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations effect actual results differ assumptionsif actual results consistent estimates assumptions may exposed impairment charge could material income tax contingencies policyour income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available judgments uncertaintiesour liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions effect actual results differ assumptionsalthough believe judgments estimates discussed herein reasonable actual results could differ may exposed losses gains could material extent prevail matters liability established required pay amounts excess established liability effective income tax rate given financial statement period could materially affected unfavorable tax settlement generally would require use cash result increase effective income tax rate period resolution favorable tax settlement would recognized reduction effective income tax rate period resolution deferred tax valuation allowances policywe required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established must include expense within tax provision statement operations judgments uncertaintiesour effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings came results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies effect actual results differ assumptionsin event actual results differ estimates assumptions use determining valuation allowances provision income taxes results operations could materially impacted item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends rd expenses trends capital expenditures make document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results refer “risk factors” item 1a discussion primary risks uncertainties known us time management’s discussion analysis presented six sections follows • business overview • fiscal year 2013 financial highlights • results operations • liquidity capital resources • recent accounting pronouncements • critical accounting policies report financial condition results operations fiscal year basis ending july 31 dollar amounts item 7 thousands except per share data business overview analogic high technology company designs manufactures advanced medical imaging ultrasound security systems subsystems sold original equipment manufacturers oems end users primarily healthcare airport security markets business strategically aligned three segments medical imaging ultrasound security technology business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily urology surgery including robotic assisted surgery anesthesia pointofcare markets • security technology includes advanced threat detecting ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide following table sets forth percentage total net revenue reporting segment fiscal years 2013 2012 fiscal year 2013 financial highlights following table summary financial results fiscal years ended july 31 2013 2012 summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document fiscal year 2013 total net revenue increased 7 compared prior year due primarily growth sales medical imaging security technology segments 6 29 respectively offset part ultrasound revenues decreased 1 fiscal year 2013 gross margin improved fiscal year 2013 versus prior year due higher volume efficient global manufacturing processes cost reductions income operations increased 14 fiscal year 2013 prior year due primarily revenue growth gross margin improvement along overall cost control results included expenses related acquisition ultrasonix well restructuring expenses march 2013 completed acquisition issued outstanding shares capital stock ultrasonix medical corporation nevada corporation customer lists intangibles related solely sales destined us ii outstanding equity securities ultrasonix medical corporation “ultrasonix” privately held company located vancouver canada pursuant “plan arrangement” canadian law ultrasonix supplier advanced ultrasound systems pointofcare general imaging applications 5000 systems installed worldwide undertook acquisition accelerate expansion pointofcare ultrasound market purchase price net cash acquired 79932 finalized july 2013 acquisition funded existing cash hand accounted acquisition business fiscal year 2013 incurred pretax charges 3519 primarily relating severance personnel related costs 137 involuntarily terminated employees well facility exit costs associated restructuring activities including consolidation manufacturing certain support activities currently conducted ultrasonix facility vancouver operations existing facilities closure ultrasonix sales subsidiary paris france transition costs associated planned closure englewood colorado facility consolidate manufacturing development activities state college pennsylvania facility optimization operations montreal canada peabody massachusetts recognized consolidated statement operation restructuring pretax charges included operating results medical imaging segment ultrasound segment security technology segment expect record additional pretax restructuring charges approximately 1500 complete transitions associated restructuring activities fourth quarter fiscal year 2014 results operations fiscal year 2013 compared fiscal year 2012 net revenue product revenue product revenue fiscal year 2013 compared fiscal year 2012 summarized table medical imaging fiscal year 2013 compared prior year product revenue increased largely due growing global demand highpower mri subsystems product revenue product lines segment flat overall compared prior year slight decrease ct sales offset increased sales mammography detectors ultrasound fiscal year 2013 compared prior year product revenue decreased slightly lower oem transducer sales partially offset higher sales direct sales channel sales direct channel included 10095 revenue ultrasonix products following march 2013 acquisition ultrasonix apart incremental revenues following ultrasonix acquisition revenue direct channel lower compared prior year due weakness ultrasound market well temporary disruption sales force related continued sales force expansion channel integration following acquisition ultrasonix security technology fiscal year 2013 compared prior year product revenue increased significantly due strong shipments highspeed threat detection systems demand ctbased explosives threat detection grew outside us shipments included increased sales highspeed systems l3 well initial shipments highspeed systems smiths following regulatory approval fiscal year 2013 highspeed system incorporating ctbased detection technology engineering revenue engineering revenue fiscal year 2013 compared fiscal year 2012 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability medical imaging increase fiscal year 2013 versus prior year primarily due increased work customerfunded engineering projects ultrasound increase fiscal year 2013 versus prior year primarily due work customerfunded engineering project security technology decrease fiscal year 2013 versus prior year due primarily timing work performed security technology development projects gross margin product gross margin product gross margin fiscal year 2013 compared fiscal year 2012 summarized table product gross profit increased significantly fiscal year 2013 versus prior year due higher volume along global manufacturing process cost improvements three business segments increased product gross profit driven increased gross profit higher product revenue approximately 12500 lower scrap production rework costs improved vendor component quality inspection process digital mammography product line approximately 4100 lower manufacturing costs following consolidation manufacturing operations approximately 3900 cost savings approximately 3000 ramp production shanghai operation opened latter half fiscal 2012 partially offsetting lower costs amortization intangible assets fair value inventory stepup adjustment 3033 relating acquisition ultrasonix engineering gross margin engineering gross margin fiscal year 2013 compared fiscal year 2012 summarized table increase engineering gross margin fiscal year 2013 versus prior year primarily due mix engineering projects worked period well impact cash incentive compensation directly related changes operating results operating expenses operating expenses increased 18083 118 fiscal year 2013 compared fiscal year 2012 shown table research product development expenses increased fiscal year 2013 versus prior year primarily due approximately 5300 incremental internal contract personnel related expenses internallyfunded research product development projects addition approximately 1500 research development costs ultrasonix following march 2013 acquisition selling marketing expenses increased fiscal year 2013 versus prior year primarily result acquisition ultrasonix march 2013 acquisition ultrasonix added approximately 5300 selling marketing expenses fiscal year 2013 also added selling marketing expenses approximately 1700 related expansion existing sales force north america general administrative expenses increased fiscal year 2013 versus prior year due primarily approximately 1100 partialyear operating expenses ultrasonix vancouver canada facility following march 2013 acquisition 1210 acquisitionrelated expenses 1000 incremental audit costs 400 associated medical device tax patient protection affordable care act went effect fiscal year 2013 partially offset decrease approximately 2700 contingent consulting related income tax refund received fiscal year 2012 please refer fiscal year 2013 financial highlights section information regarding restructuring charge manufacturing consolidation restructuring efforts seek optimize overall operational footprint march 2013 completed acquisition issued outstanding shares capital stock ultrasonix medical corporation nevada corporation customer lists intangibles related solely sales destined us ii outstanding equity securities ultrasonix medical corporation refer ultrasonix privately held company located vancouver canada pursuant “plan arrangement” canadian law ultrasonix supplier advanced ultrasound systems pointofcare general imaging applications 5000 systems installed worldwide undertook acquisition accelerate expansion pointofcare ultrasound market purchase price net cash acquired 79932 finalized july 2013 fiscal year 2013 incurred pretax charges 3519 primarily relating severance personnel related costs 137 involuntarily terminated employees well facility exit costs associated restructuring activities including consolidation manufacturing certain support activities currently conducted ultrasonix facility vancouver operations existing facilities closure ultrasonix sales subsidiary paris france transition costs associated planned closure englewood colorado facility consolidate manufacturing development activities state college pennsylvania facility optimization operations montreal canada peabody massachusetts recognized consolidated statement operation restructuring pretax charges included operating results medical imaging segment ultrasound segment security technology segment restructuring related charges including actions associated acquisitions segment follows expect record additional pretax restructuring charges approximately 1500 complete transitions associated restructuring activities fourth quarter fiscal year 2014 total pretax charges approximately 1500 expect approximately 1300 130 0 included operating results ultrasound medical imaging security technology segments respectively expense income net total expense income net fiscal year 2013 consisted primarily foreign currency transaction exchange losses foreign subsidiaries 1546 total income expense net fiscal year 2012 consisted income approximately 350 resolution obligations former facility third quarter fiscal year 2012 gain sale investments fiscal year 2012 due 2500 sale 25 equity interest chinabased affiliate book value investment written 0 fiscal year ended july 31 2006 refer fiscal year 2006 income 1204 consisted primarily foreign currency transaction exchange gains foreign subsidiaries provision income taxes effective tax rate fiscal year 2013 lower statutory rate 35 due primarily reversal tax reserves us federal state tax returns result expiration applicable statutes limitations 638 including interest impact retroactive extension us rd credit 466 ongoing benefits us rd credits us deductions manufacturing activity lower foreign tax rates compared us statutory rate 35 effective tax rate fiscal year 2012 3 due primarily discrete benefit 10025 completion irs tax audit resulted refund including related interest reversal remeasurement related tax reserves 2308 decrease effective rate fiscal year 2012 benefits partially offset unfavorable impact expiration us rd credit december 31 2011 income continuing operations diluted net income per share continuing operations income operations diluted net income per share operations fiscal years 2013 2012 follows decrease net income fiscal year 2013 versus prior year primarily due income fiscal year 2012 related benefit irs refund 7311 net associated costs pretax gain 2500 sale equity investment fiscal year 2012 offset improvements operating results fiscal year 2013 fiscal year 2012 compared fiscal year 2011 net revenue product revenue product revenue fiscal year 2012 compared fiscal year 2011 summarized table medical imaging increase fiscal year 2012 versus prior year primarily reflects growth mri digital mammography product lines driven higher sales volume existing products increase offset part fewer shipments ct product line due primarily customer ordering patterns lower sales motion control products reflecting decline semiconductor market sale subsidiary motion control business fourth quarter fiscal year 2011 ultrasound increase fiscal year 2012 versus prior year due primarily increased sales flex focus platform products us expanded sales force internationally direct sales force distributor network also contributing increase acquisition oem ultrasound transducer business second quarter fiscal year 2011 security technology increase fiscal year 2012 versus prior year due primarily increased sales baggage scanners driven demand new high speed small footprint systems well growth demand medium speed systems engineering revenue engineering revenue fiscal year 2012 compared fiscal year 2011 summarized table medical imaging increase fiscal year 2012 versus prior year due primarily increased work customer funded engineering projects timing project milestones completed security technology decrease fiscal year 2012 versus prior year due primarily timing work performed significant development project large oem customer gross margin product gross margin product gross margin fiscal year 2012 compared fiscal year 2011 summarized table product gross margin increased fiscal year 2012 versus prior year due primarily improved gross margin ultrasound security technology segments partially offset decline gross margin medical imaging segment improvement ultrasound segment driven cost savings following consolidation manufacturing operations end fiscal year 2011 growth overall sales volume well increase shipments highermargin premium systems improvement security technology segment driven favorable product mix higher sales volume medical imaging segment decline driven vendor component quality issues digital mammography business unfavorable product mix engineering gross margin engineering gross margin fiscal year 2012 compared fiscal year 2011 summarized table decreases engineering gross profit engineering gross margin fiscal year 2012 versus prior year due primarily mix engineering projects worked security technology segment fiscal year 2012 compared prior year also contributing decrease gross margin increase sharebased cashbased incentive compensation improved operating results operating expenses operating expenses increased 994 less 1 fiscal year 2012 compared fiscal year 2011 shown research product development costs included operating expenses related projects funded customers expenses decreased 5895 fiscal year 2012 versus prior year due primarily cost savings work force reductions made throughout fiscal year 2011 well decreases consulting material costs less investment internally funded research product development projects selling marketing expenses increased 2825 fiscal year 2012 versus prior year due primarily new product launches increased trade show activity ultrasound segment general administrative expenses increased 11130 fiscal year 2012 versus prior year due primarily impact contingent consulting fees 2714 fiscal year 2012 related income tax refund related interest received period well increased sharebased cashbased incentive compensation costs 3530 improved operating results also contributing increase inquiry costs 1288 fiscal year 2012 related distributor matter bk medical favorable impact fiscal year 2011 acquisition bargain purchase gain included general administrative expenses 1042 increases partially offset 386 amortization intangible assets inventory fair value adjustment associated acquisition restructuring charges fiscal year 2011 included severance personnel related costs plan reduce headcount 155 employees worldwide restructuring related charges including actions associated acquisitions segment follows income expense net gain sale investments fiscal year 2012 due 2500 sale 25 equity interest chinabased affiliate book value investment written 0 fiscal year 2006 income expense net fiscal years 2012 2011 consisted primarily foreign currency exchange gains losses foreign subsidiaries denmark canada also contributing fiscal year 2012 income approximately 350 resolution obligations fit former facility provision income taxes effective income tax rate continuing operations based upon income year composition income different countries adjustments applicable quarterly periods potential tax consequences benefits resolutions tax audits tax contingencies effective tax rate fiscal year 2012 3 due primarily discrete benefit 10025 completion irs tax audit resulted refund including related interest reversal remeasurement related tax reserves 2308 decrease effective rate fiscal year 2012 benefits partially offset unfavorable impact expiration us rd credit december 31 2011 fiscal year 2011 effective tax rate 21 compared us statutory rate 35 due primarily full year benefit federal research experimentation credit discrete tax benefit 536 reinstatement federal research experimentation credit back january 1 2010 lower foreign tax rates compared us statutory rate 35 discrete benefit 599 reversal tax reserves result expiration statute limitations fiscal year ended july 31 2007 refer fiscal year 2007 settlements various taxing authorities addition taxes 621 related bargain purchase gain acquisition oem ultrasound transducer probe business recorded operating expenses fiscal year 2011 income continuing operations diluted net income per share continuing operations income continuing operations diluted net income per share continuing operations fiscal years 2012 2011 follows increase income continuing operations diluted net income per share continuing operations fiscal year 2012 versus prior year due primarily cost savings following consolidation manufacturing operations operational headcount reductions fiscal year 2011 also contributing increase gross profit increase sales volume fiscal year 2012 declines research product development costs restructuring charges income tax benefit refund related interest fiscal year 2012 gain sale equity interest fiscal year 2012 items partially offset increases selling marketing general administrative expenses discontinued operations discontinued operations fiscal year 2012 compared fiscal year 2011 summarized table first quarter fiscal year 2011 sold hotel business refer note 2 consolidated financial statements included report details liquidity capital resources key liquidity capital resources information summarized table includes approximately 49700 26500 cash equivalents held outside us july 31 2013 2012 respectively decrease cash equivalents july 31 2012 july 31 2013 due primarily purchase ultrasonix march 2013 approximately 79273 decrease working capital july 31 2012 july 31 2013 primarily driven decrease cash resulting acquisition ultrasonix decrease partially offset increase accounts receivable 10523 decreases accounts payable deferred revenue 11991 2445 respectively increase accounts receivable associated sales growth company fiscal year 2013 decrease accounts payable primarily due timing payments decrease deferred revenue result timing milestone payments engineering products medical imaging security technology segments cash equivalents july 31 2013 primarily consisted demand deposits highly rated banks financial institutions periodically review investment portfolio determine investments impaired due changes credit risk potential valuation concerns believe cash equivalents appropriately valued july 31 2013 july 31 2012 aware market events would impact valuation could change future new developments arise credit markets carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2013 due short maturities instruments cash flows following table summarizes sources uses cash periods indicated cash flows provided continuing operations operating activities fiscal year 2013 primarily reflects income continuing operations 44097 noncash charges depreciation amortization expenses 17275 share based compensation 11601 cash provided continuing operations operating activities largely offset increase inventory 2127 increase accounts receivable 10523 decrease accounts payable 11991 increase inventory partially attributable acquisition ultrasonix increase accounts receivable due primarily higher sales volumes three months ended july 31 2013 compared period fiscal year 2012 decrease accounts payable primarily due timing payments cash flows provided continuing operations operating activities fiscal year 2012 primarily reflects income continuing operations 44199 included noncash charges depreciation amortization 17775 sharebased compensation expense 13396 also contributing increase tax refund 12007 increases advance payments deferred revenue 5471 increase accrued income taxes 3850 increase accrued liabilities 3948 positive impact operating earnings cash flows partially offset increases accounts receivables inventories 8258 7206 respectively increase advance payments deferred revenue primarily due timing milestone payments engineering products medical imaging security technology segments increase accrued income taxes primarily due increased pretax earnings continuing operations fourth quarter fiscal year 2012 compared fourth quarter fiscal year 2011 increase accrued liabilities primarily due increase accrued cashbased incentive compensation due improved operating results increase accounts receivable due primarily increased revenue fourth quarter fiscal year 2012 compared fourth quarter fiscal year 2011 increase inventories primarily due increased demand across segments cash flows provided continuing operations operating activities fiscal year 2011 primarily reflects income continuing operations 20932 included depreciation amortization expenses 17798 noncash sharebased compensation expense 9638 positive impact operating earnings cash flows excluding noncash acquisitionrelated bargain purchase gain 1042 partially offset increases inventories accounts receivable 20550 17099 respectively net increases accounts payable accrued liabilities 12490 4078 respectively well decrease assets 2578 increase inventories 20550 due primarily demandrelated inventory increases planned increases ultrasound medical imaging inventories associated shift production denmark us china increase accounts receivable 17099 due primarily growth net revenue well increase unbilled receivables 5578 engineering projects due timing completing milestones increase accounts payable 12490 due primarily timing vendor payments increased inventory purchases increase accrued liabilities 4078 due primarily restructuring charges 7066 partially offset payments made restructuring charges net cash used continuing operations investing activities fiscal year 2013 driven march 2013 acquisition ultrasonix 79273 purchases property plant equipment 25551 facility state college pennsylvania well global manufacturing test capacity infrastructure investments support growth net cash used continuing operations investing activities fiscal year 2012 due primarily purchases property plant equipment 30606 approximately 15629 relates construction manufacturing facility shanghai china purchase facility state college pennsylvania capital spending partially offset proceeds 2500 received sale 25 equity interest chinabased affiliate fiscal year 2012 net cash used continuing operations investing activities fiscal year 2011 due primarily purchases property plant equipment 22430 approximately 6200 relates construction manufacturing facility shanghai china uses cash partially offset net proceeds 10467 sale hotel business net cash used financing activities fiscal year 2013 primarily reflects 7945 used repurchase common stock 4661 shares surrendered taxes paid related vested employee restricted stock 5114 dividends paid shareholders partially offset 4684 proceeds related issuance stock primarily exercise employee stock options 2053 excess tax benefit sharebased compensation net cash used financing activities fiscal year 2012 primarily reflected 23260 used repurchase common stock 4980 dividends paid stockholders net cash used financing activities fiscal year 2011 primarily reflected 15187 used repurchase common stock 5154 dividends paid stockholders believe balances cash equivalents cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2013 effect obligations expected liquidity cash flows future periods follows restructuring fiscal year 2013 incurred restructuring charges manufacturing consolidation restructuring efforts seek optimize overall operational footprint detailed description restructuring efforts including plan consolidate facilities please refer note 5 consolidated financial statements included report related party transactions july 25 2011 entered agreement sell 25 interest chinabased affiliate 2500 book value interest chinabased affiliate written 0 fiscal year 2006 upon final approval transaction chinese government receipt proceeds recorded gain sale investments 2500 fiscal year 2012 july 31 2011 net advance payment deferred revenue balance 474 former chinabased affiliate sales chinabased affiliate fiscal years 2012 2011 approximately 0 2808 respectively april 2010 invested 1900 pocketsonics startup company proprietary ultrasound technology expensed 898 1547 2438 engineering services startup company fiscal years 2013 2012 2011 respectively financing arrangements october 11 2011 entered 100 million fiveyear revolving credit agreement “credit agreement” financial institutions identified therein lenders included sovereign bank td bank na hsbc bank usa national association credit agreement guaranteed material domestic subsidiaries designated us time required credit agreement supported pledge 65 capital stock equity equivalents principal international subsidiary credit facility require amortization principal may reduced maturity whole part option without penalty borrowings credit agreement may used general corporate purposes including permitted acquisitions amount facility increased specified circumstances 150000 aggregate sole borrower credit agreement interest rates borrowings outstanding credit facility would range 125 200 libor rate elect libor rate 000 100 defined base rate highest 1 prime rate 2 federal funds rate plus 050 3 onemonth libor plus 1 case based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits us subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters ebitda greater 275100 time • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2013 leverage ratio 0005 interest coverage ratio applicable attributable interest expense july 31 2013 full compliance financial operating covenants failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control us defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility incurred approximately 500 transactions costs expensed fiveyear life credit facility funding commitments currently also approximately 12025 revolving credit facilities banks available direct borrowings connection acquisition ultrasonix assumed 784 debt certain credit facility paid july 31 2013 addition debt assumed borrowed 2230 credit facility fiscal year 2013 paid july 31 2013 borrowings outstanding credit facilities july 31 2013 july 31 2012 tax related obligations 7256 unrecognized tax benefits uncertain tax positions 682 million related accrued interest penalties unable reasonably estimate amount period liabilities might paid note 16 consolidated financial statements provide additional information regarding matters relating income taxes including unrecognized tax benefits impact investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice refer doj sec cooperating inquiries danish government doj sec unable estimate potential penalties andor sanctions might assessed connection matters concluded transactions identified date properly accounted reported financial statements material respects fiscal year 2013 incurred inquiryrelated costs approximately 1211 connection matter compared 1288 fiscal year 2012 terminated employment certain bk medical employees wound relationships bk medical distributors involved transactions incurred employee termination costs 0 400 respectively connection matter fiscal years 2013 2012 revenue sales bk medical distributors wound bk medical’s relationship represented less 02 total revenue fiscal year 2013 compared less 13 total revenue fiscal year 2012 recent accounting pronouncements recently adopted presentation comprehensive income june 2011 financial accounting standards board “fasb” issued update accounting comprehensive income increase prominence items reported comprehensive income facilitate convergence us gaap international financial reporting standards “ifrs” update requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements update change items must reported comprehensive income item comprehensive income must reclassified net income furthermore update affect earnings per share calculated presented update effective annual periods beginning december 15 2011 periods thereafter applied retrospectively adoption update impact financial condition results operations comprehensive income january 2013 fasb issued update seeks improve reporting reclassifications accumulated comprehensive income requiring entity report effect significant reclassifications accumulated comprehensive income respective line items net income amount reclassified required us gaap reclassified entirety net income amounts required us gaap reclassified entirety net income reporting period entity required crossreference disclosures required us gaap provide additional detail amounts update effective annual interim reporting periods beginning december 15 2012 adopted standard third quarter fiscal year 2013 information presented note 21 annual report form 10k adoption standard impact financial condition results operations yet effective testing indefinitelived intangible assets impairment july 2012 fasb issued update regarding testing indefinitelived intangible assets impairment update gives entity option first assess qualitative factors determine whether existence events circumstances indicates likely indefinitelived intangible asset impaired assessing totality events circumstances entity concludes likely indefinitelived intangible asset impaired entity required take action however entity concludes otherwise required determine fair value indefinitelived intangible asset perform quantitative impairment test comparing fair value carrying amount entity also option bypass qualitative assessment indefinitelived intangible asset period proceed directly performing quantitative impairment test entity able resume performing qualitative assessment subsequent period guidance effective interim period ending october 31 2013 expected impact financial condition results operations early adoption permitted foreign currency matters march 2013 fasb issued update amends guidance foreign currency matters consolidations address diversity practice related release cumulative translation adjustments “cta” earnings upon occurrence certain derecognition events update reflects compromise cta release guidance included within foreign currency matters loss control concepts included within consolidation guidance precludes release cta derecognition events occur within foreign entity unless events represent complete substantially complete liquidation foreign entity derecognition events related investments foreign entity result release cta related derecognized foreign entity even noncontrolling financial interest retained update also amends guidance business combinations transactions result company obtaining control business step acquisition increasing investment foreign entity one accounted equity method one accounted consolidated investment update effective fiscal years beginning december 15 2013 update applied prospectively prior periods adjusted update expected impact financial condition results operations early adoption permitted beginning entity’s fiscal year presentation unrecognized tax benefits july 2013 fasb issued update intended eliminate diversity practice regard financial statement presentation unrecognized tax benefits net operating loss carryforward similar tax loss tax credit carryforward exists guidance effective interim period ending january 31 2014 adoption update expected material impact consolidated financial statements critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies refer note 1 summary business operations significant accounting policies notes consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition provide engineering services customers contractual basis recognize revenue using percentage completion method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed allocation consideration multiple element revenue arrangements allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vendor specific objective evidence “vsoe” exists otherwise third party evidence “tpe” neither vsoe tpe selling price exists unit accounting use estimated selling price “esp” generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available esp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use esp allocation arrangement consideration objective esp determine price would transact product service sold us standalone basis determination esp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold inventory value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory technological obsolescence actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed inventory includes demo equipment utilized sales force field inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence sharebased compensation sharebased compensation plans include stock options restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned optionpricing models generally accepted valuation techniques value restricted stock awards market conditions require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving future company financial targets personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize warranty reserves estimate costs product warranties based specific warranty claims historical data engineering estimates applicable warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable business combinations account acquired businesses using acquisition method accounting requires limited exceptions assets acquired liabilities assumed recognized estimated fair values acquisition date transaction costs expensed incurred excess consideration transferred fair values net assets acquired recorded goodwill methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies impairment goodwill indefinite lived intangible assets evaluate goodwill indefinite lived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing internal valuation analyses consider market approach income approach goodwill relief royalty approach indefinite lived intangible assets market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows relief royalty approach fair value indefinite lived intangible asset based tax royalty rate discount rate applied future forecasted sales second quarter fiscal year 2013 completed annual impairment testing goodwill indefinite lived intangible assets using methodologies described herein determined impairment valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations income tax contingencies income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions deferred tax valuation allowances required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent likely portion deferred tax assets realized valuation allowance must established effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings came results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends rd expenses trends capital expenditures make document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results refer “risk factors” item 1a discussion primary risks uncertainties known us time management’s discussion analysis presented seven sections follows • business overview • fiscal year 2014 financial highlights • results operations • liquidity capital resources • impact investigation regarding danish subsidiary • recent accounting pronouncements • critical accounting policies report financial condition results operations fiscal year basis ending july 31 business overview analogic high technology company designs manufactures advanced medical imaging ultrasound security systems subsystems sold original equipment manufacturers oems end users primarily healthcare airport security markets business strategically aligned three segments medical imaging ultrasound security technology business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily urology surgery including robotic assisted surgery anesthesia pointofcare markets • security technology includes advanced threat detection ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide following table sets forth percentage total net revenue reporting segment fiscal years 2014 2013 2012 fiscal year 2014 financial highlights following table summary financial results fiscal years ended july 31 2014 2013 summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document fiscal year 2014 total net revenue decreased 6 compared prior year due primarily declines sales security technology medical imaging segments 15 7 respectively offset growth sales ultrasound segment 2 fiscal year 2014 gross profit gross margin improved fiscal year 2014 versus prior year due shift mix lower margin oem product engineering revenues higher margin direct sales within ultrasound business higher average selling prices period efficient manufacturing operations shanghai china montreal canada gross margin improvements partially offset amortization fair value stepup adjustments inventory associated march 2013 acquisition ultrasonix income operations decreased 36 fiscal year 2014 prior year due primarily 6 decline revenues increase operating expenses lower customerfunded engineering projects full year effect acquisition ultrasonix partially offset gross profit margin improvement along cost reduction actions taken fiscal year fiscal year 2014 incurred pretax restructuring charges 35 million 29 million primarily related severance personnel related costs 48 involuntarily terminated employees 2014 restructuring plan recognized consolidated statement operations restructuring september 2013 acquired remaining stock pocketsonics privately held ultrasound technology company based charlottesville virginia purchase price included base consideration 111 million paid cash closing fair value contingent consideration 19 million revaluation initial equity investment undertook acquisition strengthen competitive position procedure guidance pointofcare advanced guidance applications acquisition funded existing cash hand accounted acquisition business results operations fiscal year 2014 compared fiscal year 2013 net revenue product revenue product revenue fiscal year 2014 compared fiscal year 2013 summarized table medical imaging fiscal year 2014 medical imaging product revenue decreased 143 million versus prior comparable period 136 million resulted exit legacy patient monitoring product line end fiscal year 2013 ultrasound fiscal year 2014 ultrasound product revenue increased 27 million versus prior year comparable period mainly driven higher sales direct sales channel including primary markets urology surgery well expansion pointofcare market following march 2013 acquisition ultrasonix revenue products acquired acquisition ultrasonix represented 237 million 101 million fiscal year 2014 fiscal year 2013 respectively increases sales direct channel largely offset 90 million lower oem ultrasound probe sales fiscal year 2014 fulfillment delays related order timing security technology fiscal year 2014 security technology product revenue decreased 57 million versus prior year comparable period primarily driven fewer sales highspeed threat detection systems largely delays government tenders outside us partially offset greater demand mediumspeed threat detection systems primarily us market engineering revenue engineering revenue fiscal year 2014 compared fiscal year 2013 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability medical imaging 87 million decrease engineering revenue fiscal year 2014 versus prior year comparable periods due primarily winding certain customerfunded engineering projects products complete development phase prior movement production addition increasing development base platforms enable scalable solutions oems bring market quickly less upfront development cost resulted increase product gross margin corresponding decrease customerfunded engineering projects security technology 69 million decrease engineering revenue fiscal year 2014 versus prior year comparable periods due primarily timing customerfunded engineering projects gross margin product gross margin product gross margin fiscal year 2014 compared fiscal year 2013 summarized table improvement product gross margin fiscal year 2014 versus prior year comparable period due primarily shift product mix lower margin oem sales higher margin direct sales within ultrasound business higher average selling prices period efficient manufacturing operations shanghai china montreal canada gross margin also improved fiscal year 2014 due lower purchase accounting fair value adjustments inventory associated march 2013 acquisition ultrasonix engineering gross margin engineering gross margin fiscal year 2014 compared fiscal year 2013 summarized table decrease engineering gross profit fiscal year 2014 versus prior year comparable period result lower engineering revenue customerfunded engineering projects completed development phase moving production engineering gross margin remained consistent compared prior year comparable period operating expenses operating expenses summarized follows operating expenses fiscal year 2014 increased 193 million 113 versus prior year comparable period research product development expenses increased 98 million fiscal year 2014 versus prior year comparable period due reduction customerfunded engineering projects resulted increase 71 million expenses additionally 25 million attributable incremental engineering expenses resulting march 2013 acquisition ultrasonix 07 million attributable severance period decreased headcount related expenses fiscal year 2014 align resources expected customer funded engineering requirements selling marketing expenses increased 79 million fiscal year 2014 versus prior year comparable period due primarily 92 million incremental pointofcare sales marketing expenses resulting march 2013 acquisition ultrasonix offset reduction performancebased compensation expense general administrative expenses increased 16 million fiscal year 2014 versus prior year comparable period primarily due general administrative expenses 12 million attributable inclusion ultrasonix operating results approximately 14 million incremental depreciation expense 13 million incremental accounting legal costs including 02 million incremental bk medical inquiry costs increases partially offset reduction 24 million performancebased compensation expense fiscal year 2014 restructuring plan fourth quarter fiscal year 2014 incurred pretax charges 29 million primarily relating severance personnel related costs 48 involuntarily terminated employees associated restructuring activities including optimization operations peabody massachusetts recognized consolidated statement operations restructuring 29 million charge recorded operating results medical imaging ultrasound security technology segments charges 19 million 05 million 05 million respectively fiscal year 2013 restructuring plan fiscal year 2013 completed acquisition issued outstanding shares capital stock ultrasonix medical corporation nevada corporation customer lists intangibles related solely sales destined us ii outstanding equity securities ultrasonix medical corporation refer ultrasonix privately held company located vancouver canada pursuant “plan arrangement” canadian law ultrasonix supplier advanced ultrasound systems pointofcare general imaging applications 5000 systems installed worldwide undertook acquisition accelerate expansion pointofcare ultrasound market purchase price net cash acquired 799 million finalized july 2013 fiscal year 2013 incurred pretax charges 35 million primarily relating severance personnel related costs 115 involuntarily terminated employees well facility exit costs associated restructuring activities including consolidation manufacturing certain support activities currently conducted ultrasonix facility vancouver operations existing facilities closure ultrasonix sales subsidiary paris france transition costs associated planned closure englewood colorado facility consolidated manufacturing development activities state college pennsylvania facility optimization operations montreal canada peabody massachusetts recognized consolidated statement operations restructuring pretax charges included operating results medical imaging segment ultrasound segment security technology segment fiscal year 2014 incurred additional 06 million restructuring related charges respect fiscal year 2013 restructuring plan related facility exit costs total pretax charges 06 million incurred 02 million 09 million 01 million included operating results medical imaging ultrasound security technology segments respectively restructuring related charges including actions associated acquisitions segment follows expense net total expenses net fiscal year 2014 primarily comprised interest income net 03 million recognition 05 million loss related 10 preacquisition equity interest pocketsonics recognized upon completion acquisition remaining equity pocketsonics september 2013 please refer note 3 business combinations consolidated financial statements included report information acquisition total expenses net fiscal year 2013 predominantly comprised 15 million foreign currency transaction exchange losses primarily foreign subsidiaries denmark china provision income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2014 2013 effective income tax rate based upon composition income different countries adjustments applicable quarterly periods tax consequences benefits resolutions tax audits tax contingencies discrete items effective tax rate discrete items fiscal year 2014 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2014 includes certain discrete tax benefits totaling 129 million discrete tax benefit fiscal year 2014 consists primarily reduction net deferred tax liability 88 million associated change classification canadian operations 27 million benefit associated us deduction historical currency losses incurred result operating offshore nonfunctional currency 1 million reduction uncertain tax positions primarily associated federal tax credits research development rd credits following conclusion internal revenue service irs review fiscal year 2009 along 04 million items effective tax rate fiscal year 2013 lower statutory rate 35 due primarily reversal tax reserves us federal state tax returns result expiration applicable statutes limitations 06 million including interest impact retroactive extension us rd credit 05 million ongoing benefits us rd credits us deductions manufacturing activity lower foreign tax rates compared us statutory rate 35 net income diluted net income per share net income diluted net income per share operations fiscal years 2014 2013 follows increase net income fiscal year 2014 versus prior year due net tax benefit income taxes fiscal year 2014 compared fiscal year 2013 offset lower income operations period due decrease customerfunded engineering projects increase operating expenses resulting fiscal year 2013 acquisition ultrasonix fiscal year 2013 compared fiscal year 2012 net revenue product revenue product revenue fiscal year 2013 compared fiscal year 2012 summarized table medical imaging fiscal year 2013 compared prior year product revenue increased 149 million largely due growing global demand highpower mri subsystems product revenue product lines segment flat overall compared prior year slight decrease ct sales offset increased sales mammography detectors ultrasound fiscal year 2013 compared prior year product revenue decreased 16 million lower oem transducer sales partially offset higher sales direct sales channel sales direct channel included 101 million revenue ultrasonix products following march 2 2013 acquisition ultrasonix apart incremental revenues following ultrasonix acquisition revenue direct channel lower compared prior year due weakness ultrasound market well temporary sales force disruption related continued sales force expansion well channel integration following acquisition ultrasonix security technology fiscal year 2013 compared prior year product revenue increased 188 million due strong shipments highspeed threat detection systems demand ctbased explosives threat detection grew outside us shipments included increased sales highspeed systems l3 well initial shipments highspeed systems smiths following regulatory approval fiscal year 2013 highspeed system incorporating ctbased detection technology engineering revenue engineering revenue fiscal year 2013 compared fiscal year 2012 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability medical imaging increase fiscal year 2013 versus prior year primarily due increased work customerfunded engineering projects ultrasound increase fiscal year 2013 versus prior year primarily due work customerfunded engineering project security technology decrease fiscal year 2013 versus prior year due primarily timing work performed security technology development projects gross margin product gross margin product gross margin fiscal year 2013 compared fiscal year 2012 summarized table product gross profit increased significantly fiscal year 2013 versus prior year comparable period due higher volume along global manufacturing process cost improvements three business segments increased product gross profit driven increased gross profit 125 million higher product revenue lower scrap production rework costs improved vendor component quality inspection process digital mammography product line approximately 41 million lower manufacturing costs following consolidation manufacturing operations approximately 39 million cost savings approximately 30 million ramp production lower cost shanghai operation opened latter half fiscal 2012 partially offsetting lower costs amortization intangible assets fair value inventory stepup adjustment 30 million relating acquisition ultrasonix engineering gross margin engineering gross margin fiscal year 2013 compared fiscal year 2012 summarized table increase engineering gross margin fiscal year 2013 versus prior year comparable period primarily due mix engineering projects worked period well impact performancebased equity cash incentive compensation directly related changes operating results operating expenses operating expenses summarized follows operating expenses fiscal year 2013 increased 181 million 118 versus prior year comparable period research product development expenses increased fiscal year 2013 versus prior year comparable period primarily due approximately 53 million incremental internal contract personnel related expenses internallyfunded research product development projects addition approximately 15 million research development costs ultrasonix following march 2013 acquisition selling marketing expenses increased fiscal year 2013 versus prior year comparable period primarily result acquisition ultrasonix march 2013 acquisition ultrasonix added approximately 53 million selling marketing expenses fiscal year 2013 also added selling marketing expenses approximately 17 million related expansion existing sales force north america general administrative expenses increased fiscal year 2013 versus prior year comparable period due primarily approximately 11 million partialyear operating expenses ultrasonix vancouver canada facility following march 2013 acquisitions 12 million acquisitionrelated expenses 10 million incremental audit costs 04 million associated medical device tax patient protection affordable care act went effect fiscal year 2013 partially offset decrease approximately 27 million contingent consulting related income tax refund related interest received fiscal year 2012 march 2013 completed acquisition issued outstanding shares capital stock ultrasonix medical corporation nevada corporation customer lists intangibles related solely sales destined us ii outstanding equity securities ultrasonix medical corporation refer ultrasonix privately held company located vancouver canada pursuant “plan arrangement” canadian law ultrasonix supplier advanced ultrasound systems pointofcare general imaging applications 5000 systems installed worldwide undertook acquisition accelerate expansion pointofcare ultrasound market purchase price net cash acquired 799 million fiscal year 2013 incurred pretax charges 35 million primarily relating severance personnel related costs 115 employees involuntarily terminated ultrasonix manufacturing consolidation transition costs begin closure englewood facility optimization global operations charges approved plan restructuring recognized consolidated statement operation restructuring fiscal year 2013 restructuring related charges including actions associated acquisitions segment follows expense income net total expense net fiscal year 2013 consisted primarily foreign currency transaction exchange losses foreign subsidiaries 15 million total income net fiscal year 2012 consisted income approximately 04 million resolution obligations former facility third quarter fiscal year 2012 gain sale investments fiscal year 2012 25 million sale 25 equity interest chinabased affiliate book value investment written 0 fiscal year 2006 income 12 million consisted primarily foreign currency transaction exchange gains foreign subsidiaries provision income taxes effective income tax rate based upon composition income different countries adjustments applicable quarterly periods tax consequences benefits resolutions tax audits tax contingencies discrete items effective tax rate fiscal year 2013 lower statutory rate 35 due primarily reversal tax reserves us federal state tax returns result expiration applicable statutes limitations 06 million including interest onetime impact retroactive extension us rd credit 05 million ongoing benefits us rd credits us deductions manufacturing activity lower foreign tax rates compared us statutory rate 35 effective tax rate fiscal year 2012 3 due primarily discrete benefit 100 million receipt irs tax refund including related interest reversal remeasurement related tax reserves 23 million decrease effective rate fiscal year 2012 partially offset unfavorable impact expiration us rd credit december 31 2011 net income diluted net income per share net income diluted net income per share fiscal years 2013 2012 follows decrease net income fiscal year 2013 versus prior year comparable period primarily due income fiscal year 2012 related benefit irs refund 73 million net associated costs pretax gain 25 million sale equity investment fiscal year 2012 offset improvements operating results fiscal year 2013 liquidity capital resources key liquidity capital resources information summarized table includes approximately 579 million 497 million cash equivalents held outside us july 31 2014 2013 respectively increase cash equivalents july 31 2013 july 31 2014 due primarily net income period collection receivables partially offset net cash payment 106 million acquisition pocketsonics september 2013 purchases property plant equipment 175 million existing cash hand increase stockholder’s equity july 31 2013 july 31 2014 primarily driven recorded net income period cash equivalents july 31 2014 july 31 2013 primarily consisted demand deposits highly rated banks financial institutions believe cash equivalents appropriately valued july 31 2014 july 31 2013 aware market events would impact valuation could change future new developments arise credit markets carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2014 due shortterm maturities instruments revolving credit facilities 104 million available direct borrowings outstanding credit facilities july 31 2014 2013 details surrounding revolving credit facilities please refer commitments contractual obligations offbalance sheet arrangements section cash flows following table summarizes sources uses cash periods indicated operating activities cash flows provided operating activities fiscal year 2014 primarily reflects net income 345 million noncash charge depreciation amortization 221 million decrease accounts receivable 66 million offset increase inventory 123 million related increase safety stock consolidate manufacturing operations following acquisition ultrasonix support new product launches cash flows provided operating activities fiscal year 2013 primarily reflects net income 311 million noncash charges depreciation amortization expenses 173 million increase net working capital increase working capital fiscal year 2012 fiscal year 2013 mainly due increase accounts receivable 105 million due primarily higher sales volumes three months ended july 31 2013 compared period fiscal year 2012 increase inventory 21 million acquisition ultrasonix increase accounts payable 120 million cash flows provided operating activities fiscal year 2012 primarily reflects net income 431 million noncash charges depreciation amortization 178 million net decrease working capital 25 million also contributing increase tax refund 120 million investing activities net cash used investing activities fiscal year 2014 primarily driven acquisition pocketsonics net cash acquired 106 million well purchases property plant equipment 175 million capital expenditures primarily related infrastructure test equipment investments support growth lower compared last two fiscal years due completion infrastructure investments associated facilities state college pennsylvania shanghai china net cash used investing activities fiscal year 2013 driven march 2013 acquisition ultrasonix 793 million purchases property plant equipment 256 million facility state college pennsylvania well global manufacturing test capacity infrastructure investments support growth net cash used investing activities fiscal year 2012 due primarily purchases property plant equipment 306 million approximately 156 million relates construction manufacturing facility shanghai china purchase facility state college pennsylvania capital spending partially offset proceeds 25 million received sale 25 equity interest chinabased affiliate fiscal year 2012 financing activities net cash used financing activities fiscal year 2014 primarily reflected 150 million used repurchase common stock 77 million shares surrendered taxes paid related vested employee restricted stock 50 million dividends paid shareholders partially offset cash received associated exercise stock options employee stock purchase plan 54 million net cash used financing activities fiscal year 2013 primarily reflects 79 million used repurchase common stock 47 million shares surrendered taxes paid related vested employee restricted stock 51 million dividends paid shareholders partially offset 47 million proceeds related issuance stock primarily exercise employee stock options 21 million excess tax benefit sharebased compensation net cash used financing activities fiscal year 2012 primarily reflected 233 million used repurchase common stock 50 million dividends paid stockholders believe balances cash equivalents cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2014 effect obligations expected liquidity cash flows future periods follows restructuring fiscal year 2014 fiscal year 2013 incurred restructuring charges improving operational effectiveness better leverage core competencies across business detailed description restructuring efforts including plan consolidate facilities please refer note 4 consolidated financial statements included report related party transactions july 25 2011 entered agreement sell 25 interest chinabased affiliate 25 million book value interest chinabased affiliate written 0 fiscal year 2006 upon final approval transaction chinese government receipt proceeds recorded gain sale investments 25 million fiscal year 2012 sales chinabased affiliate 0 fiscal year 2012 april 2010 invested 19 million pocketsonics startup company proprietary ultrasound technology prior acquisition remaining equity pocketsonics expensed 09 million 15 million engineering services startup company fiscal years 2013 2012 respectively see note 3 business acquisitions discussion financing arrangements october 11 2011 entered 1000 million fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included santander bank td bank na hsbc bank usa national association credit agreement guaranteed material domestic subsidiaries designated us time required credit agreement supported pledge 65 capital stock equity equivalents principal international subsidiary credit facility require amortization principal may reduced maturity whole part option without penalty borrowings credit agreement may used general corporate purposes including permitted acquisitions amount facility increased specified circumstances 1500 million aggregate sole borrower credit agreement interest rates borrowings outstanding credit facility would range 125 200 libor rate elect libor rate 000 100 defined base rate highest 1 prime rate 2 federal funds rate plus 050 3 onemonth libor plus 1 case based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters ebitda greater 275100 time • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2014 leverage ratio 0003 interest coverage ratio applicable attributable interest expense july 31 2014 full compliance financial operating covenants failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control us defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility incurred approximately 05 million transactions costs expensed fiveyear life credit facility currently approximately 44 million revolving credit facilities banks available direct borrowings outstanding credit facilities july 31 2014 2013 tax related obligations 69 million unrecognized tax benefits uncertain tax positions 06 million related accrued interest penalties unable reasonably estimate amount period liabilities might paid note 15 consolidated financial statements included annual report form 10k provide additional information regarding matters relating income taxes including unrecognized tax benefits asset retirement obligations ultimate cost restoring leased facilities difficult predict given uncertainties regarding extent required restoration interpretation applicable laws regulations based upon experience current information applicable laws believe probable incur costs including asset retirement obligations approximately 11 million july 31 2014 included “other liabilities” consolidated balance sheet accruals recorded without giving effect possible future insurance proceeds note 11 consolidated financial statements provides additional information regarding environmental matters including asset retirement obligations impact investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving danish subsidiary bk medical aps bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors terminated employment certain bk medical employees wound relationships bk medical distributors involved transactions concluded transactions identified date properly accounted reported financial statements material respects however unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice doj sec cooperating inquiries danish government doj sec believe sec doj substantially completed investigation transactions issue reasonably likely one entities may seek impose sanctions andor penalties us connection resolution inquiries unable estimate potential penalties andor sanctions may ultimately assessed fiscal year 2014 incurred inquiryrelated costs approximately 14 million connection matter compared 12 million fiscal year 2013 recent accounting pronouncements recently adopted testing indefinitelived intangible assets impairment july 2012 financial accounting standards board fasb issued update regarding testing indefinitelived intangible assets impairment update gives entity option first assess qualitative factors determine whether existence events circumstances indicates likely indefinitelived intangible asset impaired assessing totality events circumstances entity concludes likely indefinitelived intangible asset impaired entity required take action however entity concludes otherwise required determine fair value indefinitelived intangible asset perform quantitative impairment test comparing fair value carrying amount entity also option bypass qualitative assessment indefinitelived intangible asset period proceed directly performing quantitative impairment test entity able resume performing qualitative assessment subsequent period guidance effective interim period ended october 31 2013 adopted standard first quarter fiscal year 2014 adoption standard material impact financial condition results operations presentation unrecognized tax benefits july 2013 fasb issued update intended eliminate diversity practice regard financial statement presentation unrecognized tax benefits net operating loss carryforward similar tax loss tax credit carryforward exists guidance effective interim period ending january 31 2014 adopted standard first quarter fiscal year 2014 presented information note 15 consolidated financial statements included annual report form 10k adoption standard material impact financial condition results operations yet effective revenue contracts customers may 2014 fasb issued update provides guidance revenue recognition update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition requirement industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates current guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update effective us first quarter fiscal year 2018 early adoption permitted currently evaluating impact adoption update consolidated financial statements foreign currency matters march 2013 fasb issued update amends guidance foreign currency matters consolidations address diversity practice related release cumulative translation adjustments “cta” earnings upon occurrence certain derecognition events update reflects compromise cta release guidance included within foreign currency matters loss control concepts included within consolidation guidance precludes release cta derecognition events occur within foreign entity unless events represent complete substantially complete liquidation foreign entity derecognition events related investments foreign entity result release cta related derecognized foreign entity even noncontrolling financial interest retained update also amends guidance business combinations transactions result company obtaining control business step acquisition increasing investment foreign entity one accounted equity method one accounted consolidated investment update effective fiscal years beginning december 15 2013 update applied prospectively prior periods adjusted update expected impact financial condition results operations early adoption permitted beginning entity’s fiscal year critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies refer note 1 summary business operations significant accounting policies consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition provide engineering services customers contractual basis recognize revenue using percentage completion method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed allocation consideration multiple element revenue arrangements allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vendor specific objective evidence vsoe exists otherwise third party evidence tpe neither vsoe tpe selling price exists unit accounting use best estimated selling price besp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available besp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use besp allocation arrangement consideration objective besp determine price would transact product service sold us standalone basis determination besp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold inventory value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based age inventory lower cost market along significant management judgments concerning future demands inventory technological obsolescence actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed inventory includes demo equipment utilized sales force field inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence sharebased compensation sharebased compensation plans include stock options restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned optionpricing models generally accepted valuation techniques value restricted stock awards market conditions require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving future company financial targets personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize warranty reserves estimate costs product warranties based specific warranty claims historical data engineering estimates applicable warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable business combinations account acquired businesses using acquisition method accounting requires assets acquired liabilities assumed recognized estimated fair values acquisition date transaction costs expensed incurred excess consideration transferred fair values identifiable net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies impairment goodwill indefinite lived intangible assets evaluate goodwill indefinite lived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing valuation analyses consider market approach income approach goodwill relief royalty approach indefinite lived intangible assets market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows relief royalty approach fair value indefinite lived intangible asset based tax royalty rate discount rate applied future forecasted sales second quarter fiscal year 2014 completed annual impairment testing goodwill indefinite lived intangible assets using methodologies described herein determined impairment valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations income tax contingencies income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions deferred tax valuation allowances required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent likely portion deferred tax assets realized valuation allowance must established effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings came results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends rd expenses trends capital expenditures make document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results refer “risk factors” item 1a discussion primary risks uncertainties known us time management’s discussion analysis presented seven sections follows • business overview • fiscal year 2015 financial highlights • results operations • liquidity capital resources • impact investigation regarding danish subsidiary • recent accounting pronouncements • critical accounting policies report financial condition results operations fiscal year basis ending july 31 business overview analogic high technology company designs manufactures advanced medical imaging ultrasound security systems subsystems sold original equipment manufacturers oems end users primarily healthcare airport security markets business strategically aligned three segments medical imaging ultrasound security detection business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily urology surgery including robotic assisted surgery anesthesia pointofcare markets • security detection includes advanced threat detection ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide following table sets forth percentage total net revenue reporting segment fiscal years 2015 2014 2013 fiscal year 2015 financial highlights following table summary financial results fiscal years ended july 31 2015 2014 summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document fiscal year 2015 total net revenue increased 4 compared prior year primarily increase sales ultrasound security detection segments 9 17 respectively offset decline sales medical imaging segment 1 fiscal year 2015 gross profit increased 4 result higher revenues gross margin remained consistent fiscal year 2015 compared prior year consistent margin mostly due manufacturing efficiency volume offset foreign exchange effects also due changes product mix income operations increased 40 fiscal year 2015 prior year due primarily 4 increase revenues decline operating expenses due cost reduction actions taken research development spending savings due reduced headcount offset increases incentive compensation sales marketing spending operating expenses also include 10 million charge settlement proposal sec related danish subsidiary bk medical october 2014 acquired certain assets assumed certain liabilities related surgical planning guidance business pathfinder 16 million paid cash acquisition date acquisition funded existing cash hand accounted acquisition business outlook fiscal 2016 expect continued midsingle digit revenue growth combined focus cost control results operations fiscal year 2015 compared fiscal year 2014 net revenue product revenue product revenue fiscal year 2015 compared fiscal year 2014 summarized table medical imaging fiscal year 2015 medical imaging product revenue decreased 27 million versus prior comparable period due reduction mri revenues partially offset higher ct revenues ultrasound fiscal year 2015 ultrasound product revenue increased 113 million versus prior year comparable period due continued growth direct sales north america additionally successfully introduced shipped early production units tricore™ based flagship bk3000™ systems security detection fiscal year 2015 security detection product revenue increased 13 million versus prior year comparable period primarily driven sales growth highspeed threat detection systems engineering revenue engineering revenue fiscal year 2015 compared fiscal year 2014 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability medical imaging 03 million decrease engineering revenue fiscal year 2015 versus prior year comparable periods due primarily timing customerfunded engineering projects ultrasound 24 million increase engineering revenue fiscal year 2015 versus prior comparable periods driven private label development expected begin shipments fiscal 2016 security detection 10 million decrease engineering revenue fiscal year 2015 versus prior year comparable periods due primarily timing customerfunded engineering projects gross margin product gross margin product gross margin fiscal year 2015 compared fiscal year 2014 summarized table gross margin fiscal year 2015 flat versus prior year comparable period reflective changes product mix efficient manufacturing operations partially offset impact unfavorable foreign currency engineering gross margin engineering gross margin fiscal year 2015 compared fiscal year 2014 summarized table engineering gross profit relatively flat fiscal year 2015 versus prior year comparable period operating expenses operating expenses summarized follows operating expenses fiscal year 2015 decreased 17 million 09 versus prior year comparable period research product development expenses decreased 54 million fiscal year 2015 versus prior year comparable period due cost reduction actions specifically reduction headcount resulted decrease 53 million expenses selling marketing expenses increased 43 million fiscal year 2015 versus prior year comparable period due primarily increased incentive compensation 34 million increase costs associated introduction new products 15 million offset staffing changes general administrative expenses increased 31 million fiscal year 2015 versus prior year comparable period driven higher incentive compensation costs accrued based fiscal year 2015 performance well 10 million charge settlement proposal sec related danish subsidiary bk medical fiscal year 2014 restructuring plan fourth quarter fiscal year 2014 incurred pretax charges 29 million primarily relating severance personnel related costs 48 involuntarily terminated employees associated restructuring activities including optimization operations peabody massachusetts recognized consolidated statement operations restructuring 29 million charge recorded operating results medical imaging ultrasound security detection segments charges 19 million 05 million 05 million respectively fiscal year 2015 adjustments 03 million restructuring respect fiscal year 2014 restructuring total adjustments 03 million 02 million 01 million 01 million included operating results medical imaging ultrasound security detection segments respectively fiscal year 2013 restructuring plan fiscal year 2014 incurred additional 06 million restructuring related charges respect fiscal year 2013 restructuring plan related facility exit costs total pretax charges 06 million incurred 02 million 09 million 01 million included operating results medical imaging ultrasound security detection segments respectively fiscal year 2015 adjusted restructuring 01 included operating results restructuring related charges including actions associated acquisitions segment follows expense net total expenses net fiscal year 2015 primarily comprised interest income net 01 million 06 million interest charge settlement proposal sec related danish subsidiary bk medical see “impact investigation regarding danish subsidiary” section netted foreign translation gains 07 million total expenses net fiscal year 2014 predominantly comprised interest income net 03 million recognition 05 million loss related 10 preacquisition equity interest pocketsonics recognized upon completion acquisition remaining equity pocketsonics september 2013 please refer note 3 business combinations consolidated financial statements included report information acquisition provision income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2015 2014 effective income tax rate based upon composition income different countries adjustments applicable quarterly periods tax consequences benefits resolutions tax audits tax contingencies discrete items effective tax rate discrete items fiscal year 2015 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2015 includes certain discrete tax benefits totaling 29 million discrete tax benefit fiscal year 2015 consists primarily 34 million reduction uncertain tax positions primarily associated expiration statute limitations 08 million benefit associated extension federal rd tax credit 03 million provision reduction domestic production deduction due filing nol carryback claim along 10 million provision items effective tax rate discrete items fiscal year 2014 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2014 includes certain discrete tax benefits totaling 129 million discrete tax benefit fiscal year 2014 consists primarily reduction net deferred tax liability 88 million associated change classification canadian operations 27 million benefit associated us deduction historical currency losses incurred result operating offshore nonfunctional currency 1 million reduction uncertain tax positions primarily associated federal tax credits research development rd credits following conclusion internal revenue service irs review fiscal year 2009 along 04 million items net income diluted net income per share net income diluted net income per share operations fiscal years 2015 2014 follows decrease net income fiscal year 2015 versus prior year due net tax benefits certain discrete tax items taken fiscal year 2014 totaling 129 million partially offset 29 million discrete tax benefits taken fiscal year 2015 fiscal year 2014 compared fiscal year 2013 net revenue product revenue product revenue fiscal year 2014 compared fiscal year 2013 summarized table medical imaging fiscal year 2014 medical imaging product revenue decreased 143 million versus prior comparable period 136 million resulted exit legacy patient monitoring product line end fiscal year 2013 ultrasound fiscal year 2014 ultrasound product revenue increased 27 million versus prior year comparable period mainly driven higher sales direct sales channel including primary markets urology surgery well expansion pointofcare market following march 2013 acquisition ultrasonix revenue products acquired acquisition ultrasonix represented 237 million 101 million fiscal year 2014 fiscal year 2013 respectively increases sales direct channel largely offset 90 million lower oem ultrasound probe sales fiscal year 2014 fulfillment delays related order timing security detection fiscal year 2014 security detection product revenue decreased 57 million versus prior year comparable period primarily driven fewer sales highspeed threat detection systems largely delays government tenders outside us partially offset greater demand mediumspeed threat detection systems primarily us market engineering revenue engineering revenue fiscal year 2014 compared fiscal year 2013 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability medical imaging 87 million decrease engineering revenue fiscal year 2014 versus prior year comparable periods due primarily winding certain customerfunded engineering projects products complete development phase prior movement production addition increasing development base platforms enable scalable solutions oems bring market quickly less upfront development cost resulted increase product gross margin corresponding decrease customerfunded engineering projects security detection 69 million decrease engineering revenue fiscal year 2014 versus prior year comparable periods due primarily timing customerfunded engineering projects gross margin product gross margin product gross margin fiscal year 2014 compared fiscal year 2013 summarized table improvement product gross margin fiscal year 2014 versus prior year comparable period due primarily shift product mix lower margin oem sales higher margin direct sales within ultrasound business higher average selling prices period efficient manufacturing operations shanghai china montreal canada gross margin also improved fiscal year 2014 due lower purchase accounting fair value adjustments inventory associated march 2013 acquisition ultrasonix engineering gross margin engineering gross margin fiscal year 2014 compared fiscal year 2013 summarized table decrease engineering gross profit fiscal year 2014 versus prior year comparable period result lower engineering revenue customerfunded engineering projects completed development phase moving production engineering gross margin remained consistent compared prior year comparable period operating expenses operating expenses summarized follows operating expenses fiscal year 2014 increased 193 million 113 versus prior year comparable period research product development expenses increased 98 million fiscal year 2014 versus prior year comparable period due reduction customerfunded engineering projects resulted increase 71 million expenses additionally 25 million attributable incremental engineering expenses resulting march 2013 acquisition ultrasonix 07 million attributable severance period decreased headcount related expenses fiscal year 2014 align resources expected customer funded engineering requirements selling marketing expenses increased 79 million fiscal year 2014 versus prior year comparable period due primarily 92 million incremental pointofcare sales marketing expenses resulting march 2013 acquisition ultrasonix offset reduction performancebased compensation expense general administrative expenses increased 16 million fiscal year 2014 versus prior year comparable period primarily due general administrative expenses 12 million attributable inclusion ultrasonix operating results approximately 14 million incremental depreciation expense 13 million incremental accounting legal costs including 02 million incremental bk medical inquiry costs increases partially offset reduction 24 million performancebased compensation expense fiscal year 2014 restructuring plan fourth quarter fiscal year 2014 incurred pretax charges 29 million primarily relating severance personnel related costs 48 involuntarily terminated employees associated restructuring activities including optimization operations peabody massachusetts recognized consolidated statement operations restructuring 29 million charge recorded operating results medical imaging ultrasound security detection segments charges 19 million 05 million 05 million respectively fiscal year 2013 restructuring plan fiscal year 2013 completed acquisition issued outstanding shares capital stock ultrasonix medical corporation nevada corporation customer lists intangibles related solely sales destined us ii outstanding equity securities ultrasonix medical corporation refer ultrasonix privately held company located vancouver canada pursuant “plan arrangement” canadian law ultrasonix supplier advanced ultrasound systems pointofcare general imaging applications 5000 systems installed worldwide undertook acquisition accelerate expansion pointofcare ultrasound market purchase price net cash acquired 799 million finalized july 2013 fiscal year 2013 incurred pretax charges 35 million primarily relating severance personnel related costs 115 involuntarily terminated employees well facility exit costs associated restructuring activities including consolidation manufacturing certain support activities currently conducted ultrasonix facility vancouver operations existing facilities closure ultrasonix sales subsidiary paris france transition costs associated planned closure englewood colorado facility consolidated manufacturing development activities state college pennsylvania facility optimization operations montreal canada peabody massachusetts recognized consolidated statement operations restructuring pretax charges included operating results medical imaging segment ultrasound segment security detection segment fiscal year 2014 incurred additional 06 million restructuring related charges respect fiscal year 2013 restructuring plan related facility exit costs total pretax charges 06 million incurred 02 million 09 million 01 million included operating results medical imaging ultrasound security detection segments respectively restructuring related charges including actions associated acquisitions segment follows expense income net total expenses net fiscal year 2014 primarily comprised interest income net 03 million recognition 05 million loss related 10 preacquisition equity interest pocketsonics recognized upon completion acquisition remaining equity pocketsonics september 2013 please refer note 3 business combinations consolidated financial statements included report information acquisition total expenses net fiscal year 2013 predominantly comprised 15 million foreign currency transaction exchange losses primarily foreign subsidiaries denmark china provision income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2014 2013 effective income tax rate based upon composition income different countries adjustments applicable quarterly periods tax consequences benefits resolutions tax audits tax contingencies discrete items effective tax rate discrete items fiscal year 2014 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2014 includes certain discrete tax benefits totaling 129 million discrete tax benefit fiscal year 2014 consists primarily reduction net deferred tax liability 88 million associated change classification canadian operations 27 million benefit associated us deduction historical currency losses incurred result operating offshore nonfunctional currency 1 million reduction uncertain tax positions primarily associated federal tax credits research development rd credits following conclusion internal revenue service irs review fiscal year 2009 along 04 million items effective tax rate fiscal year 2013 lower statutory rate 35 due primarily reversal tax reserves us federal state tax returns result expiration applicable statutes limitations 06 million including interest impact retroactive extension us rd credit 05 million ongoing benefits us rd credits us deductions manufacturing activity lower foreign tax rates compared us statutory rate 35 net income diluted net income per share net income diluted net income per share operations fiscal years 2014 2013 follows increase net income fiscal year 2014 versus prior year due net tax benefit income taxes fiscal year 2014 compared fiscal year 2013 offset lower income operations period due decrease customerfunded engineering projects increase operating expenses resulting fiscal year 2013 acquisition ultrasonix liquidity capital resources key liquidity capital resources information summarized table includes approximately 378 million 579 million cash equivalents held outside us july 31 2015 2014 respectively increase cash equivalents july 31 2014 july 31 2015 due primarily net income period offset timing receivables larger inventory balance reduction deferred revenue capital expenditures stock repurchases increase stockholder’s equity july 31 2014 july 31 2015 primarily driven recorded net income period cash equivalents july 31 2015 july 31 2014 primarily consisted demand deposits highly rated banks financial institutions believe cash equivalents appropriately valued july 31 2015 july 31 2014 aware market events would impact valuation could change future new developments arise credit markets carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2015 due shortterm maturities instruments revolving credit facilities 101 million available direct borrowings outstanding credit facilities july 31 2015 2014 details surrounding revolving credit facilities please refer commitments contractual obligations offbalance sheet arrangements section cash flows following table summarizes sources uses cash periods indicated operating activities cash flows provided operating activities fiscal year 2015 primarily reflects net income 335 million noncash charge depreciation amortization 233 million sharebased compensation expense 109 million increase accounts receivable 161 million consistent increased revenues increase inventory 147 million related new product development cash flows provided operating activities fiscal year 2014 primarily reflects net income 345 million noncash charge depreciation amortization 221 million decrease accounts receivable 66 million offset increase inventory 123 million consolidate manufacturing operations following acquisition ultrasonix support new product launches cash flows provided operating activities fiscal year 2013 primarily reflects net income 311 million noncash charges depreciation amortization expenses 173 million increase net working capital increase working capital fiscal year 2012 fiscal year 2013 mainly due increase accounts receivable 105 million due primarily higher sales volumes three months ended july 31 2013 compared period fiscal year 2012 increase inventory 21 million acquisition ultrasonix increase accounts payable 120 million investing activities net cash used investing activities fiscal year 2015 primarily driven purchases property plant equipment 100 million well acquisition pathfinder net cash acquired 16 million capital expenditures primarily related infrastructure test equipment investments support growth net cash used investing activities fiscal year 2014 primarily driven acquisition pocketsonics net cash acquired 106 million well purchases property plant equipment 175 million capital expenditures primarily related infrastructure test equipment investments support growth lower compared last fiscal year due completion infrastructure investments associated facilities state college pennsylvania net cash used investing activities fiscal year 2013 driven march 2013 acquisition ultrasonix 793 million purchases property plant equipment 256 million facility state college pennsylvania well global manufacturing test capacity infrastructure investments support growth financing activities net cash used financing activities fiscal year 2015 primarily reflected 139 million used repurchase common stock 28 million shares surrendered taxes paid related vested employee restricted stock 51 million dividends paid shareholders partially offset cash received associated exercise stock options employee stock purchase plan 79 million net cash used financing activities fiscal year 2014 primarily reflected 150 million used repurchase common stock 77 million shares surrendered taxes paid related vested employee restricted stock 50 million dividends paid shareholders partially offset cash received associated exercise stock options employee stock purchase plan 54 million net cash used financing activities fiscal year 2013 primarily reflects 79 million used repurchase common stock 47 million shares surrendered taxes paid related vested employee restricted stock 51 million dividends paid shareholders partially offset 47 million proceeds related issuance stock primarily exercise employee stock options 21 million excess tax benefit sharebased compensation believe balances cash equivalents cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2015 effect obligations expected liquidity cash flows future periods follows restructuring fiscal year 2014 fiscal year 2013 incurred restructuring charges improving operational effectiveness better leverage core competencies across business detailed description restructuring efforts including plan consolidate facilities please refer note 4 consolidated financial statements included report financing arrangements october 11 2011 entered 1000 million fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included santander bank td bank na hsbc bank usa national association credit agreement guaranteed material domestic subsidiaries designated us time required credit agreement supported pledge 65 capital stock equity equivalents principal international subsidiary credit facility require amortization principal may reduced maturity whole part option without penalty borrowings credit agreement may used general corporate purposes including permitted acquisitions amount facility increased specified circumstances 1500 million aggregate sole borrower credit agreement interest rates borrowings outstanding credit facility would range 125 200 libor rate elect libor rate 000 100 defined base rate highest 1 prime rate 2 federal funds rate plus 050 3 onemonth libor plus 1 case based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters ebitda greater 275100 time • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2015 leverage ratio 0004100 interest coverage ratio applicable attributable interest expense july 31 2015 full compliance financial operating covenants failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control us defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility incurred approximately 05 million transactions costs expensed fiveyear life credit facility currently approximately 12 million revolving credit facilities banks available direct borrowings outstanding credit facilities july 31 2015 2014 tax related obligations 47 million unrecognized tax benefits uncertain tax positions 03 million related accrued interest penalties unable reasonably estimate amount period liabilities might paid note 15 consolidated financial statements included annual report form 10k provides additional information regarding matters relating income taxes including unrecognized tax benefits asset retirement obligations ultimate cost restoring leased facilities difficult predict given uncertainties regarding extent required restoration interpretation applicable laws regulations based upon experience current information applicable laws believe probable incur costs including asset retirement obligations approximately 12 million july 31 2015 included “other liabilities” consolidated balance sheet accruals recorded without giving effect possible future insurance proceeds impact investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving danish subsidiary bk medical aps bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors terminated employment certain bk medical employees also terminated relationships bk medical distributors involved transactions concluded transactions identified date properly accounted reported financial statements material respects however unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice doj sec cooperating inquiries danish government doj sec believe sec doj substantially completed investigation transactions issue commenced discussions sec concerning resolution sec inquiry proposed payment 16 million settlement inquiry three months ended july 31 2015 accrued 16 million charge connection settlement proposal uncertain whether doj danish government seek impose sanctions penalties us engaged settlement discussions either entities assurance enter settlement sec doj danish government cost settlements resolutions matters could materially exceed accruals incurred inquiryrelated costs approximately 14 million fiscal years ended july 31 2014 july 31 2015 connection matter recent accounting pronouncements recently adopted none yet effective cloud computing arrangements april 2015 fasb issued update amends accounting standards codification asc 350 “intangibles goodwill other” amendments provide guidance whether cloud computing arrangement eg software service platform service infrastructure service similar hosting arrangements includes software license based determination account arrangements amendments effective fiscal years interim periods within years beginning december 15 2015 may applied either prospective retrospective basis provisions effective us first quarter fiscal year ending july 31 2017 early adoption permitted expect adoption provisions material impact consolidated financial statements consolidation february 2015 fasb issued asc update 201502 “consolidation topic 810 amendments consolidation analysis” update 201502 amended process reporting entity must perform determine whether consolidate certain types legal entities update 201502 effective annual reporting periods ending december 15 2015 annual periods interim periods thereafter early adoption permitted adoption update expected material impact financial position results operations revenue contracts customers may 2014 fasb issued update provides guidance revenue recognition update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition requirement industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates today’s guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update applied either retrospective modified retrospective basis update effective us first quarter fiscal year ending july 31 2018 early adoption permitted april 2015 fasb issued proposal defer effective date new revenue standard public entities one year therefore update would effective us first quarter fiscal year ending july 31 2019 proposal would also permit entities early adopt original effective date ie one year earlier currently evaluating impact adoption update consolidated financial statements critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies refer note 1 summary business operations significant accounting policies consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition provide engineering services customers contractual basis recognize revenue using percentage completion method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed allocation consideration multiple element revenue arrangements allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vendor specific objective evidence vsoe exists otherwise third party evidence tpe neither vsoe tpe selling price exists unit accounting use best estimated selling price besp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available besp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use besp allocation arrangement consideration objective besp determine price would transact product service sold us standalone basis determination besp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold inventory value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based age inventory lower cost market along significant management judgments concerning future demands inventory technological obsolescence actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed inventory includes demo equipment utilized sales force field company intends sell demo equipment demo equipment amortized straightline basis four year period included cost sales inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence sharebased compensation sharebased compensation plans include stock options restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned optionpricing models generally accepted valuation techniques value restricted stock awards market conditions require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving future company financial targets personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize warranty reserves estimate costs product warranties based specific warranty claims historical data engineering estimates applicable warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable business combinations account acquired businesses using acquisition method accounting requires assets acquired liabilities assumed recognized estimated fair values acquisition date transaction costs expensed incurred excess consideration transferred fair values identifiable net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies impairment goodwill indefinitelived intangible assets evaluate goodwill indefinitelived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing valuation analyses consider market approach income approach goodwill relief royalty approach indefinitelived intangible assets market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows relief royalty approach fair value indefinitelived intangible asset based tax royalty rate discount rate applied future forecasted sales second quarter fiscal year 2015 completed annual impairment testing goodwill indefinitelived intangible assets using methodologies described herein determined impairment valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations income tax contingencies income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions deferred tax valuation allowances required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent likely portion deferred tax assets realized valuation allowance must established effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings came results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends rd expenses trends capital expenditures make document incorporated reference forwardlooking without limiting foregoing words “believes” “anticipates” “plans” “expects” “seeks” “estimates” similar expressions intended identify forward looking statements forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results refer “risk factors” item 1a discussion primary risks uncertainties known us time addition forwardlooking statements represent management’s views date annual report form 10k filed sec relied upon representing management’s views subsequent date management may elect update forwardlooking statements point future specifically disclaims obligation even views change except required law report financial condition results operations fiscal year basis ending july 31 three months ended july 31 2016 2015 represent fourth quarters fiscal years 2016 2015 respectively management’s discussion analysis presented seven sections follows • business overview • fiscal year 2016 financial highlights • results operations • liquidity capital resources • impact investigation regarding danish subsidiary • recent accounting pronouncements • critical accounting policies business overview analogic corporation designs manufactures commercializes innovative realtime guidance diagnostic imaging threat detection technologies advance practice medicine save lives design manufacture sell advanced medical imaging ultrasound security systems subsystems original equipment manufacturers oems end users primarily healthcare airport security markets business strategically aligned three segments medical imaging ultrasound security detection business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily used urology surgery pointofcare markets • security detection includes advanced threat detection ct systems utilizing expertise advanced medical imaging technology primarily used checked baggage screening airports worldwide following table sets forth percentage total net revenue reporting segment fiscal years 2016 2015 2014 fiscal year 2016 financial highlights following table summary financial results fiscal years ended july 31 2016 2015 summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document fiscal year 2016 total net revenue decreased 6 compared prior year primarily due decrease sales security detection segments driven reductions high speed shipments lower medium speed shipments reductions sales rapid dna analysis systems gross profit decreased 1 result lower revenues gross margin increased 23 points fiscal year 2016 compared prior year due favorable pricing product mix cost reductions medical imaging security detection segments income operations decreased 38 operating margin decreased 25 points fiscal year 2016 prior year due primarily lower revenues approximate 100 million increase restructuring expenses 91 million increase expenses related bk medical matter please refer note 11 commitments guarantees contingencies results operations fiscal year 2016 compared fiscal year 2015 net revenue product revenue product revenue fiscal year 2016 compared fiscal year 2015 summarized table medical imaging fiscal year 2016 medical imaging product revenue decreased 1 versus prior comparable period mainly due lower ct mr result mix ultrasound fiscal year 2016 ultrasound product revenue decreased 2 versus prior year comparable period 7 increase ultrasound direct offset 42 decrease customer demand oem probes security detection fiscal year 2016 security detection product revenue decreased 29 versus prior year comparable period primarily driven reductions high speed shipments lower medium speed shipments reductions sales rapid dna analysis systems engineering revenue engineering revenue fiscal year 2016 compared fiscal year 2015 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability change engineering revenue fiscal year 2016 versus prior year comparable period primarily due timing work done customerfunded engineering projects three reported segments gross margin product gross margin product gross margin fiscal year 2016 compared fiscal year 2015 summarized table gross margin fiscal year 2016 increased 22 points fiscal year 2016 compared prior year primarily result favorable pricing product mix medical imaging security detection segments well due ongoing cost control efforts engineering gross margin engineering gross margin fiscal year 2016 compared fiscal year 2015 summarized table decrease engineering gross profit increase engineering gross margin fiscal year 2016 versus prior year comparable period due lower engineering revenue due mix engineering projects operating expenses operating expenses summarized follows operating expenses fiscal year 2016 increased 74 versus prior year comparable period research product development expenses decreased 20 fiscal year 2016 versus prior year comparable period primarily due lower compensationrelated costs selling marketing expenses increased 28 fiscal year 2016 versus prior year comparable period due primarily additional costs related acquisition oncura general administrative expenses increased 61 fiscal year 2016 versus prior year comparable period primarily due 101 million charge fiscal year 2016 related bk medical matter please refer note 11 commitments guarantees contingencies partially offset lower compensationrelated costs restructuring expenses increased approximately 10 million fiscal year 2016 versus prior years comparable period due execution fiscal year 2016 restructuring plan please refer note 4 restructuring charges expense income net total expenses increased 53 million fiscal year 2016 versus prior year comparable period primarily due increase 26 million interest charge connection bk medical matter see “impact investigation regarding danish subsidiary” section foreign currency translation losses increased 23 million provision income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2016 2015 effective income tax rate based upon composition income different countries adjustments applicable quarterly periods tax consequences benefits resolutions tax audits tax contingencies discrete items effective tax rate fiscal year 2016 higher statutory rate 35 primarily due certain discrete tax provisions totaling 12 million discrete tax provision fiscal year 2016 consists primarily 15 million increase uncertain tax positions primarily associated bk medical matter offset 04 million benefit associated extension federal rd tax credit 03 million reduction uncertain tax positions primarily associated expiration statute limitations along 03 million provision items effective tax rate fiscal year 2015 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2015 includes certain discrete tax benefits totaling 29 million discrete tax benefit fiscal year 2015 consists primarily 34 million reduction uncertain tax positions primarily associated expiration statute limitations 08 million benefit associated extension federal rd tax credit 03 million provision reduction domestic production deduction due filing nol carryback claim along 10 million provision items net income diluted net income per share net income diluted net income per share operations fiscal years 2016 2015 follows fiscal year 2015 compared fiscal year 2014 net revenue product revenue product revenue fiscal year 2015 compared fiscal year 2014 summarized table medical imaging fiscal year 2015 medical imaging product revenue decreased 27 million versus prior comparable period due reduction mri revenues partially offset higher ct revenues ultrasound fiscal year 2015 ultrasound product revenue increased 113 million versus prior year comparable period due continued growth direct sales north america additionally successfully introduced shipped early production units tricore™ based flagship bk3000™ systems security detection fiscal year 2015 security detection product revenue increased 13 million versus prior year comparable period primarily driven sales growth highspeed threat detection systems engineering revenue fiscal year 2015 compared fiscal year 2014 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability medical imaging 03 million decrease engineering revenue fiscal year 2015 versus prior year comparable periods due primarily timing customerfunded engineering projects ultrasound 24 million increase engineering revenue fiscal year 2015 versus prior comparable periods driven private label development expected begin shipments fiscal 2016 security detection 10 million decrease engineering revenue fiscal year 2015 versus prior year comparable periods due primarily timing customerfunded engineering projects gross margin product gross margin product gross margin fiscal year 2015 compared fiscal year 2014 summarized table gross margin fiscal year 2015 flat versus prior year comparable period reflective changes product mix efficient manufacturing operations partially offset impact unfavorable foreign currency engineering gross margin engineering gross margin fiscal year 2015 compared fiscal year 2014 summarized table engineering gross profit relatively flat fiscal year 2015 versus prior year comparable period operating expenses operating expenses summarized follows operating expenses fiscal year 2015 decreased 17 million 09 versus prior year comparable period research product development expenses decreased 54 million fiscal year 2015 versus prior year comparable period due cost reduction actions specifically reduction headcount resulted decrease 53 million expenses selling marketing expenses increased 43 million fiscal year 2015 versus prior year comparable period due primarily increased incentive compensation 34 million increase costs associated introduction new products 15 million offset staffing changes general administrative expenses increased 31 million fiscal year 2015 versus prior year comparable period driven higher incentive compensation costs accrued based fiscal year 2015 performance well 10 million charge settlement proposal sec related danish subsidiary bk medical fiscal year 2014 restructuring plan fourth quarter fiscal year 2014 incurred pretax charges 29 million primarily relating severance personnel related costs 48 involuntarily terminated employees associated restructuring activities including optimization operations peabody massachusetts recognized consolidated statement operations restructuring 29 million charge recorded operating results medical imaging ultrasound security detection segments charges 19 million 05 million 05 million respectively fiscal year 2015 adjustments 04 million restructuring respect fiscal year 2014 restructuring total adjustments 04 million 02 million 01 million 01 million included operating results medical imaging ultrasound security detection segments respectively fiscal year 2013 restructuring plan fiscal year 2014 incurred additional 06 million restructuring related charges respect fiscal year 2013 restructuring plan related facility exit costs total pretax charges 06 million incurred 02 million 09 million 01 million included operating results medical imaging ultrasound security detection segments respectively fiscal year 2015 adjusted restructuring 01 included operating results restructuring related charges including actions associated acquisitions segment follows expense income net total expenses net fiscal year 2015 primarily comprised interest income net 01 million 06 million interest charge settlement proposal sec related danish subsidiary bk medical see “impact investigation regarding danish subsidiary” section netted foreign translation gains 07 million total expenses net fiscal year 2014 predominantly comprised interest income net 03 million recognition 05 million loss related 10 preacquisition equity interest pocketsonics recognized upon completion acquisition remaining equity pocketsonics september 2013 please refer note 3 business combinations consolidated financial statements included report information acquisition provision income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2015 2014 effective income tax rate based upon composition income different countries adjustments applicable quarterly periods tax consequences benefits resolutions tax audits tax contingencies discrete items effective tax rate discrete items fiscal year 2015 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2015 includes certain discrete tax benefits totaling 29 million discrete tax benefit fiscal year 2015 consists primarily 34 million reduction uncertain tax positions primarily associated expiration statute limitations 08 million benefit associated extension federal rd tax credit 03 million provision reduction domestic production deduction due filing nol carryback claim along 10 million provision items effective tax rate discrete items fiscal year 2014 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2014 includes certain discrete tax benefits totaling 129 million discrete tax benefit fiscal year 2014 consists primarily reduction net deferred tax liability 88 million associated change classification canadian operations 27 million benefit associated us deduction historical currency losses incurred result operating offshore nonfunctional currency 1 million reduction uncertain tax positions primarily associated federal tax credits research development rd credits following conclusion internal revenue service irs review fiscal year 2009 along 04 million items net income diluted net income per share net income diluted net income per share operations fiscal years 2015 2014 follows decrease net income fiscal year 2015 versus prior year due net tax benefits certain discrete tax items recorded fiscal year 2014 totaling 129 million partially offset 29 million discrete tax benefits taken fiscal year 2015 liquidity capital resources key liquidity capital resources information summarized table includes approximately 453 million 378 million cash equivalents held outside us july 31 2016 2015 respectively july 31 2016 cash equivalents 1187 million 51 million decrease july 31 2015 generated 33 million cash operations 47 million issuance stock offset 137 million paid repurchase common stock 131 million paid additions property equipment 84 million net cash paid purchase oncura 50 million cash payment shareholders dividends 27 million shares repurchased taxes vested employee restricted stock grants decrease working capital july 31 2015 july 31 2016 primarily attributable decrease income tax receivable 96 million decrease accounts receivable 69 million decrease cash 51 million increase accrued restructuring charges 47 million increase contingent consideration 45 million partially offset increase inventory 128 million decrease accrued employee compensation benefits 47 million decrease accrued income tax 25 million decrease accounts payable 19 million increase current assets 10 million decrease current liabilities 08 million cash equivalents july 31 2016 july 31 2015 primarily consisted demand deposits highly rated banks financial institutions periodically review investment portfolio determine investments impaired due changes credit risk potential valuation concerns believe cash equivalents appropriately valued july 31 2016 july 31 2015 aware market events would impact valuation could change future new developments arise credit markets carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2016 due shortterm maturities instruments revolving credit facilities 101 million available direct borrowings outstanding credit facilities july 31 2016 2015 details surrounding revolving credit facilities please refer commitments contractual obligations offbalance sheet arrangements section cash flows following table summarizes sources uses cash periods indicated operating activities net cash provided operating activities decreased 57 million year ended july 31 2016 versus prior year comparable period primarily due decrease cash generated earnings partially offset collection accounts receivable cash flows provided operating activities year ended july 31 2016 reflects net income 121 million 230 million related depreciation amortization 89 million related sharebased compensation 66 million related accrued income taxes income taxes receivable partially offset net increase 174 million inventory related noncash write demo equipment net realizable value noncash provision excess obsolescence inventory net change operating inventory primarily related transition products peabody massachusetts location existing facility shanghai china cash flows provided operating activities fiscal year 2015 primarily reflects net income 335 million 233 million related depreciation amortization 109 million related sharebased compensation expense partially offset increase accounts receivable 161 million consistent increased revenues increase inventory 147 million related new product development cash flows provided operating activities fiscal year 2014 primarily reflects net income 345 million 221 million related depreciation amortization 66 million related decrease accounts receivable partially offset increase inventory 123 million consolidate manufacturing operations following acquisition ultrasonix support new product launches investing activities net cash used investing activities year ended july 31 2016 driven purchase property plant equipment 131 million well acquisition oncura 84 million net cash payment capital expenditures primarily related infrastructure manufacturing equipment investments net cash used investing activities year ended july 31 2015 primarily driven purchases property plant equipment 100 million well acquisition pathfinder net cash acquired 16 million capital expenditures primarily related infrastructure test equipment investments net cash used investing activities year ended july 31 2014 primarily driven acquisition pocketsonics net cash acquired 106 million well purchases property plant equipment 175 million capital expenditures primarily related infrastructure test equipment investments support growth lower compared previous fiscal year due completion infrastructure investments associated facilities state college pennsylvania financing activities net cash used financing activities year ended july 31 2016 primarily reflected 137 million used repurchase common stock 50 million dividends paid stockholders 27 million used shares surrendered taxes paid related vested employee restricted stock partially offset proceeds issuance common stock amounting 47 million associated stock option exercises net cash used financing activities year ended july 31 2015 primarily reflected 139 million used repurchase common stock 51 million dividends paid stockholders 28 million used shares surrendered taxes paid related vested employee restricted stock partially offset proceeds issuance common stock amounting 79 million associated sharebased compensation net cash used financing activities year ended july 31 2014 primarily reflected 150 million used repurchase common stock 77 million used shares surrendered taxes paid related vested employee restricted stock 50 million dividends paid stockholders partially offset proceeds issuance common stock amounting 54 million associated sharebased compensation believe balances cash equivalents cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2016 effect obligations expected liquidity cash flows future periods follows restructuring fiscal year 2016 fiscal year 2014 fiscal year 2013 announced restricting plans incurred restructuring charges improving operational effectiveness better leverage core competencies across business detailed description restructuring efforts including plan consolidate facilities please refer note 4 consolidated financial statements included report financing arrangements november 23 2015 entered fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included jpmorgan chase bank na td bank na wells fargo bank na hsbc bank na people’s united bank na credit agreement provides 1000 million available credit expires november 23 2020 outstanding borrowings must paid full credit facility require amortization principal may reduced maturity whole part option without penalty upon entry credit agreement terminated without penalty 1000 million fiveyear revolving credit agreement entered october 11 2011 previously paid full accordance terms borrowings credit agreement may used general corporate purposes including permitted acquisitions amount available credit increased specified circumstances 2000 million aggregate sole borrower credit agreement obligations credit facility required guaranteed material domestic subsidiaries designated us time required credit agreement pledges capital stock assets international subsidiaries interest rates borrowings outstanding credit facility range 125 175 libor rate option range 000 100 defined base rate amount case varying based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters earnings interest taxes depreciation amortization ebitda adjustments stipulated credit agreement greater 275100 temporary stepup event certain acquisitions • interest coverage ratio defined ratio consolidated trailing four quarters adjusted ebitda consolidated interest charges less 300100 time july 31 2016 leverage ratio 0004100 interest coverage ratio applicable attributable interest expense july 31 2016 full compliance financial operating covenants contained credit agreement failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering credit agreement incurred approximately 05 million transaction costs amortized fiveyear life credit facility july 31 2016 2015 approximately 12 revolving credit facilities banks available direct borrowings borrowing outstanding credit facilities july 31 2016 2015 respectively contingent consideration connection acquisition oncura july 31 2016 recorded contingent consideration obligation 102 million obligation payable upon achievement certain revenue gross margin targets four year period starting may 1 2016 limit earnout paid connection acquisition pocketsonics july 31 2016 recorded contingent consideration obligation 20 million contingent earnout payments sellers pocketsonics would payable upon commercial launch achievement volume sales target defined asset purchase agreement please refer note 3 business combinations information tax related obligations 62 million unrecognized tax benefits uncertain tax positions 04 million related accrued interest penalties unable reasonably estimate amount period liabilities might paid liability excluded commitments contingencies table note 15 consolidated financial statements included annual report form 10k provides additional information regarding matters relating income taxes including unrecognized tax benefits asset retirement obligations ultimate cost restoring leased facilities difficult predict given uncertainties regarding extent required restoration interpretation applicable laws regulations based upon experience current information applicable laws believe probable incur costs including asset retirement obligations approximately 11 million july 31 2016 included “other liabilities” consolidated balance sheet accruals recorded without giving effect possible future insurance proceeds legal claims subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable believe valid defenses respect matters currently pending us intend defend vigorously outcome matters individually aggregate expected material impact cash flows results operations financial position record losses estimable probable accordance us gaap impact investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving danish subsidiary bk medical aps bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors terminated employment certain bk medical employees also terminated relationships bk medical distributors involved transactions concluded identified transactions properly accounted reported financial statements material respects however unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice doj sec cooperated inquiries danish government doj sec reach resolution matter fiscal year ended july 31 2016 june 22 2016 issued press release announcing reached agreements sec doj danish government resolve matters voluntarily disclosed result resolutions paid total 149 million disgorgement interest penalties expect inquiries related matter second quarter fiscal 2016 accrued charge 133 million 101 million classified general administrative expense 32 million classified expense net consolidated statements operations connection matters addition 16 million charge accrued fourth quarter fiscal 2015 10 million classified general administrative expense 06 million classified expense net consolidated statements operations incurred inquiryrelated costs approximately 04 million 14 million 14 million fiscal years ended july 31 2016 2015 2014 respectively connection matter recent accounting pronouncements recently adopted classification deferred taxes november 2015 financial accounting standards board fasb issued accounting standards update asu 201517 “income taxes topic 740 balance sheet classification deferred taxes” standard requires deferred tax assets liabilities classified noncurrent balance sheet rather separated current noncurrent asu 201517 effective fiscal years interim periods within years beginning december 15 2016 early adoption permitted standard may applied either retrospectively prospective basis deferred tax assets liabilities elected early adoption asu 201517 second quarter fiscal year 2016 retrospective basis accordingly reclassified current deferred taxes noncurrent july 31 2015 consolidated balance sheets decreased refundable deferred income taxes 80 million increased noncurrent deferred tax assets 46 million decreased noncurrent deferred tax liabilities 34 million consolidation february 2015 financial accounting standards board fasb issued accounting standards update asu 201502 “consolidation topic 810 amendments consolidation analysis” asu 201502 amended process reporting entity must perform determine whether consolidate certain types legal entities asu 201502 effective annual interim periods beginning december 15 2015 early adoption permitted update would effective us beginning august 1 2016 elected early adoption asu 201502 first quarter fiscal year ending july 31 2016 adoption update material impact consolidated financial statements yet effective improvements employee sharebased payment accounting march 2016 financial accounting standards board fasb issued accounting standards update asu 201609 “improvements employee sharebased payment accounting” amends asc 718 “stock based compensation” amendments require excess tax benefits recorded income tax benefit expense income statement classified operating activity statement cash flows entities may also elect estimate amount forfeitures recognize occur amendments effective fiscal years interim periods within years beginning december 15 2016 standard effective us first quarter fiscal year ending july 31 2018 early adoption permitted currently evaluating impact adoption update consolidated financial statements leases february 2016 financial accounting standards board fasb issued accounting standards update asu 201602 “leases topic 842” standard requires lessees recognize assets liabilities leases balance sheet income statement purposes standard requires leases classified either operating finance standard effective annual interim periods beginning december 15 2018 early adoption permitted standard effective us first quarter fiscal year ending july 31 2020 adoption requires application new guidance periods presented currently evaluating impact adoption standard consolidated financial statements cloud computing arrangements april 2015 financial accounting standards board fasb issued accounting standards update asu 201505 “intangibles goodwill otherinternaluse software subtopic 35040” amendments provide guidance whether cloud computing arrangement eg software service platform service infrastructure service similar hosting arrangements includes software license based determination account arrangements amendments effective fiscal years interim periods within years beginning december 15 2015 may applied either prospective retrospective basis provisions effective us first quarter fiscal year ending july 31 2017 early adoption permitted expect adoption provisions material impact consolidated financial statements disclosure uncertainties entity’s ability continue going concern august 2014 financial accounting standards board fasb issued accounting standards update asu 201415 “presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern” standard requires management evaluate entity’s ability continue going concern within one year date issuance entity’s financial statements amendments effective annual period ending december 15 2016 annual periods interim periods thereafter applied prospective basis early adoption permitted provisions effective us first quarter fiscal year ending july 31 2017 expect adoption provisions material impact consolidated financial statements revenue contracts customers may 2014 financial accounting standards board fasb issued update provides guidance revenue recognition update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition requirements industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates today’s guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update applied either retrospective modified retrospective basis update effective us first quarter fiscal year ending july 31 2018 april 2015 fasb issued proposal defer effective date new revenue standard public entities one year therefore update would effective us first quarter fiscal year ending july 31 2019 proposal would also permit entities early adopt original effective date ie one year earlier currently evaluating impact adoption update consolidated financial statements critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies refer note 1 summary business operations significant accounting policies consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition provide engineering services customers contractual basis recognize revenue using percentage completion method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed allocation consideration multiple element revenue arrangements allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vendor specific objective evidence vsoe exists otherwise third party evidence tpe neither vsoe tpe selling price exists unit accounting use best estimated selling price besp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available besp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use besp allocation arrangement consideration objective besp determine price would transact product service sold us standalone basis determination besp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold inventory value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based age inventory lower cost market along significant management judgments concerning future demands inventory technological obsolescence actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed product held sales force field sales demonstration purposes classify value product based manner used sales force prior fiscal 2016 demonstration inventory amortized straight line basis four year period approximate net realizable value beginning fiscal 2016 based ability intent sell inventory normal profit margin company longer amortized demonstration inventory first year placed field company implemented policy prospectively fiscal 2016 based changes demonstration inventory utilized field extent demonstration inventory unsold period year reclassified fixed assets amortized estimated remaining useful life 36 months amortization demonstration inventory recorded sales marketing expense inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence sharebased compensation sharebased compensation plans include stock options restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned optionpricing models generally accepted valuation techniques value restricted stock awards market conditions require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving future company financial targets personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize warranty reserves estimate costs product warranties based specific warranty claims historical data engineering estimates applicable warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable business combinations account acquired businesses using acquisition method accounting requires assets acquired liabilities assumed recognized estimated fair values acquisition date transaction costs related acquisition expensed incurred excess consideration transferred fair values identifiable net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets including intangible assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses furthermore fair value contingent consideration recorded part acquisition determined valuation model incorporates probability adjusted assumptions related achieving related milestones likelihood us making contingent payments unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies impairment goodwill indefinitelived intangible assets evaluate goodwill indefinitelived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing valuation analyses consider market approach income approach goodwill relief royalty approach indefinitelived intangible assets market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows relief royalty approach fair value indefinitelived intangible asset based tax royalty rate discount rate applied future forecasted sales second quarter fiscal year 2016 completed annual impairment testing goodwill indefinitelived intangible assets using methodologies described herein determined impairment valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations income tax contingencies file income tax returns jurisdictions operate record liability position cannot establish conclusively benefits related positions likely realized change position information available eg result audits conclusive resolution issue relevant taxing authority income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions deferred tax valuation allowances required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent likely portion deferred tax assets realized valuation allowance must established effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings came results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends rd expenses trends capital expenditures make document incorporated reference forwardlooking without limiting foregoing words “believes” “anticipates” “plans” “expects” “seeks” “estimates” similar expressions intended identify forward looking statements forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results refer “risk factors” item 1a discussion primary risks uncertainties known us time addition forwardlooking statements represent management’s views date annual report form 10k filed sec relied upon representing management’s views subsequent date management may elect update forwardlooking statements point future specifically disclaims obligation even views change except required law report financial condition results operations fiscal year basis ending july 31 three months ended july 31 2017 2016 represent fourth quarters fiscal years 2017 2016 respectively management’s discussion analysis presented six sections follows • business overview • fiscal year 2017 financial highlights • results operations • liquidity capital resources • recent accounting pronouncements • critical accounting policies business overview analogic corporation designs manufactures commercializes innovative realtime guidance diagnostic imaging threat detection technologies advance practice medicine save lives design manufacture sell advanced medical imaging ultrasound security systems subsystems original equipment manufacturers oems end users primarily medical airport security markets business strategically aligned three segments medical imaging ultrasound security detection business segments described follows • medical imaging primarily includes systems subsystems computed tomography subsystems mri equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily used urology surgery emed anesthesia markets • security detection includes advanced threat detection ct systems utilizing expertise advanced medical imaging technology primarily used checked baggage screening airports worldwide following table sets forth percentage total net revenue reporting segment fiscal years 2017 2016 2015 fiscal year 2017 financial highlights following table summary financial results fiscal years ended july 31 2017 2016 summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document fiscal year 2017 total net revenue decreased 4 compared fiscal year 2016 primarily due decrease sales ultrasound segment driven decrease private label sales lower demand legacy oem probes decrease medical imaging segment driven reductions ct mri digital mammography partially offset increase sales security detection segment driven increases high speed airport screening systems increases rapid dna system sales gross profit gross margin decreased 13 38 points respectively fiscal year 2017 compared fiscal year 2016 result lower revenues including reversal engineering revenue ultrasound security detection segments impairment charges related writedowns obsolete inventory loss income operations decreased operating margin decreased fiscal year 2017 compared fiscal year 2016 primarily due lower revenues 83 million impairment charge related writedowns excess obsolete inventory please refer note 9 inventory 845 million asset impairment charges please refer note 1i property plant equipment note 10 intangible assets goodwill partially offset 102 million decrease contingent consideration related acquisition oncura please refer note 8 fair value information charges bk medical matter 101 million 2016 information bk medical matter please refer note 11 commitments guarantees contingencies annual report form 10k fiscal year 2016 filed sec september 27 2016 results operations fiscal year 2017 compared fiscal year 2016 net revenue product revenue product revenue fiscal year 2017 compared fiscal year 2016 summarized table medical imaging fiscal year 2017 medical imaging product revenue decreased 6 compared fiscal year 2016 primarily due reductions ct mri digital mammography partially offset increases motion due additions new customers ultrasound fiscal year 2017 ultrasound product revenue decreased 8 compared fiscal year 2016 primarily driven decrease private label sales reduced customer demand legacy oem probes security detection fiscal year 2017 security detection product revenue increased 19 compared fiscal year 2016 primarily driven increases high speed airport screening systems increases rapid dna system sales engineering revenue engineering revenue fiscal year 2017 compared fiscal year 2016 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability change engineering revenue fiscal year 2017 compared fiscal year 2016 primarily due timing work done customerfunded engineering projects medical imaging segment reversal revenue ultrasound security detection segments result changes facts circumstances fourth quarter lead us longer able meet revenue recognition criteria gross margin product gross margin product gross margin fiscal year 2017 compared fiscal year 2016 summarized table fiscal year 2017 compared fiscal year 2016 gross margin decreased 35 points primarily result 83 million excess obsolescence charges related writedowns inventory productsegment mix primarily related strategic changes business discontinue investment certain products engineering gross margin engineering gross margin fiscal year 2017 compared fiscal year 2016 summarized table decrease engineering gross profit decrease engineering gross margin fiscal year 2017 compared fiscal year 2016 due lower engineering revenue reversal engineering revenue ultrasound security detection segments result changes facts circumstances fourth quarter lead us longer able meet revenue recognition criteria operating expenses operating expenses summarized follows operating expenses fiscal year 2017 increased 31 compared fiscal year 2016 research product development expenses decreased 5 fiscal year 2017 compared fiscal year 2016 due lower material related spending lower headcountrelated costs selling marketing expenses increased 4 fiscal year 2017 compared fiscal year 2016 primarily due higher headcountrelated costs general administrative expenses decreased 29 fiscal year 2017 compared fiscal year 2016 primarily relating gain recorded fiscal 2017 decrease contingent consideration 102 million related oncura due revisions forecasted revenues oncura business reduced amount contingent consideration expect pay charges bk medical matter 101 million 2016 information bk medical matter please refer note 11 commitments guarantees contingencies annual report form 10k fiscal year 2016 filed sec september 27 2016 restructuring expenses decreased 25 fiscal year 2017 compared fiscal year 2016 primarily due expenses related fiscal year 2017 restructuring plan fiscal year 2016 restructuring plan respectively please refer note 4 restructuring charges information fiscal year 2017 restructuring plan fiscal year 2016 restructuring plan fiscal 2017 recorded aggregate 845 million asset impairment charges primarily driven lower revenues anticipated reduced revenue forecast ultrasound business compared prior estimates certain strategic changes strategic review ultrasound business described third quarter fiscal year 2017 recorded impairment charge 32 million including writeoff customer relationships 24 million writeoff trade names 08 million result lower revenues anticipated reduced revenue forecast oncura reporting unit compared prior estimates strategic changes oncura business information acquisition oncura please refer note 3 business combination third quarter fiscal year 2017 recorded impairment charge 81 million related acquired technology connection acquisition pocketsonics based projected future cash flows decision forgo investment business information acquisition pocketsonics please refer note 3 business combination annual report form 10k fiscal year 2016 filed sec september 27 2016 second quarter fiscal year 2017 recorded estimated charge 98 million goodwill impairment oncura reporting unit annual impairment test goodwill intangible assets indefinite lives december 31 2016 changes strategy caused us decrease future forecasted revenues prior estimates amount charge finalized third quarter fiscal year 2017 change information goodwill impairment test please refer note 10 intangible assets goodwill third quarter fiscal year 2017 strategic review oncura reporting unit noted decreased forecasted revenue compared prior estimates caused disruption sales channel veterinary business determined remaining goodwill impaired recorded charge 66 million third quarter fiscal year 2017 information goodwill impairment test please refer note 10 intangible assets goodwill third quarter fiscal year 2017 company noted impairment indicators related ultrasound reporting unit additional delays related introduction commercialization general imaging platform sold technology partner general imaging caused company reassess revenue expectations product significant change well reduction revenue estimates fiscal 2017 impacted overall revenue growth expectations ultrasound future periods management performed interim impairment test based market approach income approach recorded estimated impairment charge 552 million amount charge finalized fourth quarter fiscal 2017 change information goodwill impairment test please refer note 10 intangible assets goodwill fiscal year 2017 recorded impairment charge 06 million including writeoff developed technology 05 million writeoff trade names 01 million second quarter fiscal 2017 based projected future cash flows change strategy discontinue investments commercializing technology pathfinder part security detection operating segment information acquisition pathfinder please refer note 3 business combination annual report form 10k fiscal year 2016 filed sec september 27 2016 fourth quarter fiscal year 2017 recorded asset impairment charge approximately 10 million result assessing potential impairment longlived assets whenever events changes circumstances indicate carrying value assets may recoverable impairment charges recorded fiscal 2016 expense income net total income increased 54 million fiscal year 2017 compared fiscal year 2016 primarily related increase interest income 04 million fiscal 2017 net 26 million interest charge connection bk medical matter information bk medical matter please refer note11 commitments guarantees contingencies annual report form 10k fiscal year 2016 filed sec september 27 2016 foreign currency translation losses 21 million 2016 provision income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2017 2016 effective income tax rate based actual income year composition income different countries adjustments applicable quarterly periods potential tax consequences benefits resolution tax audits tax contingencies discrete items effective tax rate fiscal year 2017 lower statutory rate 35 primarily due tax effect goodwill asset impairment charges recording additional valuation allowance certain goodwill asset impairment charges give rise tax deduction therefore give rise benefit tax rate tax provision fiscal year 2017 includes certain discrete tax provisions totaling 157 million discrete tax provision fiscal year 2017 consists primarily 166 million increase valuation allowance deferred tax assets 08 million decrease prepaid income taxes offset 07 million reduction uncertain tax positions associated expiration statute limitations 04 million decrease uncertain tax positions associated bk medical matter 05 million decrease uncertain tax positions associated settlement transfer pricing audit along 01 million benefit items effective tax rate fiscal year 2016 higher statutory rate 35 primarily due certain discrete tax provisions totaling 12 million discrete tax provision fiscal year 2016 consists primarily 15 million increase uncertain tax positions primarily associated bk medical matter offset 04 million benefit associated extension federal rd tax credit 03 million reduction uncertain tax positions primarily associated expiration statute limitations along 03 million provision items net income diluted net income per share net income diluted net income per share operations fiscal years 2017 2016 follows fiscal year 2016 compared fiscal year 2015 net revenue product revenue product revenue fiscal year 2016 compared fiscal year 2015 summarized table medical imaging fiscal year 2016 medical imaging product revenue decreased 1 versus prior comparable period mainly due lower ct mr result mix ultrasound fiscal year 2016 ultrasound product revenue decreased 2 versus prior year comparable period 7 increase ultrasound direct offset 42 decrease customer demand oem probes security detection fiscal year 2016 security detection product revenue decreased 29 versus prior year comparable period primarily driven reductions high speed shipments lower medium speed shipments reductions sales rapid dna analysis systems engineering revenue fiscal year 2016 compared fiscal year 2015 summarized table business model includes customerfunded engineering projects integrate core technologies within customer’s product portfolios projects vary substantially period terms resource requirements type size length project profitability change engineering revenue fiscal year 2016 versus prior year comparable period primarily due timing work done customerfunded engineering projects three reported segments gross margin product gross margin product gross margin fiscal year 2016 compared fiscal year 2015 summarized table gross margin fiscal year 2016 increased 22 points fiscal year 2016 compared prior year primarily result favorable pricing product mix medical imaging security detection segments well due ongoing cost control efforts engineering gross margin engineering gross margin fiscal year 2016 compared fiscal year 2015 summarized table decrease engineering gross profit increase engineering gross margin fiscal year 2016 versus prior year comparable period due lower engineering revenue due mix engineering projects operating expenses operating expenses summarized follows operating expenses fiscal year 2016 increased 7 versus prior year comparable period research product development expenses decreased 2 fiscal year 2016 versus prior year comparable period primarily due lower compensationrelated costs selling marketing expenses increased 3 fiscal year 2016 versus prior year comparable period due primarily additional costs related acquisition oncura general administrative expenses increased 6 fiscal year 2016 versus prior year comparable period primarily due 101 million charge fiscal year 2016 related bk medical matter please refer note 11 commitments guarantees contingencies partially offset lower compensationrelated costs restructuring expenses increased approximately 10 million fiscal year 2016 versus prior year comparable period due execution fiscal year 2016 restructuring plan please refer note 4 restructuring charges expense income net total expenses increased 53 million fiscal year 2016 versus prior year comparable period primarily due increase 26 million interest charge connection bk medical matter see “impact investigation regarding danish subsidiary” section foreign currency translation losses increased 23 million provision income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2016 2015 effective income tax rate based upon composition income different countries adjustments applicable quarterly periods tax consequences benefits resolutions tax audits tax contingencies discrete items effective tax rate fiscal year 2016 higher statutory rate 35 primarily due certain discrete tax provisions totaling 12 million discrete tax provision fiscal year 2016 consists primarily 15 million increase uncertain tax positions primarily associated bk medical matter offset 04 million benefit associated extension federal rd tax credit 03 million reduction uncertain tax positions primarily associated expiration statute limitations along 03 million provision items effective tax rate fiscal year 2015 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2015 includes certain discrete tax benefits totaling 29 million discrete tax benefit fiscal year 2015 consists primarily 34 million reduction uncertain tax positions primarily associated expiration statute limitations 08 million benefit associated extension federal rd tax credit 03 million provision reduction domestic production deduction due filing nol carryback claim along 10 million provision items net income diluted net income per share net income diluted net income per share operations fiscal years 2016 2015 follows liquidity capital resources key liquidity capital resources information summarized table includes approximately 477 million 453 million cash equivalents held outside us july 31 2017 2016 respectively july 31 2017 cash equivalents 1293 million 106 million increase july 31 2016 generated 751 million cash operations 34 million issuance stock offset 450 million paid purchases marketable securities 91 million paid additions property equipment 50 million cash payment shareholders dividends 44 million paid repurchase common stock 22 million shares repurchased taxes vested employee restricted stock grants 19 million contingent consideration paid business acquisitions decrease working capital july 31 2016 july 31 2017 primarily attributable decrease accounts receivable 348 million decrease inventory 149 million partially offset increase shortterm marketable securities 188 million increase cash 106 million decrease contingent consideration 45 million decrease accounts payable accrued expenses 55 million cash equivalents july 31 2017 july 31 2016 primarily consisted demand deposits highly rated banks financial institutions periodically review investment portfolio determine investments impaired due changes credit risk potential valuation concerns believe cash equivalents appropriately valued july 31 2017 july 31 2016 aware market events would impact valuation could change future new developments arise credit markets carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2017 due shortterm maturities instruments marketable securities investment portfolio invested primarily highlyrated securities investment policy generally require investments investment grade primary objective minimizing potential risk principal loss revolving credit facilities 1012 million available direct borrowings outstanding credit facilities july 31 2017 2016 details surrounding revolving credit facilities please refer commitments contractual obligations offbalance sheet arrangements section cash flows following table summarizes sources uses cash periods indicated operating activities net cash provided operating activities increased 421 million year ended july 31 2017 compared fiscal year 2016 primarily due collection accounts receivable decrease inventory expenditure partially offset income tax payments 2017 cash flows provided operating activities 751 million year ended july 31 2017 reflects net loss 742 million noncash adjustment net loss 845 million related asset impairment charges 358 connection collection accounts receivable 246 million related depreciation amortization 112 million inventory related noncash amortization demo equipment noncash provision excess obsolete inventory net change operating inventory 95 million related sharebased compensation partially offset change fair value contingent consideration 102 million decrease accrued income tax income taxes receivable 51 million cash flows provided operating activities year ended july 31 2016 reflects net income 121 million 230 million related depreciation amortization 89 million related sharebased compensation 66 million related accrued income taxes income taxes receivable partially offset net increase 174 million inventory related noncash write demo equipment net realizable value noncash provision excess obsolescence inventory net change operating inventory primarily related transition products peabody massachusetts location existing facility shanghai china cash flows provided operating activities fiscal year 2015 primarily reflects net income 335 million 233 million related depreciation amortization 109 million related sharebased compensation expense partially offset increase accounts receivable 161 million consistent increased revenues increase inventory 147 million related new product development investing activities net cash used investing activities year ended july 31 2017 driven purchase marketable security 450 million purchase property plant equipment 91 million capital expenditures primarily related infrastructure manufacturing equipment investments net cash used investing activities year ended july 31 2016 driven purchase property plant equipment 131 million well acquisition oncura 84 million net cash payment capital expenditures primarily related infrastructure manufacturing equipment investments net cash used investing activities year ended july 31 2015 primarily driven purchases property plant equipment 100 million well acquisition pathfinder net cash acquired 16 million capital expenditures primarily related infrastructure test equipment investments support growth financing activities net cash used financing activities year ended july 31 2017 primarily reflected 50 million dividends paid stockholders 44 million used repurchase common stock 22 million used shares surrendered taxes paid related vested employee restricted stock 19 million contingent consideration paid business acquisitions partially offset proceeds issuance common stock amounting 34 million associated sharebased compensation net cash used financing activities year ended july 31 2016 primarily reflected 137 million used repurchase common stock 50 million dividends paid stockholders 27 million used shares surrendered taxes paid related vested employee restricted stock partially offset proceeds issuance common stock amounting 47 million associated sharebased compensation net cash used financing activities year ended july 31 2015 primarily reflected 139 million used repurchase common stock 51 million dividends paid stockholders 28 million used shares surrendered taxes paid related vested employee restricted stock partially offset proceeds issuance common stock amounting 79 million associated sharebased compensation believe balances cash equivalents cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2017 effect obligations expected liquidity cash flows future periods follows purchase obligations relate primarily inventory procurement capital expenditures entered normal course business miscellaneous production related obligations restructuring fiscal year 2017 2016 announced restructuring plans incurred restructuring charges improving operational effectiveness better leverage core competencies across business july 31 2017 28 million restructuring liability paid throughout fiscal 2018 detailed description restructuring efforts including plan consolidate facilities please refer note 4 consolidated financial statements included report financing arrangements november 23 2015 entered fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included jpmorgan chase bank na td bank na wells fargo bank na hsbc bank na people’s united bank na effective august 25 2017 hsbc exited credit agreement replaced citibank credit agreement provides 1000 million available credit expires november 23 2020 outstanding borrowings must paid full credit facility require amortization principal may reduced maturity whole part option without penalty upon entry credit agreement terminated without penalty 1000 million fiveyear revolving credit agreement entered october 11 2011 previously paid full accordance terms borrowings credit agreement may used general corporate purposes including permitted acquisitions amount available credit increased specified circumstances 2000 million aggregate sole borrower credit agreement obligations credit facility required guaranteed material domestic subsidiaries designated us time required credit agreement pledges capital stock assets international subsidiaries interest rates borrowings outstanding credit facility range 125 175 libor rate option range 000 100 defined base rate amount case varying based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters earnings interest taxes depreciation amortization ebitda adjustments stipulated credit agreement greater 275100 temporary stepup event certain acquisitions • interest coverage ratio defined ratio consolidated trailing four quarters adjusted ebitda consolidated interest charges less 300100 time july 31 2017 leverage ratio 0004100 interest coverage ratio applicable attributable interest expense july 31 2017 full compliance financial operating covenants contained credit agreement failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering credit agreement incurred approximately 05 million transaction costs amortized fiveyear life credit facility july 31 2017 2016 approximately 12 million revolving credit facilities banks available direct borrowings borrowing outstanding credit facilities july 31 2017 2016 respectively contingent consideration connection acquisition oncura july 31 2017 102 million decrease fair value contingent consideration obligation fiscal 2017 due revisions forecasted revenues oncura business reduced remaining contingent consideration obligation zero please refer note 8 fair value measurements information tax related obligations 63 million unrecognized tax benefits uncertain tax positions unable reasonably estimate amount period liabilities might paid liability excluded commitments contingencies table note 15 consolidated financial statements included annual report form 10k provides additional information regarding matters relating income taxes including unrecognized tax benefits asset retirement obligations ultimate cost restoring leased facilities difficult predict given uncertainties regarding extent required restoration interpretation applicable laws regulations based upon experience current information applicable laws believe probable incur costs including asset retirement obligations approximately 13 million july 31 2017 included “other liabilities” consolidated balance sheets accruals recorded without giving effect possible future insurance proceeds legal claims subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable believe valid defenses respect matters currently pending us intend defend vigorously outcome matters individually aggregate expected material impact cash flows results operations financial position record losses estimable probable accordance us gaap january 3 2017 companys subsidiary ultrasonix medical corporation umc received notice civil claim defendant lawsuit relates lease corporate office burnaby british columbia umc never took possession lawsuit claims umc indebted landlord unpaid accelerated rent amount approximately cad 10 million plus costs plus interest unpaid rent commencing april 2014 june 2017 company reached settlement matter company agreed pay cad 0775 million 06 million full satisfaction matters dispute 06 million settlement amount recorded general administrative expenses fiscal year 2017 july 31 2017 twentyfour former interestholders oncura partners diagnostics llc “plaintiffs” filed suit district court travis county texas analogic corporation “analogic” oncura partners diagnostics llc “oncura” together “defendants” alleging claims arising analogic’s acquisition oncura plaintiffs 2016 plaintiffs assert claims breach contract anticipatory repudiation fraud negligent misrepresentation breach implied duty good faith fair dealing unjust enrichment declaratory judgement seek unspecified damages excess 1 million august 25 2017 defendants timely removed action federal court texas case subsequently transferred consent united states district court southern district new york reasonably possible may incur loss connection matter unable time provide estimate possible loss range possible losses given early stage matter recent accounting pronouncements w recent accounting pronouncements accounting pronouncements issued recently adopted simplifying test goodwill impairment january 2017 fasb issued asu 201704 “intangiblesgoodwill topic 350” amendments remove step 2 goodwill impairment test requires hypothetical purchase price allocation goodwill impairment amount reporting unit’s carrying value exceeds fair value exceed carrying amount goodwill amendments effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted impairment tests performed january 1 2017 standard effective us annual interim goodwill impairment tests fiscal years beginning august 1 2020 elected early adoption asu 201704 january 1 2017 result removed step 2 goodwill impairment test requires hypothetical purchase price allocation accordingly starting third quarter fiscal 2017 goodwill impairment amount recorded reporting unit’s carrying value exceeds fair value exceed carrying amount goodwill accordingly recorded impairment charges 552 million ultrasound reporting unit 66 million oncura reporting unit respectively third quarter fiscal 2017 based amount fair value reporting unit carrying value exceed carrying amount goodwill cloud computing arrangements april 2015 fasb issued asu 201505 “intangibles goodwill otherinternaluse software subtopic 35040” amendments provide guidance whether cloud computing arrangement eg software service platform service infrastructure service similar hosting arrangements includes software license based determination account arrangements amendments effective fiscal years interim periods within years beginning december 15 2015 may applied either prospective retrospective basis early adoption permitted provisions effective us first quarter fiscal year ending july 31 2017 effective august 1 2016 adopted asu 201505 adoption update material impact consolidated financial statements disclosure uncertainties entity’s ability continue going concern august 2014 fasb issued asu 201415 “presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern” standard requires management evaluate entity’s ability continue going concern within one year date issuance entity’s financial statements amendments effective annual period ending december 15 2016 annual periods interim periods thereafter applied prospective basis early adoption permitted provisions would effective us annual period ending july 31 2017 elected early adoption asu 201415 first quarter fiscal year beginning august 1 2016 prospective basis assessed ability continue going concern july 31 2017 concluded substantial doubt ability continue going concern exist yet effective scope modification accounting may 2017 fasb issued asu 201709 “compensation stock compensation topic 718” standard provides guidance changes terms conditions sharebased payment award require entity apply modification accounting asu 201709 effective fiscal years beginning december 15 2017 including interim periods within fiscal years applied prospectively award modified adoption date early adoption permitted standard effective us first quarter fiscal year ending july 31 2019 currently evaluating impact adoption update consolidated financial statements improving presentation net periodic pension cost net periodic postretirement benefit cost march 2017 fasb issued asu 201707 “compensation retirement benefits topic 715” standard improves presentation net periodic pension cost net periodic postretirement benefit cost requiring employer offers employees defined benefit pension postretirement benefit plans report service cost component line item items compensation costs arising services rendered pertinent employees period components net benefit cost required presented income statement separately service cost component outside subtotal income operations one presented standard effective fiscal years beginning december 15 2017 including interim periods within fiscal years early adoption permitted standard effective us fiscal year beginning august 1 2018 currently evaluating impact adoption update consolidated financial statements clarifying definition business january 2017 fasb issued asu 201701 “business combinations topic 805 clarifying definition business” amendments provide requirements needed set transferred assets activities business establish practical way determine set transferred assets activities business considered business acquisition would include input substantive process together significantly contribute ability create outputs output result inputs substantive processes provide goods services customers revenue investment income dividends interest amendments narrow definition outputs align outputs described topic 606 “revenue contracts customers” amendments effective annual periods beginning december 15 2017 including interim periods within periods early adoption permitted standard effective us fiscal year beginning august 1 2018 currently evaluating impact adoption update consolidated financial statements intraentity transfers assets inventory october 2016 fasb issued asu 201616 “income taxes topic 740” standard requires recognition income tax consequences intraentity transfer asset inventory transfer occurs two common examples assets included scope amendment intellectual property plant equipment amendments effective annual reporting periods beginning december 15 2017 including interim reporting periods within annual reporting periods early adoption permitted standard effective us fiscal year beginning august 1 2018 currently evaluating impact adoption update consolidated financial statements classification certain cash receipts cash payments august 2016 fasb issued asu 201615 “statement cash flows topic 230” amendments provide guidance eight specific cash flow statement presentation classification issues follows 1 debt prepayment debt extinguishment costs 2 settlement zerocoupon debt instruments debt instruments coupon interest rates insignificant relation effective interest rate borrowing 3 contingent consideration payments made business combination 4 proceeds settlement insurance claims 5 proceeds settlement corporateowned life insurance policies including bankowned life insurance policies 6 distributions received equity method investees 7 beneficial interests securitization transactions 8 separately identifiable cash flows application predominance principle amendments effective fiscal years beginning december 15 2017 interim periods within fiscal years early adoption permitted standard effective us first quarter fiscal year ending july 31 2019 currently evaluating impact adoption update consolidated financial statements measurement credit losses financial instruments june 2016 fasb issued asu 201613 “financial instruments credit losses topic 326” amendment modifies measurement expected credit losses certain financial instruments credit losses relating availableforsale debt securities recorded allowance credit losses 3 availableforsale accounting recognizes value may realized either collection contractual cash flows sale security therefore amendments limit amount allowance credit losses amount fair value amortized cost classification available sale premised investment strategy recognizes investment could sold fair value cash collection would result realization amount less fair value allowance credit losses purchased availableforsale securities morethaninsignificant amount credit deterioration since origination determined similar manner availableforsale debt securities however initial allowance credit losses added purchase price rather reported credit loss expense subsequent changes allowance credit losses recorded credit loss expense interest income recognized based effective interest rate excluding discount embedded purchase price attributable acquirer’s assessment credit losses acquisition amendments effective fiscal years beginning december 15 2019 including interim periods within fiscal years standard effective us fiscal year beginning august 01 2020 currently evaluating impact adoption update consolidated financial statements improvements employee sharebased payment accounting march 2016 fasb issued asu 201609 “improvements employee sharebased payment accounting” amends asc 718 “stock based compensation” amendments require excess tax benefits recorded income tax benefit expense income statement classified operating activity statement cash flows entities may also elect estimate amount forfeitures recognize occur amendments effective fiscal years interim periods within years beginning december 15 2016 standard effective us first quarter fiscal year ending july 31 2018 early adoption permitted adopt asu 201609 first quarter fiscal 2018 currently excess tax benefits deficiencies company’s sharebased payment awards recorded capital excess par value apic consolidated balance sheets upon adoption company record excess tax benefits deficiencies sharebased payments consolidated statements operations reporting periods occur currently excess tax benefits deficiencies classified within financing activities statement cash flows upon adoption company classify excess tax benefits deficiencies operating activity statement cash flows currently process assessing adoption method analyzing impact adoption update believe adoption new standard material impact company’s consolidated financial statements leases february 2016 fasb issued asu 201602 “leases topic 842” standard requires lessees recognize assets liabilities leases balance sheet income statement purposes standard requires leases classified either operating finance standard effective annual interim periods beginning december 15 2018 early adoption permitted standard effective us first quarter fiscal year ending july 31 2020 adoption requires application new guidance periods presented currently evaluating impact adoption standard consolidated financial statements revenue contracts customers may 2014 fasb issued asu 201409 “revenue contracts customers topic 606” update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition requirements industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates today’s guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update applied either retrospective modified retrospective basis update originally effective us first quarter fiscal year ending july 31 2018 early adoption permitted august 2015 fasb approved one year delay effective date new revenue standard public entities therefore update would effective us first quarter fiscal year ending july 31 2019 standard permits entities early adopt original effective date ie one year earlier expected adopt new standard first quarter fiscal year 2019 effective august 01 2018 still early stage assessing adoption method analyzing impact adoption update consolidated financial statements unable quantify impact time established project plan implementation team implementation team continues apprise management audit committee project status recurring basis critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies refer note 1 summary business operations significant accounting policies consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition provide engineering services customers contractual basis recognize revenue using percentage completion method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed allocation consideration multiple element revenue arrangements allocate arrangement consideration deliverable arrangement based relative selling price determine selling price using vendor specific objective evidence vsoe exists otherwise third party evidence tpe neither vsoe tpe selling price exists unit accounting use best estimated selling price besp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available besp unable establish selling price using vsoe tpe order received materially modified july 31 2009 use besp allocation arrangement consideration objective besp determine price would transact product service sold us standalone basis determination besp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies evident price list established updated regular basis value enhancements built deliverable characteristics varying markets deliverable sold inventory value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based age inventory lower cost market along significant management judgments concerning future demands inventory technological obsolescence actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed product held sales force field sales demonstration purposes classify value product based manner used sales force prior fiscal 2016 demonstration inventory amortized straight line basis four year period beginning fiscal 2016 ceased amortization demonstration inventory first year placed field based ability intent sell inventory normal profit margin implemented policy prospectively fiscal 2016 based changes demonstration inventory utilized field extent demonstration inventory unsold period year reclassified fixed assets amortized estimated remaining useful life 36 months amortization demonstration inventory recorded sales marketing expense inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence sharebased compensation sharebased compensation plans include stock options restricted stock awards employee stock purchase plan estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned optionpricing models generally accepted valuation techniques value restricted stock awards market conditions require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving future company financial targets personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize warranty reserves estimate costs product warranties based specific warranty claims historical data engineering estimates applicable warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable business combinations account acquired businesses using acquisition method accounting requires assets acquired liabilities assumed recognized estimated fair values acquisition date transaction costs related acquisition expensed incurred excess consideration transferred fair values identifiable net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets including intangible assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses furthermore fair value contingent consideration recorded part acquisition determined valuation model incorporates probability adjusted assumptions related achieving related milestones likelihood us making contingent payments unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies impairment goodwill indefinitelived intangible assets evaluate goodwill indefinitelived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable performed annual impairment test goodwill intangible assets indefinite lives december 31 2016 first assess qualitative factors determine whether likely fair value reporting unit less carrying value basis determining whether necessary perform quantitative impairment test alternatively may elect bypass qualitative assessment proceed twostep quantitative impairment test choose perform qualitative assessment determine likely carrying value net assets fair value related operations twostep impairment process performed otherwise testing required quantitative impairment assessment considered market approach income approach calculate fair value reporting unit different weights assigned market approach fair value reporting unit based trading multiples peer group companies determined based analysis selected guideline public companies’ business enterprise value “bev” plus control premium determined based analysis control premiums recent relevant acquisitions income approach fair value reporting unit based present value estimated future cash flows determined based upon company’s recent strategic operating plan considering market participant assumptions income approach dependent number significant management assumptions including estimates future revenues costs expenses number significant valuation inputs including discount rates working capital rates tax rates valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations discussed note 1w recent accounting pronouncements second quarter fiscal year 2017 subsequent annual impairment test goodwill intangible assets indefinite lives december 31 2016 elected early adoption asu 201704 january 01 2017 “intangibles─goodwill topic 350 simplifying test goodwill impairment” result removed step 2 goodwill impairment test requires hypothetical purchase price allocation accordingly starting third quarter fiscal 2017 goodwill impairment amount recorded reporting unit’s carrying value exceeds fair value exceed carrying amount goodwill relief royalty approach fair value indefinitelived intangible asset based tax royalty rate discount rate applied future forecasted sales four reporting units goodwillmedical imaging ultrasound oncura security detection three reportable segmentsmedical imaging ultrasound security detection second quarter fiscal year 2017 medical imaging ultrasound oncura security detection reporting units used twostep quantitative impairment test security detection reporting unit performed market approach determined fair value security detection reporting unit excess carrying value concluded impairment annual impairment test goodwill intangible assets indefinite lives december 31 2016 medical imaging ultrasound reporting units used market approach income approach determined impairment goodwill annual impairment test goodwill intangible assets indefinite lives december 31 2016 medical imaging reporting unit determined estimated fair value medical imaging reporting unit substantially exceeds carrying value ultrasound reporting unit determined ultrasound reporting unit risk failing first step goodwill impairment test future reporting periods due forecast revisions changes strategy ultrasound business ultrasound reporting unit excess fair value carrying value approximately 25 annual test date held 552 million allocated goodwill december 31 2016 second quarter fiscal year 2017 oncura reporting unit recent changes strategy caused us decrease future forecasted revenues prior estimates result determined associated goodwill impaired recorded estimated charge 98 million second quarter fiscal 2017 annual impairment test goodwill intangible assets indefinite lives december 31 2016 recorded amount asset impairment charges caption accompanying consolidated statements operations amount charge finalized third quarter fiscal year 2017 change completed second step goodwill impairment test accordance asc topic 350 intangiblesgoodwill information goodwill impairment test please refer note 10 intangible assets goodwill third quarter fiscal year 2017 strategic review oncura reporting unit noted decreased forecasted revenue compared prior estimates caused disruption sales channel veterinary business determined remaining goodwill impaired recorded charge 66 million third quarter fiscal year 2017 recorded amount asset impairment charges caption accompanying consolidated statements operations aggregate amount goodwill associated oncura reporting unit zero july 31 2017 also result decreased revenue forecast oncura recorded adjustment associated contingent consideration liability resulted gain 102 million fiscal 2017 recorded within general administrative expenses fair value contingent consideration obligation associated oncura acquisition zero july 31 2017 information goodwill impairment test please refer note 10 intangible assets goodwill third quarter fiscal year 2017 company noted impairment indicators related ultrasound reporting unit additional delays related introduction commercialization general imaging platform sold technology partner general imaging caused company reassess revenue expectations product significant change well reduction revenue estimates fiscal 2017 impacted overall revenue growth expectations ultrasound future periods management performed interim impairment test based market approach income approach recorded estimated impairment charge 552 million result aggregate amount goodwill associated ultrasound reporting unit taken zero april 30 2017 amount charge finalized fourth quarter fiscal 2017 change addition required goodwill impairment analysis also assessed recoverability remaining book value finitelived intangible assets allocated ultrasound reporting unit failed undiscounted cash flow test finitelived intangible assets tested recoverability using relief royalty method excess earnings method fair values intangible assets exceeded carrying values impairment incurred remaining book value intangible assets allocated ultrasound reporting unit 86 million july 31 2017 information goodwill impairment test please refer note 10 intangible assets goodwill compared fair value tradename indefinite life using relief royalty approach carrying value december 31 2016 relief royalty approach utilized aftertax royalty rate discount rate aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales tradename determined fair value tradename excess carrying value current economic environment uncertainties regarding impact business estimates forecasted revenue spending levels made purposes goodwill trade name impairment testing may accurate predictions future assumptions regarding forecasted revenue margin growth rates reporting unit trade name achieved may required record impairment charge goodwill trade name future periods whether connection next annual impairment testing second quarter fiscal year ending july 31 2018 prior change constitutes triggering event outside quarter annual goodwill trade name impairment test performed made changes strategy ultrasound business part driven impairment charges changes forecasts decreases value common stock could cause book values certain operations exceed fair values may result goodwill impairment charges future periods possible time determine future impairment charge would result whether charge would material income tax contingencies file income tax returns jurisdictions operate record liability position cannot establish conclusively benefits related positions likely realized change position information available eg result audits conclusive resolution issue relevant taxing authority income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions deferred tax valuation allowances required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent likely portion deferred tax assets realized valuation allowance must established cumulative three year loss position following charges impairment goodwill intangible assets creates substantial negative evidence recoverability deferred tax assets even sources income potential benefits tax planning taken account could overcome substantial negative evidence booked valuation allowance relevant jurisdictions effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings came results tax audits deferred tax valuation allowances involve uncertainties calculations require management make assumptions based historical data future book income taxplanning strategies item 7aitem 7 managements discussion analysis financial conditions results operations results operations fiscal 1999 compared fiscal 1998 product service engineering licensing revenues fiscal 1999 260945000 compared 276562000 fiscal 1998 decrease 6 decrease 15617000 principally due completion foreign government contract danish subsidiary well softness asian south american markets adversely impacted oem customers reduced demand products computer telephony semiconductor industries contributed approximately 6000000 revenue shortfall partially offsetting revenue declines initial fourth quarter shipments exact system used airport security operating revenue 12015000 12036000 represents revenue hotel operation fiscal 1999 1998 respectively interest dividend income increased 860000 primarily due interest earned city peabody real estate tax abatement percentage total cost sales total net sales fiscal 1999 1998 60 operating costs associated hotel fiscal years 1999 1998 6098000 6091000 respectively general administrative selling expenses increased 825000 2 primarily due higher operating costs companys danish subsidiary partially offset lower staffing requirements within companys domestic operations research product development expenses increased 3421000 primarily due expanding effort applicable developing new class complex medical imaging systems computer software costs 2462000 1658000 capitalized fiscal 1999 1998 respectively amortization capitalized software amounted 1977000 2406000 fiscal 1999 1998 respectively loss foreign exchange fiscal 1999 amounted 59000 compared 4000 loss fiscal 1998 primarily companys subsidiary denmark amortization excess fair value net assets cost acquired bk 113000 335000 fiscal 1999 1998 respectively companys share losses privately held company amounted 4780 000 3488000 fiscal 1999 fiscal 1998 respectively see note 5 notes consolidated financial statements fiscal 1999 compared fiscal 1998 continued fiscal 1998 companys investment analogic scientific decreased 575000 reflecting companys share analogic scientifics equity fiscal 1999 adjustment necessary see note 5 notes consolidated financial statements fiscal 1998 company recorded write 400000 reflecting partial impairment 19 investment another privately held company adjustments fiscal 1999 fiscal 1998 company sold 140560 common shares publicly traded company resulting gain 997000 see note 5 notes consolidated statements minority interest net income companys consolidated subsidiary camtronics fiscal 1999 amounted 758000 compared 1098000 fiscal 1998 fourth quarter fiscal 1998 company purchased one founders camtronics entire equity interest camtronics 1600000 transaction companys share camtronics increased approximately 77 see note 2 notes consolidated financial statements effective tax rate fiscal 1999 20 vs 32 fiscal 1998 decrease due increased benefits tax exempt interest increased general business credits impact resolution prior year tax audit increased fsc foreign sales corporation benefit net income fiscal 1999 19513000 compared net income 23888000 period last year basic pershare earnings 154 189 diluted pershare earnings 153 187 fiscal 1998 compared fiscal 1997 product service engineering licensing revenues fiscal 1998 276562000 compared 239550000 fiscal 1997 increase 15 increase 37012000 principally due increased sales medical technology products 30060000 primarily due continued strengthening demand digital laser imaging systems magnetic resonance imaging products new products digital ultrasound subsystems ultrasound systems danish subsidiary bk signal processing technology products 4532000 primarily due company entering new growing market dsp resource boards computer telephony integration applications automated directory assistance voice internet industrial technology products 2420000 primarily due increased demand companys high frequency ate boards operating revenue 12036000 11591000 represents revenue hotel operation fiscal 1998 1997 respectively percentage total cost sales total net sales fiscal 1998 1997 60 59 respectively operating costs associated hotel fiscal years 1998 1997 6091000 5959000 respectively general administrative selling expenses increased 2619000 primarily due increases bad debt reserve legal expenditures related patent filings research product development expenses increased 2229000 primarily due companys expanding engineering efforts applicable developing complex imaging systems new digital ultrasound subsystems ultrasound systems companys danish subsidiary bk computer software costs 1658000 1480000 capitalized fiscal 1998 1997 respectively amortization capitalized software amounted 2406000 3115000 fiscal 1998 1997 respectively gain foreign exchange 1045000 realized 1997 versus loss 4000 fiscal 1998 companys share losses privately held company amount 3488000 1949000 fiscal 1998 1997 respectively see note 5 notes consolidated financial statements amortization excess fair value net assets cost acquired bk 335000 645000 fiscal 1998 1997 respectively fiscal 1998 companys investment another privately held company increased 447000 reflecting companys share equity fiscal 1998 companys investment analogic scientific decreased 575000 reflecting companys share analogic scientifics equity see note 5 notes consolidated financial statements fiscal 1998 company recorded write 400000 reflecting partial impairment 19 investment another privately held company fiscal 1998 company sold 140560 common shares publicly traded company resulting gain 997000 see note 5 notes consolidated statements minority interest net income companys consolidated subsidary camtronics fiscal 1998 amounted 1098000 compared 1270000 fiscal 1997 fourth quarter fiscal 1998 company purchased one founders camtronics entire equity interest camtronics 1600000 transaction companys share camtronics increased approximately 77 see note 2 notes consolidated financial statements effective tax rate fiscal 1998 32 vs 24 fiscal 1997 increase primarily due alternative minimum tax credit carry forwards utilized fiscal 1997 available fiscal 1998 see note 11 notes consolidated financial statements net income fiscal 1998 23888000 compared net income 20090000 period last year basic pershare earnings net income divided weighted average common shares outstanding 189 160 diluted pershare earnings net income divided weighted average common shares potential new shares stock options also increased 187 158 prior periods per share amounts restated reflect adoption fasb 128 see notes 1h 11 12 notes consolidated financial statements financial position companys balance sheet july 31 1999 reflects current ratio 70 1 compared 65 1 july 31 1998 cash equivalents marketable securities along accounts notes receivable constitute approximately 75 current assets july 31 1999 liquidity sustained principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution management anticipate difficulties financing operations anticipated levels companys debt equity ratio 18 1 july 31 1999 compared 21 1 july 31 1998 company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact companys financial results companys primary exposure related local currency revenue operating expenses europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 1999 due short maturities instruments company maintains bond investment portfolio various issuers types maturities companys cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value companys investment portfolio company currently hedge interest rate exposures fiscal 1999 funds provided operations 37018000 major components 37018000 net income 19513000 depreciation amortization 13638000 inventory decrease 2493000 increase account payable 2909000 following investing activities resulted cash decrease 28066000 1999 company invested additional 3950000 privately held company designs manufactures medical imaging equipment capital expenditures fiscal 1999 20665000 include approximately 7100000 assets acquired anrad capitalized computer software cost approximately 2462000 company also made additional investment 1085000 marketable securities net maturities following financing activities resulted net cash reduction 6329000 dividends paid shareholders fiscal year 3425000 cash flows financing activities decreased payment unsecured bank line credit 2600000 offset proceeds stock options exercised 1156000 total investments advances affiliated companies decreased 800000 decrease primarily due companys share equity losses privately held company 4780000 partially offset additional investment 3950000 privately held company notes payable decreased 2951000 5982000 end fiscal 1999 primarily due repayment borrowing line credit camtronics minority interest consolidated subsidiaries increased 758000 represents minority interest camtronics companys three largest customers significant valued customer philips toshiba general electric accounted approximately 18 9 8 respectively product service engineering licensing revenue fiscal year ended july 31 1999 loss one customers would material adverse effect upon companys business part stock repurchase program authorized board directors company purchased 16000 shares common stock treasury fiscal 1999 aggregate cost 549000 shares repurchased fiscal 1998 impact inflation overall inflation material impact companys operations past three fiscal years accounting standards june 1997 fasb issued statement 130 sfas 130 reporting comprehensive income requires disclosure certain information displaying comprehensive income components company adopted sfas 130 fiscal year 1999 june 1997 fasb issued statement 131 sfas 131 disclosures segments enterprise related information sfas 131 requires disclosure certain information regarding operating segments products services geographic areas operation major customers company adopted sfas 131 fiscal year 1999 see note 17 notes consolidated financial statements june 1998 fasb issued statement 133 sfas 133 accounting derivative instruments hedging activities establishes new model accounting derivative hedging activities supersedes amends number existing standards provisions sfas 133 effective fiscal quarters years beginning june 15 1999 company believes statement impact financial position results operations cash flows company hold derivative instruments engage hedging activities present time year 2000 year 2000 issue result computer programs written using two digits rather four digits define applicable year computer programs timesensitive software may recognize date using 00 1900 rather year 2000 companys internal systems correctly recognize date information year changes 2000 could adverse impact companys operations year testing training software conversion hardware installation company began implementation new enterprise resource planning erp system first quarter fiscal 2000 due size complexity system company anticipated experienced problems august september 1999 company resolved many problems expects system functioning planned advance january 1 2000 company surveyed major vendors y2k compliance ensured products currently manufactured company y2k compliant company currently estimates year 2000 costs range form 60 million 80 million approximately 56 million spent july 31 1999 estimated costs based managements best projections yet guarantee forecasts achieved actual results could differ materially anticipated costs project funded operating cash flows item 8item 7 management’s discussion analysis financial condition results operations following discussion provides analysis company’s financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains forwardlooking statements within meaning securities exchange act 1934 “exchange act” statements historical fact company makes document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements company differ projected results see “risk factors” item 1a company reports financial condition results operations fiscal year basis ending july 31 dollar amounts item 7 thousands except per share data summary company engaged primarily design manufacture sale hightechnology highperformance highprecision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products primarily within two major markets within electronics industry medical technology products security technology products following summary areas management believes important understanding results periods indicated summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document net revenue fiscal year 2007 10663 3 lower fiscal year 2006 due primarily decrease product revenues 10565 3 decrease product revenues due primarily lower shipments exact systems resulted product revenue security technology products 34582 fiscal year 2007 compared 58087 fiscal year 2006 decline 23505 addition product revenue digital radiography products declined 7407 31 fiscal year 2007 compared fiscal year 2006 decreases partially offset increased sales medical imaging bk medical products 11924 6718 respectively fiscal year 2007 compared fiscal year 2006 gross margin percentage fiscal year 2007 344 remained relatively consistent gross margin percentage 345 fiscal year 2006 fiscal year 2007 company recorded asset impairment charges 8625 cost sales related writedown digital radiography business fiscal year 2006 company recorded asset impairment charges 7361 related writedowns program ct medical business restructuring anasky limited formerly known sky computers inc “sky” wholly owned subsidiary engineering gross margin increased 3550 1446 2007 loss 2104 prior year fiscal year 2006 losses due primarily costs excess contract revenues several us government projects security technology business total operating expenses decreased 11494 fiscal year 2007 compared fiscal year 2006 lower engineering development material spending sharebased compensation expense restructuring asset impairment charges cost saving initiatives contributed decrease diluted earnings per share continuing operations increased 077 110 fiscal year 2007 compared 033 fiscal year 2006 lower restructuring asset impairment charges 2007 compared 2006 well 2007 gains sale company’s investments sky bioimaging research inc “bir” increase interest income contributed improvement result continuing losses digital radiography business related business outlook company evaluated net realizability assets related business october 31 2006 result company recorded asset impairment charge 9705 associated writedown company’s digital radiography system business assets estimated fair values group based upon present value estimated future cash flows business 9705 asset impairment charges 8625 recorded cost sales 1080 recorded operating expenses 8625 asset impairment charge recorded cost sales included 4144 related inventory 4191 related software license 290 related assets 1080 asset impairment charge recorded operating expenses included 696 related capitalized software development time 384 related assets fiscal year 2007 company continued consider several alternatives regarding reduce future losses digital radiography business august 2007 company notified customers subsidiary anexa corporation “anexa” sales marketing anexa products would cease immediately analogic would continue service support products currently customers foreseeable future november 1 2006 company sold certain assets liabilities sky including obligation service previously sold products price 405 includes 225 cash paid closing 150 cash paid december 2006 assumption 30 liabilities company recorded gain 205 sale fiscal year 2007 may 23 2007 bir company approximately 17 ownership interest declared dividend 1429 paid company may 24 2007 investment accounted cost method april 30 2007 book value 200 may 24 2007 company sold entire ownership interest bir 3714 2807 paid cash upon closing remaining 907 held escrow period two years date closing secure indemnification claims company recorded income taxes sale related dividend income 4036 fiscal year 2007 based cash received escrowed balance less amounts used satisfy indemnification claims recognized income cash received september 4 2007 company received 84 907 held escrow recorded income first quarter fiscal year 2008 june 7 2007 company announced board directors “board” june 5 2007 authorized repurchase 60000 company’s common stock repurchase program funded using company’s available cash fourth quarter fiscal year 2007 company repurchased 818030 shares common stock repurchase program 60000 average purchase price 7335 per share repurchase program completed july 26 2007 company’s cash equivalent marketable securities decreased 29692 258237 july 31 2006 228545 july 31 2007 primarily result common stock repurchase november 8 2006 john w wood jr resigned company’s president mr wood’s retirement company’s ceo director effective december 31 2006 board appointed dr edmund f becker jr president chief operating officer effective november 8 2006 interim basis board appointed bernard gordon executive chairman john tarello company’s former chairman board vice chairman board interim basis search successor mr wood conducted executive chairman mr gordon served chairman board company’s principal executive officer may 7 2007 board appointed james w green company’s president chief executive officer effective may 21 2007 effective may 21 2007 mr gordon ceased company’s executive chairman principal executive officer continued serve advisor company july 31 2007 mr gordon continue serve chairman board also effective may 21 2007 dr becker ceased company’s president appointed executive vice president maintaining role chief operating officer results operations fiscal year 2007 compared fiscal year 2006 net revenue gross margin fiscal year 2007 compared fiscal year 2006 summarized tables product revenue product revenue fiscal year 2007 decreased 10565 3 fiscal year 2006 due primarily security technology product revenues 34582 fiscal year 2007 compared 58087 fiscal year 2006 decline 23505 40 decrease security technology product revenues due primarily decline shipments exact systems 52 units fiscal year 2007 107 units fiscal year 2006 due decline orders addition revenue digital radiography products declined 7407 31 fiscal year 2007 compared fiscal year 2006 decline digital radiography product sales consistent company’s business outlook first quarter fiscal year 2007 led asset impairment charge 9705 discussed section “asset impairment charges” november 1 2006 sale certain assets liabilities sky revenue fiscal year 2007 compared 4868 fiscal year 2006 also contributed product revenue decrease decreases partially offset increased sales medical imaging bk medical products 11924 7 6718 9 respectively fiscal year 2007 compared fiscal year 2006 increase medical imaging products driven strong demand 16slice 64slice data acquisition systems ct subsystems mri subsystems increase bk medical revenues due primarily foreign currency exchange rates product gross margin decreased 357 fiscal year 2007 366 fiscal year 2006 decrease due primarily increase asset writedowns 1264 fiscal year 2007 compared fiscal year 2006 discussed section “asset impairment charges” also contributing decrease product gross margin reduced manufacturing efficiency security technology products caused lower production volumes decreases partially offset efficiencies resulting increased volume certain medical technology products 16slice 64slice data acquisition systems ct subsystems well improved margins ultrasound products result favorable product distribution channel price mix continued product cost reductions engineering revenue engineering revenue decreased 677 4 fiscal year 2007 compared fiscal year 2006 decrease due primarily 1900 funding company received fiscal year 2006 completed digital radiography products project costs expensed prior periods due uncertainty recovery decrease partially offset increase 1673 medical technology projects 7570 fiscal year 2006 9243 due completion data management system project oem customer resulted revenue 1688 completed contract method engineering revenue security technology products remained relatively constant 5972 fiscal year 2007 compared 6224 fiscal year 2006 engineering gross margin fiscal year 2007 1446 compared loss 2104 fiscal year 2006 increase 3550 increase due primarily gross margin 2000 two contracts tsa related security technology products fiscal year 2007 increase additionally due company completing work security technology project resulted gross margin 793 completed contract method increases partially offset costs excess contract revenue 1706 medical technology projects loss 2104 fiscal year 2006 made primarily costs excess contract revenues medical technology security technology projects includes approximately 4061 three us government projects costs excess contract revenues partially offset 1900 additional funds received completed project costs previously expensed prior periods due uncertainty recovery revenue 10679 10100 fiscal years 2007 2006 respectively represents revenue hotel operations increase due primarily higher occupancy rates increase room rates asset impairment charges asset impairment charges included costs sales increased 1264 7361 fiscal year 2006 8625 fiscal year 2007 7361 asset impairment charges incurred fiscal year 2006 related writedown 5772 related certain inventories ct medical program due uncertainty arose respect viability program based discussions oem customer also included 7361 writedown 1179 related sky inventory result company’s decision restructure sky fiscal year 2006 based continued lowerthanexpected sales quarter ended july 31 2006 company decided close business operations sky based continued lowerthanexpected sales resulted additional writedown 410 inventory november 1 2006 company sold certain assets sky obligation service previously sold products purchase price 405 includes 225 cash paid closing 150 cash paid closing additional inventory assumption 30 liabilities company recorded gain 205 sale fiscal year 2007 result continuing losses business outlook digital radiography business fiscal year 2007 company recorded asset impairment charges 9705 associated writedown digital radiography business assets estimated net realizable values group 9705 asset impairment charges 8625 recorded cost sales 1080 recorded operating expenses 8625 asset impairment charge recorded cost sales included 4144 related inventory 4191 related software license 290 related assets august 2007 company notified customers anexa sales marketing anexa products would cease immediately analogic would continue service support products previously sold customers foreseeable future operating expenses operating expenses declined 11494 9 fiscal year 2007 compared fiscal year 2006 shown research product development expenses decreased 4835 fiscal year 2006 fiscal year 2007 decrease related primarily less spending engineering development materials decline sharebased compensation expense 531 closure sky’s business operations last year research development spending 983 fiscal year 2006 implemented cost saving initiatives selling marketing expenses increased 824 fiscal year 2006 fiscal year 2007 increase due primarily increases sales incentive bonuses consulting costs 496 511 respectively general administrative expenses decreased 1048 fiscal year 2006 fiscal year 2007 decrease related primarily 687 closure sky’s business operations last year decline sharebased compensation expense 1107 sarbanesoxley act compliance costs audit fees 2122 fiscal year 2006 fiscal year 2007 decreases partially offset real estate tax abatement credit received fiscal year 2006 reduced spending period increase bonus profit sharing costs 1129 fiscal year 2006 fiscal year 2007 restructuring asset impairment charges 1080 fiscal year 2007 compared 7515 fiscal year 2006 fiscal year 2007 company recorded asset impairment charge 1080 related digital radiography system business included charge 696 related capitalized software still development 384 related assets fiscal year 2006 includes charge 7515 made following four items 5808 asset impairment charge related primarily discontinuance medical ct workstation development program 216 impairment charge recorded investment photodetection systems inc “pds” based company’s review otherthantemporary impairment 275 impairment charge recorded company’s investment shenzhen anke high tech co ltd “sahco” based review otherthantemporary impairment 1216 restructuring charge related sky included 906 severance 310 writedown capital assets income expense interest income net 12755 fiscal year 2007 compared 10155 fiscal year 2006 increase due primarily higher invested cash balances higher effective interest rates company recorded equity loss unconsolidated affiliates 667 related pds fiscal year 2007 compared equity loss 787 fiscal year 2006 455 related sahco 332 related pds gain sale investments fiscal year 2007 includes dividend income gain sale company’s 17 ownership interest bir totaling 4036 fiscal year 2007 income 226 14 fiscal years 2007 2006 respectively increase income predominantly due foreign currency exchange gains realized company’s canadian danish subsidiaries addition fiscal year 2007 company recorded gain 205 sale sky assets offset recovery 197 bad debt writeoff prior year fiscal year 2006 provision income taxes effective tax rate fiscal years 2007 2006 provision 18 benefit 11 respectively effective tax rate fiscal year 2007 includes benefit 4 conjunction closure sky business benefit 5 due release tax reserves resulting expiration statutes limitations prior year tax filings internal revenue service “irs” refund 313 fiscal year 2007 rate also includes reinstatement us research experimentation credit january 1 2006 reduction danish tax rate 28 25 lower rate fiscal year 2006 due primarily reduced income tax benefit foreign operations due lower foreign tax rate also contributing reduced rate fiscal year 2006 rate tax reserve release 332 irs refund provisiontoreturn adjustment third quarter fiscal year 2006 provided outofperiod tax benefit 329 net income earnings per share net income earnings per share continuing operations fiscal year 2007 fiscal year 2006 follows net income continuing operations 15380 fiscal year 2007 compared net income continuing operations 4600 fiscal year 2006 basic diluted earnings per share continuing operations fiscal year 2007 111 110 respectively compared basic diluted earnings per share 034 033 respectively fiscal year 2006 net income fiscal years 2007 2006 included pretax charges 9705 14876 respectively related asset impairments restructuring net income fiscal year 2007 also includes dividend income gain sale company’s 17 ownership interest bir totaling 4036 fiscal year 2006 compared fiscal year 2005 net revenue gross margin fiscal year 2006 compared fiscal year 2005 summarized tables product revenue product revenue fiscal year 2006 323486 compared 298157 fiscal year 2005 increase 25329 8 increase product revenue due primarily sales medical technology products increased 19157 8 prior year increase due primarily increased sales company’s data acquisition products 8181 digital radiography equipment 8049 ultrasound equipment 6369 partially offset continued lower demand company’s sub systems used mri scanners increased product revenue security technology products 8282 17 prior year resulted sale additional 30 exact systems partially offset decrease spare part sales revenue increase medical technology products security technology products partially offset decrease 2132 corporate revenue due primarily lower demand embedded multiprocessing products company exits business product gross margin increased 1527 fiscal year 2006 fiscal year 2005 due primarily higher revenue product gross margin percentage decreased 366 product revenue fiscal year 2006 392 product revenue fiscal year 2005 excluding asset impairment charge 7361 fiscal year 2006 product gross margin percentage 389 fiscal year 2006 relatively consistent gross margin percentage 392 fiscal year 2005 engineering revenue engineering revenue fiscal year 2006 17859 compared 19168 fiscal year 2005 decrease 1309 7 decrease resulted primarily lower revenue security engineering funded projects approximately 2533 due primarily large funded project completed last year decrease partially offset increased funding certain customer funded projects medical technology products engineering gross margin decreased 4613 fiscal year 2006 fiscal year 2005 due primarily security products contract costs exceeding us transportation security administration “tsa” funded amounts revenue 10100 9154 fiscal year 2006 fiscal year 2005 respectively represents revenue company’s hotel operation increase due primarily higher occupancy rates operating expenses operating expenses increased 4197 34 fiscal year 2006 compared fiscal year 2005 shown research product development expenses 51790 fiscal year 2006 compared 50470 fiscal year 2005 148 155 total revenue respectively year increase research product development expenses 1320 due primarily approximately 2377 increased personnel related costs including expenses sharebased payments connection adoption statement financial accounting standards “sfas” 123r “sharebased payment” increase required support product development focused number projects security systems well developing new generation medical imaging equipment extended family multislice ct data acquisition systems partially offsetting increase savings realized restructuring sky selling marketing expenses 29242 29168 respectively fiscal years 2006 2005 selling marketing expenses 83 total revenue fiscal year 2006 compared 89 total revenue fiscal year 2005 although selling marketing expenses remained basically unchanged fiscal year 2006 versus fiscal year 2005 fiscal year 2006 includes 237 sharebased payments adoption sfas 123r general administrative expenses 37837 fiscal year 2006 108 total revenue compared 39549 fiscal year 2005 121 total revenue decrease 1712 attributable primarily nonrecurring legal costs related camtronics’ review revenue recognition procedures lower expenses comply securities exchange commission “sec” internal control rules compared prior year reductions offset partially expenses associated sharebased payments connection adoption sfas 123r general expenses restructuring asset impairment charges 7515 fiscal year 2006 compared 3000 fiscal year 2005 fiscal year 2006 asset impairment charges related primarily medical ct development program 1958 discontinuance medical ct workstation development program 3850 severance costs certain writedowns capital assets restructuring sky 1216 fiscal year 2005 restructuring asset impairment charges 3000 related pds based net realizable value company’s investment 2160 840 related realignment certain technologies research development activities impact adopting sfas 123r fiscal year 2006 operating expenses approximately 3269 software development costs 1109 3530 capitalized fiscal year 2006 fiscal year 2005 respectively amortization capitalized software costs amounted 1157 857 fiscal year 2006 fiscal year 2005 respectively included product cost sales company’s consolidated statements operations income expense interest income fiscal year 2006 10223 compared 5243 fiscal year 2005 increase 4980 primarily results higher effective interest rates shortterm investments higher invested cash balance primarily due proceeds company’s sale camtronics approximately 40000 company recorded equity loss unconsolidated affiliated investments 787 compared equity gain 283 fiscal year 2006 fiscal year 2005 respectively equity loss fiscal year 2006 consists 455 332 company’s share losses sahco pds respectively equity gain fiscal year 2005 consists gain 474 company’s share profit sahco partially offset loss 191 company’s share losses cedara gain sale marketable securities 43829 fiscal year 2005 represents gain related company’s sale equity interest cedara provision income taxes effective tax rate continuing operations fiscal year 2006 benefit 11 compared expense 31 fiscal year 2005 rate reduction due primarily reduced income tax benefit overseas operations tax reserve release 332 irs refund also reducing rate addition third quarter fiscal year 2006 company recorded provisiontoreturn adjustment provided outofperiod tax benefit 329 rate reduction offset part setting valuation allowance state income tax credits suspension federal research credit net income earnings per share net income earnings per share continuing operations fiscal year 2006 fiscal year 2005 follows net income continuing operations fiscal year 2006 4600 compared 34659 fiscal year 2005 basic earnings per share continuing operations 034 fiscal year 2006 compared 255 fiscal year 2005 diluted earnings per share continuing operations 033 fiscal year 2006 compared 254 fiscal year 2005 net income fiscal year 2006 included pretax charges 14876 related asset impairments restructuring net income fiscal year 2005 includes aftertax gain approximately 27388 201 per diluted share related company’s sale equity interest cedara addition pretax charges 3000 related asset impairments included fiscal year 2005 net income liquidity capital resources cash equivalents marketable securities totaled 228545 258237 july 31 2007 july 31 2006 respectively working capital 300114 334955 july 31 2007 july 31 2006 respectively company’s balance sheet reflected decline current ratio 56 1 july 31 2007 compared 70 1 july 31 2006 due cash used company’s stock repurchase fiscal year 2007 60000 liquidity provided principally funds provided operations shortterm time deposits marketable securities available provide additional sources cash company faces exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2007 due short maturities instruments company maintains limited bond investment portfolio various issuers types maturities portfolio classified balance sheet either cash equivalents marketable securities depending lengths time maturity original purchase cash equivalents totaled 226545 july 31 2007 include highly liquid investments maturities three months less time purchase investments maturities time purchase excess three months totaled 2000 july 31 2007 stated amortized cost approximates fair value classified available sale rise interest rates could adverse impact fair value company’s investment portfolio company currently hedge interest rate exposures net cash provided operating activities continuing operations 34221 fiscal year 2007 12516 fiscal year 2006 7016 fiscal year 2005 cash flows generated operating activities continuing operations fiscal year 2007 due primarily net income 15380 noncash impact asset impairment charges 9705 depreciation amortization 14565 partially offset gain sale bir 4036 increase deferred income taxes 2806 net change operating assets liabilities 860 net change operating assets liabilities due primarily increases accounts receivable inventories assets 6042 1532 1435 respectively partially offset increases accounts payable accrued liabilities advanced payments deferred revenue 3974 1135 2543 respectively increase deferred income taxes 2806 due primarily tax benefits derived 9705 digital radiography business asset impairment charge partially offset disposition obsolete inventory due sale sky fiscal year 2007 increase accounts receivable 6042 due primarily increase revenues 9215 fourth quarter fiscal year 2007 compared fiscal year 2006 well increase two days age receivables 54 days july 31 2006 56 days july 31 2007 increase inventories 1532 due primarily additional inventory needs fiscal year 2007 due growth medical imaging products business increase backlog 101574 july 31 2007 compared 74691 july 31 2006 increase assets 1435 due primarily increase deferred costs engineering projects accounted using completed contract method increase accounts payable due timing vendor payments increase accrued liabilities due primarily increase employee compensation benefits july 31 2006 july 31 2007 due additional bonus profitsharing accruals increase advance payments deferred revenue due primarily 2253 revenue deferred contract undelivered elements company fair value net cash used investing activities continuing operations 1587 fiscal year 2007 compared net cash provided investing activities 29452 49122 fiscal years 2006 2005 respectively cash used investing activities continuing operations fiscal year 2007 due primarily capital expenditures software development costs 8988 1295 respectively partially offset dividend income sale proceeds company’s interest bir totaling 4236 maturities marketable securities 3800 net cash used financing activities continuing operations 60001 149 fiscal years 2007 2005 respectively compared cash provided financing activities continuing operations 248 fiscal year 2006 net cash used financing activities continuing operations fiscal year 2007 consisted 5589 dividends paid stockholders 60000 repurchase company’s shares common stock partially offset cash received issuance stock pursuant company’s employee stock option stock purchase plans 5111 company believes balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements company’s contractual obligations july 31 2007 effect obligations expected liquidity cash flows future periods follows company currently approximately 23954 revolving credit facilities various banks available direct borrowings direct borrowings offbalance sheet arrangements fiscal year 2007 fiscal year 2006 new accounting pronouncements june 2006 financial accounting standards board “fasb” issued fasb interpretation “fin” 48 “accounting uncertainty income taxes” interpretation sfas 109 “accounting income taxes” fin 48 requires management perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns company required adopt fin 48 effective august 1 2007 company currently evaluating effect fin 48 financial statements company adopted sfas 158 “employer’s accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” effective december 15 2006 sfas 158 requires employer recognize statement financial position asset plan’s overfunded status liability plan’s underfunded status measure plan’s assets obligations determine funded status end employer’s fiscal year recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income separate component shareholder’s equity following table summarizes incremental effects initial adoption sfas 158 company’s consolidated balance sheet july 31 2007 company adopted sec staff accounting bulletin “sab” 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” effective november 15 2006 sab 108 requires misstatements quantified based impact financial statements related disclosures adoption statement material impact company’s financial position results operations september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 prescribes single definition fair value price received asset sold paid transfer liability orderly transaction market participants measurement date sfas 157 effective company’s interim reporting period beginning august 1 2008 company currently evaluating effect sfas 157 financial statements however company believe time adoption material impact financial condition results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment sfas 115” new statement allows entities choose specified election dates measure eligible financial assets liabilities fair value otherwise required measured fair value company elects fair value option eligible item changes item’s fair value subsequent reporting periods must recognized current earnings sfas 159 effective fiscal years beginning november 15 2007 company currently evaluating effect sfas 159 financial statements however company believe time adoption material impact financial condition results operations critical accounting policies estimates management’s discussion analysis company’s financial condition results operations based company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america company’s critical accounting policies significant impact preparation consolidated financial statements policies include estimates significant judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities company continues evaluate estimates judgments ongoing basis nature policies require management make difficult subjective judgments often result need make estimates matters inherently uncertain case company’s critical accounting policies estimates judgments based historical experience terms existing contracts company’s observance trends industry information provided customers information available outside sources appropriate company believes following accounting policies estimates require management make difficult judgments preparation company’s consolidated financial statements accordingly critical revenue recognition accounts receivable company recognizes majority product revenue accordance sec staff accounting bulletin 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification company’s transactions sometimes involve multiple elements ie products services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined vendor objective evidence “voe” recognized time delivery arrangement includes undelivered elements essential functionality delivered elements company defers fair value undelivered elements residual revenue allocated delivered elements fair value determined based upon price charged element sold separately sufficient evidence fair value undelivered elements revenue allocated delivered elements total consideration received deferred delivery elements objective reliable evidence fair value available maintenance service revenues recognized ratably life contract business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regard installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained company allocates revenue first fair value undelivered elements allocates residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term company provides engineering services customers contractual basis recognizes revenue using percentage completion method company generally estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs complete project company sufficient basis measure progress towards completion revenue related costs deferred recognized upon completion contract total cost estimates exceed total revenues company accrues estimated losses immediately deferred revenue comprised 1 maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement voe vsoe fair value available components yet delivered accepted customer revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified determined current quarter sale collectible recognition revenue sale deferred collection made stockbased compensation effective august 1 2005 company adopted provisions sfas 123r see note 3 notes consolidated financial statements sfas 123r company required record compensation cost sharebased payments granted date adoption based grant date fair value estimated accordance provisions sfas 123r unvested portion sharebased payments previously granted remain outstanding based grant date fair value estimated accordance original provisions sfas 123 company expenses sharebased compensation straightline method choice valuation technique approach utilized develop underlying assumptions technique involve significant judgments reflect management’s assessment accurate method valuing stock options company issues based company’s historical experience knowledge current conditions beliefs could occur future given available information company’s judgments could change time additional information becomes available facts underlying assumptions change time change company’s judgments could material effect financial statements management believes estimates incorporate relevant information represent reasonable approximation light difficulties involved valuing nontraded stock options inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand company’s products less estimates company experiences higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory valuation provisions subsequently reversed inventory used disposed concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company maintains limited bond investment portfolio various types maturities highcreditquality issuers cash equivalents required working capital purposes placed shortterm investments government agency discounted notes original maturities three months less company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified credit losses historically within expectations provisions established guarantee company continue experience credit loss rates past since accounts receivable concentrated among relatively customers significant change liquidity financial position one customers could material adverse impact collectibility accounts receivable future operating results warranty reserve company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery investments advances affiliated companies company investments companies whose business relates company’s strategic focus investments companies company ability exercise significant influence accounted equity method company’s ownership interest ranges 20 50 investments companies company ability exercise significant influence accounted cost method assessing recoverability investments company must make certain assumptions judgments based upon changes company’s overall business strategy financial condition affiliated companies market conditions industry economic environment entities operate intangible assets longlived assets intangible assets consist intellectual property licenses capitalized software longlived assets consist primarily property plant equipment assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations income taxes company required estimate income taxes jurisdictions within operates process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet company must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established company must include expense within tax provision statement operations event actual results differ estimates provision income taxes results operations could materially impacted company establishes liabilities possible assessments taxing authorities resulting known tax exposures including limited certain tax credits various federal state foreign tax matters company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs item 7aitem 7 management’s discussion analysis financial condition results operations following discussion provides analysis financial condition results operations read conjunction audited consolidated financial statements notes thereto included elsewhere annual report form 10k discussion contains statements extent recitation historical facts constitute “forwardlooking statements” pursuant safe harbor provisions private securities litigation reform act 1995 statements historical fact including without limitation statements product development market industry trends strategic initiatives regulatory approvals sales profits expenses price trends research development expenses trends capital expenditures make document incorporated reference forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance achievements differ projected results see “risk factors” item 1a discussion primary risks uncertainties known us time management’s discussion analysis presented six sections follows • business overview • fiscal year 2009 overview • results operations • liquidity capital resources • critical accounting policies • new accounting pronouncements report financial condition results operations fiscal year basis ending july 31 dollar amounts item 7 thousands except per share data business overview analogic high technology company designs manufactures advanced medical imaging security systems subsystems sold oems end users healthcare homeland security markets incorporated commonwealth massachusetts november 1967 recognized worldwide advancing stateoftheart technology areas medical ct mri digital radiography specialized ultrasound eds airport security oem customers incorporate technology systems turn sell various medical security applications also sell ultrasound products directly specialized clinical enduser markets direct worldwide sales force business name bk medical operate within two major markets medical technology products security technology products medical technology products consists three reporting segments medical imaging products digital radiography products bk medical significant portion products sold oems whose purchasing dynamics impact reported sales oems purchase medical imaging digital radiography products generally incorporate products components systems turn sold end users primarily hospitals medical clinics security technology products business major oem customer purchases resells products end users including domestic foreign airports well transportation security administration “tsa” security technology products oem customer’s purchasing dynamics affected level government funding expansion airport terminals fluctuations airline passenger volume fiscal year 2009 overview following summary matters management believes important understanding results operations periods indicated summary substitute detail provided following pages audited consolidated financial statements notes appear elsewhere document decline net revenue income operations net income diluted net income per share fiscal year 2009 compared fiscal year 2008 primarily related deterioration global economic conditions fiscal year 2009 reduced endowments philanthropic funding hospitals medical clinics result capital available investment end users new facilities expansions upgrades limited thereby reducing immediate demand products oem customers addition adoption dra fiscal year 2008 reduced government reimbursement rates doctors utilizing medical imaging procedures patients turn reduced demand oem customers’ products factors negatively impacted performance medical imaging products segment fiscal year 2009 partially mitigating impact full year benefit fiscal year 2009 copley business acquired late third quarter fiscal year 2008 response lower demand implemented cost control programs throughout fiscal year 2009 second quarter fiscal year 2009 reduced workforce 145 employees worldwide 9 total workforce recorded restructuring charge 3488 severance personnel related costs included workforce reduction 29 copley employees whose severance personnel related costs 323 previously accrued fiscal year 2008 connection acquisition fourth quarter fiscal year 2009 recorded restructuring charge 3131 restructuring charge primarily related 2073 severance personnel related costs reduction workforce 85 employees worldwide 6 total workforce also included restructuring 1058 facility exit costs due primarily vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility savings restructuring programs annual basis estimated approximately 14800 despite programs income operations declined 24311 fiscal year 2008 loss 4185 fiscal year 2009 august 2009 reached settlement former distributor medical imaging products cas medical systems inc “cas” agreed pay cas sum 811 full satisfaction matters dispute 811 recorded general administrative expenses fiscal year 2009 cas negotiated orderly conclusion contractual relationship allowing cas continue distributing products july 31 2010 connection settlement agreement also incurred 534 related charges fiscal year 2009 tax benefits offset 4185 loss operations fiscal year 2009 received irs refunds 8143 included 1262 interest refunds resulted reduction unrecognized tax benefits approximately 3280 1356 recorded tax benefit fiscal year 2009 also contributing income tax benefit fiscal year 2009 reversal 920 tax reserves due expiration statutes limitations 1820 reversal valuation allowance belgium net operating loss carryforwards management determined likely realized cash equivalents marketable securities 160293 186442 july 31 2009 2008 respectively interest earned cash equivalents past 15 months impacted reduction interest rates historically invested us government backed securities bonds certificates deposit interest rates declined significantly last year also contributing decline interest income approximately 68 fiscal year 2009 compared fiscal year 2008 copley acquisition related costs 73332 third quarter fiscal year 2008 repurchases common stock 25022 fiscal year 2009 following table sets forth overview cash flows fiscal years 2009 2008 fiscal year 2009 continued generate cash operating activities net cash provided operating activities fiscal year 2009 decreased fiscal year 2008 due primarily decline net income 19781 significant adjustments reconcile net income net cash provided operating activities fiscal year 2009 depreciation amortization 17964 sharebased compensation expense 3968 restructuring voluntary retirement charges 6619 gain sale investments 838 partially offset net change operating assets liabilities 13912 net cash used investing activities fiscal year 2009 due primarily purchase shortterm heldtomaturity marketable securities 220945 partially offset maturity 193037 shortterm heldtomaturity marketable securities net cash used financing activities fiscal year 2009 due primarily repurchase common stock repurchase program authorized board october 13 2008 completed repurchase program funded using available cash second quarter fiscal year 2009 fiscal year 2009 repurchased 736694 shares common stock repurchase program 25022 average purchase price per share 3397 included 25022 paid common stock program 22 commissions fees broker results operations fiscal year 2009 compared fiscal year 2008 net revenue product revenue product revenue fiscal year 2009 compared fiscal year 2008 summarized table medical imaging products decrease product revenue medical imaging products fiscal year 2009 versus prior year due primarily decline demand data acquisition systems detectors ct subsystems reflects impact dra global economic slowdown decrease partially offset fullyear impact net revenue copley business acquired april 2008 accounted 62490 18300 product revenue fiscal year 2009 2008 respectively digital radiography products increase product revenue digital radiography products fiscal year 2009 versus prior year due primarily increase shipments mammography detectors oem customer partially offset winding nonmammography product sales another oem customer expect business transition primarily sale mammography detectors fiscal year 2010 bk medical decrease bk medical product revenue fiscal year 2009 versus prior year due primarily unfavorable changes foreign currency exchange rate decline demand due global economic slowdown also contributing decrease customer order delays anticipation introduction two new ultrasound product lines one introduced late second quarter fiscal year 2009 introduced late third quarter fiscal year 2009 security technology products decrease product revenue security technology products fiscal year 2009 versus prior year due primarily decrease sales spare parts accessories approximately 5500 decrease partially offset baggage scanners shipped fiscal year 2009 compared fiscal year 2008 engineering revenue engineering revenue fiscal year 2009 compared fiscal year 2008 summarized table medical imaging products increase medical imaging products engineering revenue fiscal year 2009 versus prior year due primarily increase activity customer funded engineering projects large oem customers continued fund new product development despite current market conditions digital radiography products decrease digital radiography products engineering revenue fiscal year 2009 versus prior year due primarily less activity funded engineering project oem customer security technology products increase security technology products engineering revenue fiscal year 2009 versus prior year due primarily engineering revenue time materials project tsa transition examiner xlb prototype product manufactured increase partially offset completion project fiscal year 2008 accounted completed contract method generated revenue 2417 fiscal year 2008 revenue fiscal year 2009 compared fiscal year 2008 summarized table decrease fiscal year 2009 versus prior year due primarily lower occupancy hotel lower rates due lower business personal travel result economic slowdown gross margin product gross margin product gross margin fiscal year 2009 compared fiscal year 2008 summarized table product gross margin percentage decreased fiscal year 2009 versus prior year due primarily decline gross margin medical imaging products offset part growth higher margin bk medical sales percentage total net revenue decline medical imaging products gross margin percentage due primarily pricing reductions medical imaging products reduced manufacturing efficiency caused lower production volumes higher mix lower margin copley products decline medical imaging products gross margin percentage partially offset increase product gross margin percentage digital radiography products due primarily higher volume improved manufacturing yields engineering gross margin engineering gross margin fiscal year 2009 compared fiscal year 2008 summarized table incurred gross loss engineering revenue fiscal year 2009 primarily result write deferred engineering costs 365 due settlement agreement reached cas august 2009 gross loss engineering revenue fiscal year 2009 prior year due primarily costs incurred excess revenue certain customer funded medical imaging products projects operating expenses operating expenses increased 2594 20 fiscal year 2009 compared fiscal year 2008 shown research product development expenses decreased 3671 fiscal year 2009 versus prior year decrease due primarily increase customer funded engineering projects whose costs recorded engineering cost sales also contributing decrease reductions workforce late fiscal year 2008 fiscal year 2009 align cost structure market conditions well lower performancebased incentive compensation expenses decreases partially offset acquisition copley april 2008 accounted research product development expenses 6923 1971 fiscal years 2009 2008 respectively selling marketing expenses increased 2792 fiscal year 2009 versus prior year increase due primarily acquisition copley april 2008 accounted selling marketing expenses 3706 1548 fiscal years 2009 2008 respectively increase partially offset reductions workforce late fiscal year 2008 fiscal year 2009 align cost structure market conditions well lower performancebased incentive compensation expenses general administrative expenses increased 870 fiscal year 2009 versus prior year increase due primarily fullyear impact general administrative expenses copley acquired april 2008 copley accounted general administrative expenses 2699 866 fiscal years 2009 2008 respectively also contributing increase 811 related settlement agreement reached cas august 2009 1160 contingent professional fees related income tax refunds related interest 8389 received irs state massachusetts fiscal year 2009 increases partially offset reductions workforce late fiscal year 2008 fiscal year 2009 align cost structure market conditions well lower performancebased incentive compensation expenses restructuring voluntary retirement charges increased 2603 fiscal year 2009 versus prior year fiscal year 2009 amount includes severance personnel related costs 5561 involuntary terminations 1058 facility exit costs primarily related vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility fiscal year 2008 amount includes severance personnel related costs 3419 voluntary retirement program severance personnel related costs 597 involuntary terminations income expense decrease net interest income fiscal year 2009 versus prior year due primarily lower invested cash balances result acquisition copley 25022 common stock repurchase first second quarters fiscal year 2009 decline interest rates gain sale investments fiscal year 2009 due primarily receipt escrow proceeds 838 fiscal year 2009 relating sale 17 ownership interest bir fiscal year 2007 fiscal year 2008 includes 2000 sale 20 45 equity interest sahco remaining interest 25 receipt escrow proceeds 84 fiscal year 2008 relating sale 17 ownership interest bir fiscal year 2007 net income loss fiscal year 2009 consisted predominantly foreign currency exchange losses canadian danish british subsidiaries net income fiscal year 2008 consisted primarily 555 received insurance company reimbursement legal fees incurred relation indemnification matter related sale wholly owned subsidiary camtronics provision benefit income taxes fiscal year 2009 benefit income taxes due primarily 1820 valuation allowance reversal belgium net operating loss carryforwards management determined likely recognized irs refunds 8143 received fiscal year 2009 refunds included 1262 interest carryback loss research development credits fiscal year 2004 additional research development tax credits timing items claimed amended income tax returns fiscal years 2001 2006 recognized 2701 refunds related interest within stockholders’ equity upon adoption financial accounting standards board “fasb” interpretation “fin” 48 “accounting uncertainty income taxes” interpretation statement financial accounting standards “sfas” 109 “accounting income taxes” fiscal year 2008 impact refunds related interest reduction unrecognized tax benefits approximately 3280 1356 recorded tax benefit fiscal year 2009 also contributing benefit income taxes fiscal year 2009 reversal 920 tax reserves due expiration statutes limitations benefits partially offset additional provisions agreed federal state adjustments typical taxes owed related operations period fiscal year 2008 effective tax rate varied statutory tax rate primarily result mix income attributable foreign versus domestic jurisdictions effective tax rate fiscal year 2008 included benefits 3 1 foreign operations us domestic production deduction respectively well benefit 1 us research experimentation credit expired december 31 2007 benefits offset 3 provision due increase tax reserves net income diluted net income per share net income diluted net income per share fiscal year 2009 fiscal year 2008 follows decrease net income diluted net income per share fiscal year 2009 versus prior year due primarily declines sales volumes gross margins interest income well increase amount restructuring charges fiscal year 2009 versus prior year comparable period factors partially offset benefit income taxes decline weighted average shares outstanding due common stock repurchase program completed second quarter fiscal year 2009 fiscal year 2008 compared fiscal year 2007 net revenue product revenue product revenue fiscal year 2008 compared fiscal year 2007 summarized table medical imaging products increase product revenue medical imaging products fiscal year 2008 versus prior year due primarily shipments newly developed data management systems oem customer development completed us fourth quarter fiscal year 2007 also contributing increase continued strong demand data acquisition systems acquisition copley third quarter fiscal year 2008 accounted 18300 product revenue fiscal year 2008 digital radiography products increase product revenue digital radiography products fiscal year 2008 versus prior year due primarily shipments newly developed mammography detector oem customer development completed us fourth quarter fiscal year 2007 bk medical increase product revenue bk medical fiscal year 2008 versus prior year due primarily favorable change foreign currency exchange rate security technology products increase product revenue security technology products fiscal year 2008 versus prior year due primarily increase exact system sales 63 units fiscal year 2008 52 units fiscal year 2007 engineering revenue engineering revenue fiscal year 2008 compared fiscal year 2007 summarized table medical imaging products decrease engineering revenue medical imaging products fiscal year 2008 versus prior year due primarily fewer customer funded engineering projects medical imaging products fiscal year 2008 versus prior year digital radiography products decrease engineering revenue digital radiography products fiscal year 2008 versus prior year due primarily decline activity customer funded engineering projects revenue fiscal year 2008 compared fiscal year 2007 summarized table increase fiscal year 2008 versus prior year due primarily increase room rates gross margin product gross margin product gross margin fiscal year 2008 compared fiscal year 2007 summarized table product gross margin increased 381 fiscal year 2008 compared 357 fiscal year 2007 increase due primarily asset impairment charge 8625 related write assets digital radiography systems business fiscal year 2007 result continuing losses business outlook digital radiography systems business fiscal year 2007 recorded asset impairment charges 9705 associated write digital radiography systems business assets estimated net realizable values group 9705 asset impairment charges 8625 recorded cost sales 1080 recorded operating expenses 8625 asset impairment charge recorded cost sales included 4144 related inventory 4191 related software license 290 related assets also contributing increase improved product margins bk medical due primarily higher mix sales directly end users versus distributors provide higher margins increase manufacturing efficiency security technology products due higher production volumes reduction manufacturing employees fourth quarter fiscal year 2007 increases partially offset 1216 amortization expense fiscal year 2008 backlog intangible assets related acquisition copley april 14 2008 engineering gross margin engineering gross margin fiscal year 2008 compared fiscal year 2007 summarized table engineering gross loss fiscal year 2008 391 compared gross margin 1446 fiscal year 2007 decline 1837 127 decrease due primarily gross margin 2794 three security technology products projects fiscal year 2007 gross margins fiscal year 2007 partially offset costs excess contract revenues medical imaging products projects 1706 gross loss 391 fiscal year 2008 due primarily costs excess contract revenues 766 patient monitoring instrument projects partially offset total 434 gross margin several security technology products projects operating expenses operating expenses increased 11897 104 fiscal year 2008 compared fiscal year 2007 shown research product development expenses increased 1992 fiscal year 2008 fiscal year 2007 increase expenses due primarily reduced customer funding engineering development projects medical imaging products fiscal year 2008 compared fiscal year 2007 well acquisition copley third quarter fiscal year 2008 accounted 1971 research development fiscal year 2008 increases partially offset reduction headcount security technology products engineers end fiscal year 2007 selling marketing expenses increased 4462 fiscal year 2008 fiscal year 2007 increase due primarily increase foreign currency exchange rate bk medical accounted increase 1974 well increase bonus costs sales commissions cost bk medical 362 also contributing increase acquisition copley accounted 1548 selling marketing expenses fiscal year 2008 529 amortization expense intangible assets related acquisition increases partially offset reduction 1476 expenses related digital radiography products ceased selling marketing efforts digital radiography systems business first quarter fiscal year 2008 general administrative expenses increased 2507 fiscal year 2008 fiscal year 2007 increase due primarily increases bonus profit sharing costs sharebased compensation expense executive transition costs excluding copley 1926 1323 1053 respectively also contributing increase foreign currency exchange rate bk medical accounted increase 758 increases partially offset decrease 1101 amortization expense intangible assets related acquisition sti due intangible assets becoming fully amortized first quarter fiscal year 2008 also partially offsetting increases receivable collections 275 sahco reserved allowance doubtful accounts prior period restructuring voluntary retirement charges 4016 fiscal year 2008 consisted primarily severance personnel related costs 3419 597 voluntary retirement program involuntary terminations respectively took place fourth quarter fiscal year 2008 asset impairment charges 0 fiscal year 2008 compared 1080 fiscal year 2007 fiscal year 2007 recorded asset impairment charge 1080 related digital radiography systems business included charge 696 related capitalized software still development 384 related assets income expense decrease fiscal year 2008 versus prior year due primarily lower invested cash balances lower effective interest rates due primarily 60000 common stock repurchase fourth quarter fiscal year 2007 fiscal year 2007 recorded equity loss unconsolidated affiliates 667 related losses photodetection systems inc period gain sale investments fiscal year 2008 due primarily 2000 sale 20 45 equity interest sahco remaining interest 25 fiscal year 2007 included 4036 dividend income gain sale 17 ownership interest bir income net 715 226 fiscal years 2008 2007 respectively income fiscal year 2008 consisted primarily 555 received insurance company reimbursement legal fees incurred relation indemnification matter related sale camtronics november 2005 income fiscal year 2007 consisted primarily gain 205 sale assets wholly owned subsidiary anasky limited formerly known sky computers inc income fiscal year 2008 also included foreign currency exchange gains realized canadian danish subsidiaries fiscal year 2007 included foreign currency exchange losses us dollar weakened foreign currencies provision income taxes effective tax rate fiscal year 2008 included benefits 3 1 foreign operations us domestic production deduction respectively well benefit 1 us research experimentation credit expired december 31 2007 benefits offset 3 provision due increase tax reserves lower rate fiscal year 2007 due primarily lower income operations taxes greater tax rate impact tax benefit foreign operations due lower foreign tax rate fiscal year 2007 rate also included reinstatement us research experimentation credit january 1 2006 reduction danish tax rate 28 25 net income diluted net income per share net income diluted net income per share fiscal year 2008 fiscal year 2007 follows net income 23486 fiscal year 2008 compared net income 15380 fiscal year 2007 basic diluted net income per share fiscal year 2008 178 177 respectively compared basic diluted net income per share 111 110 respectively fiscal year 2007 net income fiscal years 2008 2007 included pretax charges 4016 9705 respectively related voluntary retirement restructuring costs asset impairments net income fiscal year 2008 also includes gain 2000 sale 20 45 equity interest sahco remaining interest 25 net income fiscal year 2007 also includes dividend income gain sale 17 ownership interest bir totaling 4036 liquidity capital resources key liquidity capital resources information summarized table increase current ratio july 31 2008 july 31 2009 due primarily reductions accounts payable accrued liabilities decrease accounts payable due timing vendor payments decrease accrued liabilities due primarily decline accrued bonuses july 31 2009 compared july 31 2008 periodically review investment portfolio determine investments impaired due changes credit risk potential valuation concerns believe cash equivalents marketable securities appropriately valued july 31 2009 aware market events date would impact valuation could change future new developments arise credit markets face exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures change time business practices evolve could material adverse impact financial results primary exposure related fluctuations us dollar local currencies subsidiaries canada europe investment international subsidiaries sensitive fluctuations currency exchange rates effect change currency exchange rates net investment international subsidiaries reflected “accumulated comprehensive income” component stockholders’ equity 10 depreciation july 31 2009 2008 functional currencies relative us dollar would result reduction stockholders’ equity 1010 1857 respectively carrying amounts reflected consolidated balance sheets cash equivalents trade receivables trade payables approximate fair value july 31 2009 due short maturities instruments cash equivalents totaled 119855 july 31 2009 consisted entirely highly liquid investments maturities three months less time purchase heldtomaturity marketable securities maturities time purchase excess three months totaled 40438 july 31 2009 stated cost approximates fair value cash flows following table summarizes sources uses cash periods indicated cash flows generated operating activities fiscal year 2009 due primarily net income 3705 restructuring charge 6619 depreciation amortization 17964 sharebased compensation expense 3968 amounts partially offset benefit deferred income taxes 1164 gain sale investments 838 net change operating assets liabilities net acquired business 13912 net changes operating assets liabilities net acquired business 13912 fiscal year 2009 due primarily decreases accounts payable accrued liabilities advance payments deferred revenue 4648 10367 3662 respectively changes partially offset decrease refundable income taxes 5557 decrease accounts payable 4648 due primarily timing vendor payments decrease accrued liabilities 10367 due primarily decline accrued bonuses profit sharing contributions july 31 2009 compared july 31 2008 decrease refundable income taxes 5557 due primarily income tax refunds 10072 included interest 1358 received fiscal year 2009 decrease advanced payments deferred revenue 3662 due primarily 2975 revenue recognized security technology products shipped fiscal year 2009 paid fiscal year 2008 cash used investing activities fiscal year 2009 due primarily purchase shortterm heldtomaturity marketable securities acquisition copley net cash acquired capital expenditures capitalized software development costs 220945 350 10230 1672 respectively partially offset maturities heldtomaturity marketable securities 193037 proceeds sale investment 838 net cash used financing activities fiscal year 2009 consisted 25022 repurchase shares common stock 5184 dividends paid stockholders believe balances cash equivalents marketable securities cash flows expected generated future operating activities sufficient meet cash requirements least next 12 months commitments contractual obligations offbalance sheet arrangements contractual obligations july 31 2009 effect obligations expected liquidity cash flows future periods follows july 31 2009 total liabilities associated uncertain tax positions fin 48 7715 included “accrued income taxes” “refundable deferred income taxes” result adoption fin 48 due complexity associated tax uncertainties cannot make reasonably reliable estimate period expect settle noncurrent liabilities associated uncertain tax positions therefore amounts included contractual obligations table currently approximately 22474 revolving credit facilities banks available direct borrowings revolving credit facility agreements contain number covenants including covenant requiring us maintain tangible net worth defined revolving credit facility agreement less 255000 end fiscal quarter compliance covenant july 31 2009 tangible net worth approximately 350000 july 31 2009 direct borrowings offbalance sheet arrangements new accounting pronouncements sfas 157 “fair value measurements” defines fair value establishes methodology measuring fair value expands required disclosure fair value measurements calendar year 2008 fasb issued following amendments sfas 157 • fasb staff position “fsp” fas 1571 “application fasb statement 157 fasb statement 13 accounting pronouncements address fair value measurements purposes lease classification measurement statement 13” amends sfas 157 remove certain leasing transactions scope • fsp fas 1572 “effective date fasb statement 157” delays effective date sfas 157 fiscal year 2009 fiscal year 2010 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually currently evaluating potential impact sfas 157 nonfinancial assets nonfinancial liabilities financial position results operations • fsp fas 1573 “determining fair value financial asset market asset active” clarifies application sfas 157 market active provides example illustrate key considerations determining fair value financial asset market financial asset active fsp fas 1573 effective upon issuance october 10 2008 including prior periods financial statements issued adopted fsp fas 1571 fsp fas 1573 first quarter fiscal year 2009 concurrent adoption sfas 157 adoption sfas 157 amended impact financial position results operations cash flows see note 8 additional sfas 157 disclosures april 2009 fasb issued fsp fas 1574 “determining fair value volume level activity asset liability significantly decreased identifying transactions orderly” provides additional guidance estimating fair value accordance sfas 157 fsp states significant decrease volume level activity asset liability compared normal market activity indication transactions quoted prices may determinative fair value may increased instances transactions orderly market conditions accordingly analysis transactions quoted prices needed significant adjustment transactions quoted prices may necessary estimate fair value fsp effective us beginning april 1 2009 impact financial position results operations cash flows february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment sfas 115” new statement allows entities choose specified election dates measure eligible financial assets liabilities fair value otherwise required measured fair value company elects fair value option eligible item changes item’s fair value subsequent reporting periods must recognized current earnings adopted sfas 159 august 1 2008 concurrent adoption sfas 157 adoption sfas 159 impact financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations” sfas 141r requires acquiring entity business combination record assets acquired liabilities assumed respective acquisition date fair values changes recognition assets acquired liabilities assumed arising contingencies changes recognition measurement contingent consideration requires expensing acquisitionrelated costs incurred sfas 141r also requires additional disclosure information surrounding business combination users entity’s financial statements fully understand nature financial impact business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 fiscal year 2010 entity may apply date provisions sfas 141r impact us party business combination july 31 2009 december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners statement effective us beginning august 1 2009 currently evaluating potential impact adoption sfas 160 financial position results operations cash flows april 2008 fasb issued fsp fas 1423 “determining useful life intangible assets” fsp fas 1423 amends factors entity consider developing renewal extension assumptions used determining useful lives recognized intangible assets fsp fas 1423 effective fiscal years beginning december 15 2008 believe adoption fsp fas 1423 material impact results operations financial position cash flows may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” provides framework selecting accounting principles used preparing financial statements presented conformity gaap nongovernmental entities prior issuance sfas 162 gaap hierarchy defined american institute certified public accountants’ aicpa statement auditing standards 69 “the meaning present fairly conformity generally accepted accounting principles” sfas 162 became effective 60 days following sec’s approval september 16 2008 public company accounting oversight board amendments au section 411 “the meaning present fairly conformity generally accepted accounting principles” statement became effective second quarter fiscal year 2009 impact financial position results operations cash flows june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” classifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities requires included computation earnings per share pursuant twoclass method described sfas 128 “earnings per share” fsp effective financial statements issued fiscal years beginning december 15 2008 interim periods within years priorperiod earnings per share data presented adjusted retrospectively including interim financial statements summaries earnings selected financial data conform provisions fsp early application permitted currently evaluating effect adoption fsp eitf 0361 financial position results operations cash flows april 2009 fasb issued fsp fas 141r1 “accounting assets acquired liabilities assumed business combination arise contingencies” amends clarifies initial recognition measurement subsequent measurement accounting related disclosures assets liabilities arising contingencies business combination sfas 141r adopt fsp first quarter fiscal year 2010 impact adoption consolidated financial statements largely depend size nature business combinations provisions fsp impact us party business combination july 31 2009 may 2009 fasb issued sfas 165 “subsequent events” objective standard establish general standards accounting disclosure events occur balance sheet date financial statements issued available issued statement effective interim annual financial periods ending june 15 2009 statement became effective fiscal year 2009 impact financial position results operations cash flows june 2009 fasb issued sfas 166 “accounting transfers financial assets amendment fasb statement 140” sfas 166 amends sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” eliminate concept qualified specialpurpose entity related guidance creates stringent conditions reporting transfer portion financial asset sale clarifies saleaccounting criteria changes initial measurement transferor’s interest transferred financial assets statement effective beginning first annual reporting period begins november 15 2009 currently evaluating effect adoption sfas 166 financial position results operations cash flows june 2009 fasb issued sfas 167 “amendments fasb interpretation 46r” sfas 167 amends fin 46r “consolidation variable interest entities” require former qualified specialpurpose entities evaluated consolidation also changes approach determining variable interest entity’s “vie” primary beneficiary requires companies frequently reassess whether must consolidate vies statement effective beginning first annual reporting period begins november 15 2009 currently evaluating effect adoption sfas 167 financial position results operations cash flows critical accounting policies management’s discussion analysis financial condition results operations based consolidated financial statements prepared accordance accounting principles generally accepted united states america critical accounting policies estimates involved application significant impact preparation consolidated financial statements policies involve significant estimates judgments affect reported amounts assets liabilities revenues expense related disclosures contingent assets liabilities continue evaluate estimates judgments ongoing basis nature policies discussed require management make difficult subjective estimates judgments often matters inherently uncertain estimates judgments based historical experience terms existing contracts observance trends industry information provided customers information available outside sources appropriate complete discussion significant accounting policies see note 1 summary business operations significant accounting policies notes consolidated financial statements included item 15 exhibits financial statements schedule annual report form 10k believe following accounting policies require management make difficult estimates judgments preparation consolidated financial statements accordingly critical understanding financial statements revenue recognition policywe provide engineering services customers contractual basis generally recognize revenue using percentage completion method generally estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues accrue estimated losses immediately judgments uncertaintiesour revenue recognition accounting methodology engineering services fixed fee arrangement involves uncertainties requires management make estimates total estimated costs completion projects timing revenue profits loss reserves recognized may fluctuate changes estimates costs completion projects needed effect actual results differ assumptionswe made material changes accounting methodology used determine estimated costs completion projects past three fiscal years actual results consistent estimates assumptions may exposed losses gains could material inventory reserves policywe value inventory lower cost inventory fair market value establishment inventory writedowns management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory write downs based upon age inventory lower cost market along significant management judgments concerning future demands inventory actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory valuation writedowns subsequently reversed inventory used disposed judgments uncertaintiesour inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence effect actual results differ assumptionswe made material changes accounting methodology use establish inventory writedowns past three fiscal years estimates regarding customer demand inaccurate changes technology affect demand certain products unforeseen manner may exposed losses could material 10 difference actual writedown july 31 2009 would affected net earnings approximately 265 fiscal year 2009 sharebased compensation policywe sharebased compensation plans include stock options unvested restricted stock awards employee stock purchase plan determine fair value stock option awards date grant using blackscholes optionpricing models determine fair value unvested timebased performancebased restricted stock awards date grant using closing market price common stock date grant recognize associated sharebased compensation expense timebased awards straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures amount sharebased compensation expense performancebased unvested restricted stock awards recognized straightline basis performance period based upon number shares management ultimately expects vest performancebased awards management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed judgments uncertaintiesoptionpricing models generally accepted valuation techniques require management make assumptions apply judgment determine fair value awards assumptions judgments include estimating future volatility stock price expected dividend yield future employee turnover rates future employee stock option exercise behaviors performancebased nonvested restricted stock awards require management make assumptions regarding likelihood achieving company personal performance goals changes assumptions materially affect fair value estimate amount compensation expense recognize effect actual results differ assumptionswe made material changes accounting methodology use determine sharebased compensation expense past three fiscal years actual results consistent estimates assumptions particularly used determining accrual percentage performancebased nonvested restricted stock awards may exposed changes sharebased compensation expense could material 10 change sharebased compensation expense year ended july 31 2009 would affected net earnings approximately 274 fiscal year 2009 warranty reserves policywe estimate costs product warranties based specific warranty claims historical data engineering estimates applicable judgments uncertaintiesour warranty reserve involves uncertainties calculation requires management make assumptions based specific warranty claims historical data engineering estimates applicable effect actual results differ assumptionswe made material changes accounting methodology use establish warranty reserves past three fiscal years actual product failure rates service delivery costs differ estimates revisions estimated warranty liability would required revisions could adversely affect operating results 10 change warranty reserve july 31 2009 would affected net earnings approximately 645 fiscal year 2009 purchase price allocation business combinations policywe apply purchase accounting method account business combinations requires extensive use accounting estimates judgments allocate purchase price fair market value assets liabilities purchased excess value classified goodwill assets finite lives useful lives assigned intangibles values amortized remaining life judgments uncertaintiesour purchase price allocation methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets liabilities management estimates fair value assets liabilities based upon carrying value acquired assets widely accepted valuation techniques including discounted cash flows market multiple analyses unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies effect actual results differ assumptionsduring last three fiscal years completed one significant acquisition copley april 2008 74032 including transaction costs see note 3 business combination notes consolidated financial statements included annual report form 10k complete purchase price allocation actual results consistent estimates assumptions accelerated amortization intangible assets finite lives impairment charges intangible assets goodwill could required impairment goodwill indefinite lived intangible assets policywe evaluate goodwill indefinite lived intangible assets impairment annually whenever events changes circumstances indicate carrying value goodwill intangible assets may recoverable conduct impairment evaluation performing internal valuation analyses consider market approach income approach market approach fair value reporting unit based trading acquisition multiples income approach fair value reporting unit based present value estimated future cash flows second quarter fiscal year 2009 completed annual impairment testing goodwill indefinite lived intangible assets using methodologies described herein determined impairment carrying values goodwill indefinite lived intangible assets related acquisition copley july 31 2009 2043 7607 respectively judgments uncertaintiesthe valuation analyses described involve uncertainties require management make assumptions apply judgment estimate industry economic factors profitability future business strategies policy conduct impairment testing based current business strategy light present industry economic conditions well future expectations effect actual results differ assumptionsif actual results consistent estimates assumptions may exposed impairment charge could material 10 change calculation fair value reporting unit december 31 2008 includes copley goodwill indefinite lived intangible asset would effect net earnings fiscal year 2009 income tax contingencies policyour income tax returns like companies periodically audited domestic foreign tax authorities audits include questions regarding tax filing positions including timing amount deductions allocation income among various tax jurisdictions one time multiple tax years subject audit various tax authorities evaluating exposures associated various tax filing positions record liability exposures subject minimum threshold likely benefit recognized number years may elapse particular matter established liability audited fully resolved clarified adjust liability unrecognized tax benefits income tax provision period uncertain tax position effectively settled statute limitations expires relevant taxing authority examine tax position information becomes available fiscal year 2008 adopted fin 48 requires management perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions taken expect take income tax returns judgments uncertaintiesour liability unrecognized tax benefits involves uncertainties management required make assumptions apply judgment estimate exposures associated various filing positions effect actual results differ assumptionsalthough believe judgments estimates discussed herein reasonable actual results could differ may exposed losses gains could material extent prevail matters liability established required pay amounts excess established liability effective income tax rate given financial statement period could materially affected unfavorable tax settlement generally would require use cash result increase effective income tax rate period resolution favorable tax settlement would recognized reduction effective income tax rate period resolution deferred tax valuation allowances policywe required estimate income taxes jurisdictions within operate process involves assessing temporary differences resulting different treatment items tax accounting purposes differences result deferred tax assets liabilities included within balance sheet must assess likelihood deferred tax assets recovered future taxable income extent recovery likely valuation allowance must established extent valuation allowance established must include expense within tax provision statement operations judgments uncertaintiesour effective income tax rate affected changes tax law tax jurisdiction new business ventures level earnings results tax audits deferred tax valuation allowance involves uncertainties calculation requires management make assumptions based historical data future book income taxplanning strategies effect actual results differ assumptionswe made material changes accounting methodology use establish deferred tax asset valuation allowances past three fiscal years event actual results differ estimates assumptions use determining effective tax rate provision income taxes results operations could materially impacted item 7a nannannannannannanitem 7a quantitative qualitative disclosures market risk company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact companys financial results companys primary exposure related local currency revenue operating expenses europe company maintains bond investment portfolio various issuers types maturities companys cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified available sale companys three largest customers significant valued customer philips general electric toshiba accounted approximately 226 105 72 respectively product engineering revenue fiscal year ended july 31 2001 loss one customers would material adverse effect upon companys business item 8item 7a quantitative qualitative disclosures market risk company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact companys financial results companys primary exposure related local currency revenue operating expenses europe company maintains bond investment portfolio various issuers types maturities companys cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified available sale total interest income net fiscal 2002 4060 interest rate change 10 would material impact fair value portfolio future earnings companys three largest customers fiscal 2002 significant valued customer philips general electric l3 communications accounted approximately 177 120 93 respectively product engineering revenue fiscal year ended july 31 2002 loss one customers would material adverse effect upon companys business item 8item 7a quantitative qualitative disclosures market risk company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related local currency revenue operating expenses canada europe company maintains bond investment portfolio various issuers types maturities company’s cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified available sale total interest income fiscal 2003 5035 interest rate change 10 would material impact fair value portfolio future earnings company’s three largest customers fiscal 2003 significant valued customer l3 communications general electric toshiba accounted approximately 431 90 66 respectively product engineering revenue fiscal year ended july 31 2003 loss one customers would material adverse effect upon company’s business item 8item 7a quantitative qualitative disclosures market risk company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related local currency revenue operating expenses canada europe company maintains bond investment portfolio various issuers types maturities company’s cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified available sale total interest income fiscal 2004 37 million interest rate change 10 would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe company maintains bond investment portfolio various types maturities high credit quality issuers cash equivalents required working capital purposes placed short term investments original maturities six months less investments original maturities excess six months stated fair value classified available sale total interest income fiscal 2005 52 million interest rate change 10 would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk company places cash investments high credit quality financial instruments policy limits amount credit exposure one financial institution company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe company maintains bond investment portfolio various issuers types maturities company’s cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated fair value classified available sale total interest income fiscal 2006 102 million interest rate change 10 would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk dollar amounts item 7a thousands company places cash investments highcreditquality financial instruments policy limits amount credit exposure one financial institution company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe company’s cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified held maturity total interest income fiscal year 2008 7936 interest rate change 10 would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk dollar amounts item 7a thousands certain foreign operations enter transactions currencies functional currency primarily us dollar euro also foreign currency exposure arising translation net equity investment foreign operations us dollars generally view investments foreign operations functional currencies us dollar longterm currencies exposed british pound chinese yuan canadian dollar danish kroner euro 10 depreciation july 31 2010 2009 functional currencies relative us dollar would result reduction stockholders’ equity approximately 700 1200 respectively place cash investments high quality financial instruments policy limit amount credit exposure one financial institution cash investments include cash equivalents consider investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified held maturity total interest income fiscal year 2010 636 interest rate change 10 would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk dollar amounts item 7a thousands certain foreign operations enter transactions currencies functional currency primarily us dollar euro also foreign currency exposure arising translation net equity investment foreign operations us dollars generally view investments foreign operations functional currencies us dollar longterm currencies exposed british pound chinese yuan canadian dollar danish kroner euro japanese yen 10 depreciation july 31 2011 2010 functional currencies relative us dollar would result reduction stockholders’ equity approximately 1458 700 respectively place cash investments high quality financial instruments policy limit amount credit exposure one financial institution cash investments include cash equivalents consider investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified held maturity total interest income fiscal year 2011 711 10 change interest income would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk dollar amounts item 7a thousands certain foreign operations enter transactions currencies functional currency primarily us dollar euro also foreign currency exposure arising translation net equity investment foreign operations us dollars generally view investments foreign operations functional currencies us dollar longterm currencies exposed british pound chinese yuan canadian dollar danish kroner euro japanese yen 10 depreciation july 31 2012 2011 functional currencies relative us dollar would result reduction stockholders’ equity approximately 697 1458 respectively july 31 2012 forward contracts outstanding notional amounts totaling 5901 canadian dollar contracts designated cash flow hedges unrealized gains 43 net tax july 31 2012 contracts reported accumulated comprehensive income loss significant cash flow hedges outstanding periods prior fiscal year 2012 realized gains losses cash flow hedges recognized income period payment expenses recognized expect contracts settle first two quarters year fiscal year ended july 31 2013 refer fiscal year 2013 amounts accumulated comprehensive income loss reported adjustment operating expenses place cash equivalents high quality financial instruments policy limit amount credit exposure one financial institution cash includes cash equivalents consider investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified held maturity total net interest income fiscal year 2012 532 10 change interest income interest rate would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk dollar amounts item 7a thousands certain foreign operations enter transactions currencies functional currency primarily us dollar euro also foreign currency exposure arising translation net equity investment foreign operations us dollars generally view investments foreign operations functional currencies us dollar longterm currencies exposed british pound canadian dollar chinese yuan danish kroner euro japanese yen 10 depreciation july 31 2013 2012 functional currencies relative us dollar would result reduction stockholders’ equity approximately 1155 697 respectively july 31 2013 forward contracts outstanding notional amounts totaling 6720 canadian dollar contracts designated cash flow hedges unrealized loss 104 net tax contracts reported accumulated comprehensive income loss liability asset derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheets realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal year 2013 2012 recorded approximately 80 70 realized losses included cost revenues operating expenses consolidated statements operations expect contracts currently outstanding settle january 31 2014 amounts accumulated comprehensive income loss reported adjustment operating expenses place cash equivalents high quality financial instruments policy limit amount credit exposure one financial institution cash includes cash equivalents consider investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified held maturity total net interest income fiscal year 2013 fiscal year 2012 371 532 respectively 10 change interest income interest rate would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk certain foreign operations enter transactions currencies functional currency primarily us dollar euro also foreign currency exposure arising translation net equity investment foreign operations us dollars generally view investments foreign operations functional currencies us dollar longterm currencies exposed british pound canadian dollar chinese yuan danish kroner euro japanese yen 10 depreciation july 31 2014 2013 functional currencies relative us dollar would result reduction stockholders’ equity approximately 11 million 12 million respectively enter forward contracts hedge foreign currency exposure canadian dollar contracts designated cash flow hedges unrealized loss net tax contracts reported within accumulated comprehensive income loss liability asset derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheet realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal year 2014 2013 recorded approximately 02 million 01 million realized gains losses included cost revenues operating expenses consolidated statements operations outstanding forward contracts july 31 2014 place cash equivalents high quality financial instruments policy limit amount credit exposure one financial institution cash includes cash equivalents consider investments purchased original maturities three months less total net interest income fiscal years 2014 2013 03 million 04 million respectively 10 change interest income interest rate would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk enter forward contracts hedge foreign currency exposure canadian dollar contracts designated cash flow hedges unrealized loss net tax contracts reported within accumulated comprehensive income loss liability asset derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheet realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal year 2015 2014 recorded approximately 05 million 02 million realized gains included cost revenues operating expenses consolidated statements operations july 31 2015 forward contracts outstanding notional amounts totaling 126 million canadian dollar outstanding forward contracts july 31 2014 place cash equivalents high quality financial instruments policy limit amount credit exposure one financial institution cash includes cash equivalents consider investments purchased original maturities three months less total net interest income fiscal years 2015 2014 01 million 03 million respectively 10 change interest income interest rate would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk certain foreign operations enter transactions currencies functional currency primarily us dollar euro also foreign currency exposure arising translation net equity investment foreign operations us dollars generally view investments foreign operations functional currencies us dollar longterm currencies exposed british pound canadian dollar chinese yuan danish kroner euro japanese yen 10 depreciation july 31 2016 functional currencies relative us dollar would result increase stockholders’ equity approximately 01 million 10 depreciation july 31 2015 functional currencies relative us dollar would result reduction stockholders’ equity approximately 01 million enter forward contracts hedge foreign currency exposure canadian dollar contracts designated cash flow hedges unrealized loss net tax contracts reported within accumulated comprehensive income loss liability asset derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheet realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal years 2016 2015 recorded approximately 07 million 05 million realized losses included cost revenues operating expenses consolidated statements operations july 31 2016 forward contracts outstanding notional amounts totaling 239 million canadian dollars july 31 2015 forward contracts outstanding notional amounts totaling 126 million canadian dollar place cash equivalents high quality financial instruments policy limit amount credit exposure one financial institution cash includes cash equivalents consider investments purchased original maturities three months less total net interest income fiscal years 2016 2015 02 million 01 million respectively 10 change interest income interest rate would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk certain foreign operations enter transactions currencies functional currency primarily us dollar euro also foreign currency exposure arising translation net equity investment foreign operations us dollars generally view investments foreign operations functional currencies us dollar longterm currencies exposed british pound canadian dollar chinese yuan danish kroner euro japanese yen 10 depreciation july 31 2017 functional currencies relative us dollar would result reduction stockholders’ equity approximately 02 million 10 depreciation july 31 2016 functional currencies relative us dollar would result reduction stockholders’ equity approximately 01 million enter forward contracts hedge foreign currency exposure canadian dollar contracts designated cash flow hedges unrealized loss net tax contracts reported within accumulated comprehensive income loss liability asset derivatives designated hedging instruments presented current assets current liabilities respectively consolidated balance sheets realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal years 2017 2016 recorded approximately 06 million 07 million realized losses included cost revenues operating expenses consolidated statements operations july 31 2017 forward contracts outstanding notional amounts totaling 144 million canadian dollar july 31 2016 forward contracts outstanding notional amounts totaling 239 million canadian dollar place cash equivalents high quality financial instruments policy limit amount credit exposure one financial institution cash includes cash equivalents consider investments purchased original maturities three months less total net interest income fiscal years 2017 2016 06 million 02 million respectively 10 change interest income interest rate would material impact fair value portfolio future earnings marketable securities portfolio primarily highlyrated short duration fixed income securities marketable securities include commercial paper us treasury securities us government agency securities corporate debt securities investment policy strategy generally require investments investment grade primary objective minimizing potential risk principal loss supporting liquidity requirements provide meaningful assessment interest rate risk associated investment marketable securities performed sensitivity analysis determine impact change interest rates would value investment portfolio assuming 25 basis point parallel shift yield curve based investment positions july 31 2017 hypothetical 25 basis point increase interest rates across maturities would result 008 million incremental decline fair market value portfolio losses would realized sold investments prior maturity item 8nanitem 7a quantitative qualitative disclosures market risk dollar amounts item 7a thousands company places cash investments highcreditquality financial instruments policy limits amount credit exposure one financial institution company faces limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact company’s financial results company’s primary exposure related fluctuations us dollar local currencies company’s subsidiaries canada europe company maintains limited bond investment portfolio various issuers types maturities company’s cash investments include cash equivalents company considers investments purchased original maturities three months less investments original maturities excess three months stated fair value classified available sale total interest income fiscal year 2007 12841 interest rate change 10 would material impact fair value portfolio future earnings item 8item 7a quantitative qualitative disclosures market risk dollar amounts item 7a thousands place cash investments high quality financial instruments policy limit amount credit exposure one financial institution face limited exposure financial market risks including adverse movements foreign currency exchange rates changes interest rates exposures may change time business practices evolve could material adverse impact financial results primary exposure related fluctuations us dollar local currencies subsidiaries canada europe cash investments include cash equivalents consider investments purchased original maturities three months less investments original maturities excess three months stated amortized cost approximates fair value classified held maturity total interest income fiscal year 2009 2612 interest rate change 10 would material impact fair value portfolio future earnings item 8 item 8 financial statements supplementary data financial statement supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statement supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statement supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statement supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statement supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 consolidated financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 consolidated financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 consolidated financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 consolidated financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9item 8 financial statements supplementary data financial statement supplementary data listed part iv item 14 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 report item 9item 8 financial statements supplementary data financial statements supplementary data listed part iv item 15 annual report form 10k included end annual report form 10k item 9 nannannannannannannanitem 15 exhibits financial statement schedules reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized analogic corporation bernard gordon bernard gordon chairman board directors date october 25 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated certifications bernard gordon certify 1 reviewed annual report form 10k analogic corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report bernard gordon bernard gordon chairman board directors executive chairman president chief executive officer principal executive officer date october 25 2002 john j millerick certify 1 reviewed annual report form 10k analogic corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report john j millerick john j millerick senior vice president chief financial officer treasurer principal financial accounting officer date october 25 2002 report independent accountants board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a1 page 30 present fairly material respects financial position analogic corporation subsidiaries july 31 2002 2001 results operations cash flows three years period ended july 31 2002 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 page 30 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp boston massachusetts september 18 2002 analogic corporation subsidiaries consolidated balance sheets accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders equity years ended july 31 2002 2001 2000 accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation subsidiaries analogic company engaged primarily design manufacture sale high technology high performance highprecision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products medical industrial use company subject risks common companies medical instrumentation technology industry including limited development competitors new technological innovations dependence key personnel loss significant customer protection proprietary technology compliance regulations domestic foreign regulatory authorities agencies significant accounting policies follows principles consolidation consolidated financial statements include accounts company subsidiaries whollyowned investments companies ownership interests range 19 50 percent andor company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b basis presentation certain prior years financial statement items reclassified conform current years presentation accounting principles generally accepted united states c inventories stated lower cost market using firstin firstout fifo method inventories include material labor manufacturing overhead costs property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives assets capital leases leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected income expenditures maintenance repairs charged expense cost significant improvements extend life underlying asset capitalized annual provisions depreciation amortization computed accordance following ranges estimated useful lives analogic corporation subsidiaries notes consolidated financial statements continued interest capitalized connection inhouse construction fixed assets capitalized interest recorded part asset relates amortized assets estimated useful life e revenue recognition revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met hardware software maintenance revenues recognized life contracts service revenues recognized time services rendered company significant obligations customer company provides engineering services customers contractual basis recognizes revenue using percentage completion method revenues related hotel operations recognized services performed occasionally request customers revenue recognized bill hold basis completion manufacture bill hold transactions meet specified revenue recognition criteria include normal billing credit payment terms firm commitment transfer customers risks rewards ownership bill hold transactions fiscal 2002 accounts receivable related bill hold transactions 1151 1806 july 31 2001 2000 respectively f capitalized software costs software development costs incurred subsequent establishing technological feasibility general release software products capitalized costs amortized straightline basis economic lives related products generally three years amortization expense 1772 1647 1778 fiscal 2002 2001 2000 respectively included product cost sales unamortized balance capitalized software 4333 5488 july 31 2002 2001 respectively g warranty costs company provides estimated warranty costs products shipped h research product development costs research product development costs expensed incurred include primarily engineering salaries overhead materials used connection research development projects income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs analogic corporation subsidiaries notes consolidated financial statements continued j net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consists stock options restricted stock k cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 122000 46000 july 31 2002 2001 respectively l concentration risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company places cash investments marketable securities high credit quality financial instruments policy limits amount credit exposure one financial institution company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers financial condition depend small number customers large portion business changes customers orders may significant impact operating results major customer significantly reduces amount business us would adverse impact operating results one export customer accounted approximately 54000 78000 18 22 total product engineering revenue fiscal 2002 2001 respectively total product engineering revenue one domestic customer accounted approximately 37000 fiscal 2002 2001 12 10 respectively companys ten largest customers including philips general electric l3 communications accounted approximately 65 product engineering revenue fiscal 2002 marketable securities companys marketable securities categorized availableforsale securities defined statement financial accounting standards 115 accounting certain investments debt equity securities unrealized marketable securities gains losses reflected net amount caption accumulated comprehensive income within statement stockholders equity realized gains losses recorded within statement income caption income expenses purpose computing realized gains losses cost identified specific identification basis n new accounting pronouncements june 2001 financial accounting standards board fasb issued statement financial accounting standard sfas 141 business combinations sfas 141 sfas 141 requires business combinations accounted purchase method certain acquired intangible assets business combination recognized assets apart goodwill sfas 141 effective business combinations initiated june 30 2001 business combinations accounted purchase method date acquisition june 30 2001 company adopted sfas 141 fiscal year ended july 31 2002 june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 requires amortization goodwill replaced periodic tests goodwills impairment intangible assets goodwill amortized useful lives provisions analogic corporation subsidiaries notes consolidated financial statements continued sfas 142 effective fiscal years beginning december 15 2001 adopted company required august 1 2002 adoption standard expected material effect companys financial position results operations june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated retirement costs standard applies legal obligations associated retirement longlived assets result acquisition construction development andor normal use asset sfas 143 effective fiscal years beginning june 15 2002 adoption standard expected material effect companys financial position results operations august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 supersedes fasb 121 accounting impairment longlived assets long lived assets disposed sfas 144 applies longlived assets including discontinued operations consequently amends accounting principles board opinion 30 apb 30 reporting results operations reporting effects disposal segment business sfas 144 effective financial statements issued fiscal years beginning december 15 2001 thus company adopted requirement beginning august 1 2002 adoption standard expected material effect companys financial position results operations june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring principal difference sfas 146 eitf 943 relates requirements recognition liability cost associated exit disposal activity sfas 146 requires liability cost associated exit disposal activity recognized liability incurred eitf 943 liability exit cost defined eitf 943 recognized date entitys commitment exit plan therefore sfas 146 eliminates definition requirements recognition exit costs eitf 943 sfas 146 also establishes fair value objective initial measurement liability provisions sfas 146 effective exit disposal activities initiated december 31 2002 therefore adopted company january 1 2003 adoption standard expected material effect companys financial position results operations use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts expenses reporting periods estimates include reserves accounts receivable inventory accruals liabilities actual results could differ estimates p comprehensive income statement financial accounting standards 130 sfas 130 reporting comprehensive income established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders equity comprehensive income consists unrealized gains losses marketable securities foreign currency translation adjustments analogic corporation subsidiaries notes consolidated financial statements continued q stockbased compensation statement financial accounting standards 123 sfas 123 accounting stockbased compensation encourages require recognition compensation expense based fair value employee stockbased compensation instruments company adopted fair value method accounting employee stockbased compensation instead complies pro forma disclosure requirements r fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value fair values marketable securities estimated based quoted market price securities impairment longlived assets company evaluates recoverability longlived assets primarily fixed assets accordance statement financial accounting standards 121 sfas 121 accounting impairment longlived assets disposed sfas 121 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets translation foreign currencies assets liabilities companys foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow included operations period occur 2 business combinations july 2001 companys ownership camtronics medical systems ltd formerly camtronics ltd increased 81 100 result company acquiring remaining outstanding shares camtronics common stock company issued 190255 shares common stock treasury value 7584 acquire remaining 19 minority interest company recorded premium excess book value 3227 1240 applied property plant equipment 1987 applied intangible assets classified assets balance sheet related software systems technology analogic corporation subsidiaries notes consolidated financial statements continued 3 marketable securities marketable securities categorized availableforsale securities summarized follows cost estimated fair value current debt securities july 31 2002 contractual maturity shown expected maturities differ contractual maturities issuers securities may right repay obligations without prepayment penalties realized gains losses marketable securities company sold marketable securities periods presented cost approximated fair value maturity dates 4 explosive assessment computed tomography exact systems agreement company announced april 2002 entered agreement supply 1000 exact systems l3 communications security detection system division l3 exact core system l3s examiner 3dx6000 certified explosive detection system eds purchased united states transportation security administration tsa installed major airports across united states terms exact contract l3 company recognizes product revenue upon shipment exact systems spare parts l3 time revenue recognition criteria met july 31 2002 company shipped 54 completed units certain spare parts related contract company recorded cash received l3 purchase longleadtime inventory components advance payments within liabilities section balance sheet payments recognized revenue systems inventory components relate shipped july 31 2002 company 50550 recorded within advance payments related longlead purchases agreement also provides company receive 22000 rampup funds purpose leasing fitting facility ensuring availability key critical raw material inventory components form suppliers meet production volume requirements contract costs incurred assets purchased fully reimbursed l3 due conditions contract company recorded revenues costs assets related funds rampup activity cash received rampup activity recorded within advance payments within liability section balance analogic corporation subsidiaries notes consolidated financial statements continued sheet reduced cash spent activities july 31 2002 company balance 7943 unexpended funds recorded within advance payments related rampup funds 5 balance sheet information additional information certain balance sheet accounts follows years ended increase land improvements building improvements primarily due construction new facility herlev denmark companys danish subsidiary bk medical depreciation expense 14380 14148 12642 fiscal years 2002 2001 2000 respectively analogic corporation subsidiaries notes consolidated financial statements continued 6 asset impairment charges fiscal year 2002 company recorded asset impairment charges totaling 8883 pretax basis result continued decline economic business conditions telecommunications industry analogic decided terminate activities related anatel companys whollyowned telecommunications subsidiary company recorded pretax charge 1901 related impairment purchased intangibles longlived assets impairment charge equal amount assets carrying value exceeded present value estimated discounted cash flows additionally pretax charge 557 related obsolete inventory well pretax charge 1120 related capitalized software recorded assets deemed unrecoverable company also decided discontinue sales certain older unprofitable product lines within semiconductor test equipment business order focus resources potential growth areas within business result company recorded pretax charge 902 fiscal 2002 related impairment purchased intangibles longlived assets impairment charge equal amount assets carrying value exceeded present value estimated discounted cash flows additionally pretax charge 3600 related excess obsolete test equipment inventory well pretax charge 803 million related capitalized software recorded fiscal 2002 assets deemed unrecoverable company also incurred immaterial costs related involuntary terminations related activities fiscal 2001 company made decision reorganize anatel focus limited number products connection decision company recognized asset impairment charges pretax basis 3200 fiscal 2001 attributable certain assets anatel entire balance charge recorded within cost sales section companys consolidated statements income inventory reserve established fiscal year 2002 fiscal year 2001 part activities noted totaled 5657 million total 1284 million inventory scrapped charged reserve fiscal 2002 7 investments advances affiliated companies fiscal 2002 company acquired 19 interest cedara software corporation mississauga ontario canada exchange cash 7500 considerations part companys investment agreement cedara agreed grant company preemptive rights whereby right maintain 19 equity interest event certain future issuances stock cedara subsequently issued additional stock may 3 2002 company acquired additional 580641 common shares cedara approximately 872 maintain companys interest approximately 19 company recorded investment 3341 premium excess book value 5031 analogic corporation subsidiaries notes consolidated financial statements continued applied intangible assets related acquired technologies amortized estimated useful life five years company accounts investment using equity method accounting company ability exercise significant influence cedaras operating financial policies two seven seats cedaras board directors fiscal 2002 company recorded gain 647 share profit cedara carrying value investment july 31 2002 3987 company also recognized amortization intangible asset 840 fiscal 2002 carrying value intangible asset july 31 2002 4191 classified assets consolidated balance sheets company also guaranteed debt owed cedara bank lender provision credit facility analogics principal bank approximately 6300 subsequent july 31 2002 analogic agreed guarantee increase credit facility approximately 63 million 95 million based upon funding requirements fiscal 2002 companys subsidiary camtronics medical systems ltd acquired 15 interest cardioworks inc 2000 cardioworks specializes knowledge databases electronic medical records camtronics plans integrate cardioworks knowledge database digital charting product offered part companys vericis product line company recorded 1900 investment 100 intangible assets related intellectual property company also recorded share 15 equity loss cardioworks amount 126 representing cardioworks cumulative losses company 446 equity ownership interest shenzhen anke hightech co ltd sahco located peoples republic china fiscal 2002 company recorded 1320 share losses sahco compared 51 fiscal 2001 carrying value investment 1965 july 31 2002 3285 july 31 2001 sales sahco fiscal years 2002 2001 2000 approximately 4037 3237 5575 respectively july 31 2002 2001 net accounts receivable affiliate 4092 2350 respectively company along another investor owned 50 interest private company design development medical imaging equipment upon completion research development phase private company sold intellectual property form license newly formed limited liability company called enhanced ct technology llc ectt distributed assets company original investor ceased operations company conjunction original investor retains 50 interest ectt receive license related royalties based upon future sales medical imaging equipment company accounted transfer historical cost continue account investment using equity method accounting companys share profit newly formed limited partnership 1429 fiscal 2002 1789 fiscal 2001 addition ectt made cash distribution form return investment owners 2302 1000 fiscal 2002 2001 respectively carrying value companys investment ectt july 31 2002 357 1230 july 31 2001 summarized financial information four partiallyowned equity affiliates july 31 years ended follows analogic corporation subsidiaries notes consolidated financial statements continued carrying amount investments approximates underlying ownership net assets investee company owns 1771802 shares norland medical systems inc received fiscal 2000 limited partnership norland partners partnership dissolved fiscal 2000 upon distributing shares norland medical systems inc respective partners time distribution shares restricted however restriction 620865 shares lapsed january 1 2001 remaining 1150937 shares became unrestricted march 29 2001 july 31 2002 company recognized loss approximately 142 reduced value norland shares market value 35 believed temporary decline value occurred fiscal 2001 company recorded loss 487 reduced value shares market value 177 july 31 2001 april 11 2002 norland medical systems inc changed name orthometric inc 8 mortgage notes payable mortgage notes payable consists following principal maturities next five fiscal years thereafter notes follows 2003 226 2004 233 2005 240 2006 247 2007 254 3095 thereafter total interest incurred amounted 359 348 472 fiscal 2002 2001 2000 respectively 0 108 171 capitalized company currently approximately 300 million revolving credit facilities various banks available direct borrowings 9 lease commitments related nonrelated third parties company leased three operating facilities partnership chairman former vice chairman partners leases accounted capital leases july 31 2001 two leases expired renewed leases contain rent escalation clauses based upon costofliving adjustments rent adjustments significant fiscal 2002 2001 2000 analogic corporation subsidiaries notes consolidated financial statements continued property capital leases included property plant equipment follows certain companys subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated companys operating leases approximately 1986 1423 989 net sublease income 0 872 1143 fiscal 2002 2001 2000 respectively following schedule year future minimum lease payments july 31 2002 1 lease costs associated haverhill facility funded rampup monies received company connection exact system order 2 commitments represent commitments suppliers production raw materials inventory components related exact system order 10 stock option stock bonus plans july 31 2002 company two key employee stock option plans two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value analogic corporation subsidiaries notes consolidated financial statements continued options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant companys key employee stock bonus plans common stock may granted key employees terms conditions determined board directors generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant upon issuance stock plans unearned compensation equivalent market value date grant charged stockholders equity subsequently amortized periods restrictions lapse six years shares granted companys key employee stock bonus plan 56500 weighted average fair market value 4157 per share fiscal 2002 89000 shares weighted average fair market value 4161 per share fiscal 2001 87000 shares weighted average fair market value 2789 per share fiscal 2000 amortization unearned compensation 1054 976 644 recorded fiscal 2002 2001 2000 respectively employee stock purchase plan eligible participants granted options purchase companys common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25000 calendar year number shares issued pursuant plan totaled 8654 2002 7864 2001 11940 2000 july 31 2002 1152969 shares reserved grant stock option bonus purchase plans following table sets forth stock option transactions years ended july 31 2002 2001 2000 analogic corporation subsidiaries notes consolidated financial statements continued following table summarizes information stock options outstanding july 31 2002 permitted current accounting standards compensation cost recognized consolidated statements income companys stock option plans compensation cost companys stockbased compensation plans recorded applied accordance fas 123 accounting stockbased compensation recognized ratably options vesting periods companys proforma information would follows weightedaverage estimated fair value stock options granted fiscal 2002 2001 2000 1812 1845 1911 per share respectively fair value companys stock options estimated using blackscholes optionpricing model following weightedaverage assumptions 11 retirement plans company qualified profit sharing retirement plan retirement plan benefit eligible employees retirement plan provides company shall make contributions current analogic corporation subsidiaries notes consolidated financial statements continued accumulated earnings determined board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code profit sharing contribution expense amounted 1000 fiscal year 2000 company contribute retirement plan fiscal 2002 2001 company sponsors 401k plan provide retirement benefits employee allowed section 401k internal revenue code plan provides taxdeferred salary deductions eligible employees may contribute 1 15 annual compensation plan limited maximum annual amount set periodically internal revenue service beginning fiscal 2001 company matched employee contributions dollar 3 eligible earning per year per person contributions vest immediately company contributions plans totaled 916 2009 fiscal 2002 2001 respectively plan discontinued effective january 2002 12 income taxes components provision income taxes follows tax effects principal temporary differences resulting deferred tax expense benefit follows analogic corporation subsidiaries notes consolidated financial statements continued income loss income taxes domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation subsidiaries notes consolidated financial statements continued reconciliation income taxes united states statutory rate effective tax rate follows july 31 2002 company capital loss carryforwards 1970 carryforwards expire 2003 amount 1617 2005 amount 353 13 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 2002 2001 company recorded asset impairment losses pretax basis 8883 first quarter fiscal 2002 related anatel companys telecommunications subsidiary certain old unprofitable product lines within semiconductor test equipment business company recorded asset impairment losses pretax basis 3200 fourth quarter fiscal 2001 related anatel charges recorded cost sales section companys consolidated statements income fiscal years 2002 2001 see note 6 notes consolidated financial statements analogic corporation subsidiaries notes consolidated financial statements continued 14 supplemental disclosure cash flow information changes operating assets liabilities follows years ended fiscal years 2002 2001 2000 interest paid amounted 334 420 431 respectively income taxes paid fiscal years 2002 2001 2000 amounted 2159 8308 6044 respectively supplemental information regarding noncash investing financing activities capital lease obligations incurred purchase new equipment 0 fiscal 2002 565 fiscal 2001 company issued 190255 shares common stock market value 7584 remaining interest camtronics fiscal 2001 15 net income per share companys reported net income number shares utilized net income per share calculations fiscal years ending july 31 2002 2001 2000 follows stock options purchase approximately 73800 90000 199000 shares common stock outstanding years ended july 31 2002 2001 2000 respectively included calculation diluted net income per share options exercise prices greater average analogic corporation subsidiaries notes consolidated financial statements continued market price companys common stock years although stock options antidilutive fiscal 2002 2001 2000 may dilutive future years calculations 16 segment geographic information company operates primarily within three segments within electronics industry medical instrumentation technology products security imaging technology products signal processing technology products medical instrumentation technology products consist primarily electronic systems subsystems medical imaging equipment security imaging technology products consist advanced explosive detection systems signal processing technology products consist ad converters supporting modules highspeed digital signal processors image processing equipment companys corporate represents companys hotel business net interest income assets corporate consist primarily companys cash equivalents marketable securities fixed assets specifically identifiable accounting policies segments described summary significant accounting policies segment information prior years restated conform provision statement financial standards 131 disclosures segment enterprise related information table presents information companys reportable segments includes asset impairment losses pretax basis 8883 fiscal 2002 3200 fiscal 2001 see note 6 notes consolidated financial statements b includes cash equivalents marketable securities 174336 114208 105751 fiscal years 2002 2001 2000 respectively analogic corporation subsidiaries notes consolidated financial statements continued information regarding geographic areas years ended july 31 2002 2001 2000 follows revenues attributed countries based location companys customers analogic corporation subsidiaries schedule ii valuation qualifying accounts index exhibitsitem 15 exhibits financial statement schedules reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent auditors board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position analogic corporation subsidiaries july 31 2003 2002 results operations cash flows three years period ended july 31 2003 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 present fairly material respects information set fourth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedules based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp pricewaterhousecoopers llp boston massachusetts october 13 2003 analogic corporation subsidiaries consolidated balance sheets thousands accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income thousands except per share data accompanying notes integral part financial statements analogic corporation consolidated statements stockholders’ equity years ended july 31 2003 2002 2001 thousands except share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation subsidiaries “analogic” “company” engaged primarily design manufacture sale high technology high performance highprecision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products medical industrial use company subject risks common companies medical instrumentation technology industry including limited development competitors new technological innovations dependence key personnel loss significant customer protection proprietary technology compliance regulations domestic foreign regulatory authorities agencies significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries whollyowned investments companies ownership interests range 19 50 percent andor company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b basis presentation certain prior years’ financial statement items reclassified conform current year’s presentation accounting principles generally accepted united states america c inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held forecasted demand changes technology assessments require management judgments estimates valuation adjustments excess obsolete inventory may recorded based assessments reserve 10438 17182 recorded fiscal years 2003 2002 respectively property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives assets capital leases leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected income expenditures maintenance repairs charged expense cost significant improvements extend life underlying asset capitalized analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data annual provisions depreciation amortization computed accordance following ranges estimated useful lives interest capitalized connection inhouse construction fixed assets capitalized interest recorded part asset relates amortized asset’s estimated useful life e revenue recognition accounts receivable company recognizes majority revenue accordance sec staff accounting bulletin 101 “revenue recognition financial statements” “sab 101” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met hardware maintenance revenues recognized ratably life contracts business units sell software licenses company recognizes revenue accordance aicpa’s statement position 972 “software revenue recognition” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence vsoe fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regards installation implementation remain fees fixed determinable collectibility reasonably assured customer acceptance applicable obtained software maintenance revenues recognized ratably life contracts software maintenance revenues recognized time services rendered company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fees monthly basis utilizing hours incurred date percentage total estimated hours complete project company sufficient basis measure progress towards completion revenue recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately shipping handling costs insignificant included revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customer’s financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collections issues identified camtronics’ revenues derived primarily sale digital cardiac information systems system sales revenues consist following components computer software licenses computer hardware installation support sublicensed software addition camtronics generates revenues related system sales software support hardware maintenance training consulting professional services analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data camtronics recognizes revenue accordance provisions sop 972 sop 972 requires revenue earned software arrangements involving multipleelements allocated element based fair values elements use residual method residual method revenue recognized multipleelement arrangement companyspecific objective evidence fair value exists undelivered elements arrangement determined price charged element sold separately ie professional services software support hardware maintenance hardware sublicensed software exist one delivered elements arrangement ie software solutions specifically camtronics determines fair value maintenance portion arrangement based renewal price maintenance charged clients professional services portion arrangement installation services based hourly rates camtronics charges services sold apart software license hardware sublicensed software based prices elements sold separately software evidence fair value cannot established undelivered elements license agreement entire amount revenue arrangement deferred elements delivered objective evidence fair value remaining undelivered element established inherent revenue recognition process significant management estimates judgments influence timing amount revenue recognition camtronics provides several models procurement digital cardiac information systems predominant model includes perpetual software license agreement projectrelated installation services professional consulting services computer hardware sublicensed software support camtronics provides installation services include projectscoping services conducting preinstallation audits detailed installation plans actual installation hardware components testing hardware software installed customer site installation services deemed essential functionality software license installation services fees recognized upon completion installation camtronics also provides professional consulting services include consulting activities fall outside scope standard installation services vary depending scope complexity requested client examples services may include additional database consulting system configuration project management interfacing existing systems network consulting professional consulting services generally deemed essential functionality software thus impact timing software license revenue recognition professional consulting service revenue recognized services performed hardware software maintenance fees marketed annual multiyear arrangements recognized revenue ratably contracted maintenance term deferred revenue comprised 1 license fee maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement fair value determined components yet delivered accepted customer deferred costs represent costs related revenues example costs goods sold services provided sales commission expenses f capitalized software costs software development costs incurred subsequent establishing technological feasibility general release software products capitalized accordance sfas 86 “accounting costs analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data computer software sold leased otherwise marketed” capitalized costs amortized straightline basis economic lives related products generally three years amortization expense 3541 1772 1647 fiscal 2003 2002 2001 respectively included product cost sales unamortized balance capitalized software 6339 4333 july 31 2003 2002 respectively g warranty costs company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligation affected product failure rates service delivery costs incurred correcting product failure actual product failure rates service costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results company warrants products perform material respects accordance standard published specification effect time delivery products customer period ranging 12 18 months date delivery h research product development costs research product development costs expensed incurred include primarily engineering salaries overhead materials used connection research development projects income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized j net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock k cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 137000 123000 july 31 2003 2002 respectively l concentration risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company places analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data cash investments marketable securities high credit quality financial instruments policy limits amount credit exposure one financial institution company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company depends small number customers large portion business changes customers’ orders may significant impact company’s operating results major customer significantly reduces amount business us would adverse impact company’s operating results one export customer accounted approximately 31000 7 total product engineering revenue fiscal 2003 another export customer accounted approximately 54000 18 total product engineering revenue fiscal 2002 total product engineering revenue one domestic customer accounted approximately 200000 43 fiscal 2003 another domestic customer accounted approximately 37000 12 fiscal 2002 company’s ten largest customers including l3 communications general electric toshiba accounted approximately 77 product engineering revenue fiscal 2003 company recognized revenue one customer 2003 accounting total 43 total product engineering revenue company recognized revenue two customers 2002 accounting total 18 12 total product engineering revenue company recognized revenue two customers 2001 accounting total 23 11 total product engineering revenue marketable securities company’s marketable securities categorized availableforsale securities defined statement financial accounting standards 115 “accounting certain investments debt equity securities” unrealized marketable securities gains losses reflected net amount caption accumulated comprehensive income within statement stockholders’ equity realized gains losses recorded within statement income caption income expenses purpose computing realized gains losses cost identified specific identification basis n new accounting pronouncements june 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities” “sfas 146” sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” principal difference sfas 146 eitf 943 relates requirements recognition liability cost associated exit disposal activity sfas 146 requires liability cost associated exit disposal activity recognized liability incurred eitf 943 liability exit cost defined eitf 943 recognized date entity’s commitment exit plan therefore sfas 146 eliminates definition requirements recognition exit costs eitf 943 sfas 146 also establishes fair value objective initial measurement liability provisions sfas 146 effective exit disposal activities initiated december 31 2002 therefore adopted company january 1 2003 november 2002 eitf reached consensus issue 0021 “revenue arrangements multiple deliverables” “eitf 0021” eitf 0021 addresses revenue recognition arrangements encompassing analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data multiple elements delivered different points time defining criteria must met elements considered separate unit accounting element determined separate unit accounting revenue element recognized time delivery eitf 0021 effective revenue arrangements entered fiscal periods beginning june 15 2003 company expect pronouncement material impact financial position results operations january 2003 financial accounting standards board “fasb” issued financial accounting standards board interpretation 46 “consolidation variable interest entities” “fin 46” fin 46 requires entity controlling financial interest variable interest entity assets liabilities results activities variable interest entity included consolidated financial statements entity fin 46 effective immediately new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior january 31 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 october 2003 fasb deferred effective date applying provision fin 46 first interim annual period ending december 15 2003 company still assessing impact financial position results operations april 30 2003 fasb issued statement 149 “amendment statement 133 derivative instruments hedging activities” statement 149 intended result consistent reporting contracts either freestanding derivative instruments subject statement 133 entirety hybrid instruments debt host contracts embedded derivative features addition statement 149 clarifies definition derivative providing guidance meaning initial net investments related derivatives statement 149 effective contracts entered modified june 30 2003 company expect pronouncement material impact financial position results operations may 15 2003 fasb issued statement 150 “accounting certain financial instruments characteristics liabilities equity” statement 150 establishes standards classifying measuring liabilities certain financial instruments embody obligations issuer characteristic liabilities equity statement 150 represents significant change practice accounting number financial instruments including mandatory redeemable equity instruments certain equity derivatives frequently used connection share repurchase programs company use instruments share repurchase program statement 150 effective financial instruments created modified may 31 2003 instruments september 1 2003 company expect pronouncement material impact financial position results operations use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates fair value investments privately held companies goodwill intangible assets valuation allowances deferred income tax assets accruals product warranty liabilities income taxes actual results could differ estimates analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data p comprehensive income statement financial accounting standards 130 “sfas 130” “reporting comprehensive income” established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders’ equity comprehensive income consists unrealized gains losses marketable securities foreign currency translation adjustments q stockbased compensation company adopted disclosure requirements statement financial accounting standards 148 “sfas 148” “accounting stockbased compensationtransition disclosure amendment fasb statement 123” current fiscal year beginning quarter ended april 30 2003 sfas 148 amends statement financial accounting standards 123 “sfas 123” “accounting stockbased compensation” provide alternative methods transition voluntary change fair value based method accounting stockbased compensation also amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements methods accounting stockbased employee compensation effect method used reported results permitted sfas 148 sfas 123 company continues apply accounting provisions accounting principle board “apb” 25 related interpretations regard measurement compensation cost options granted company’s equity compensation plans permitted current accounting standards compensation cost recognized consolidated statements income company’s stock option plans compensation cost company’s stockbased compensation plans recorded applied accordance fas 123 accounting stockbased compensation recognized ratably options’ vesting periods company’s proforma information would follows analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data r fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value fair values marketable securities estimated based quoted market price securities impairment longlived assets company evaluates recoverability longlived assets primarily fixed assets accordance statement financial accounting standards 144 “sfas 144” “accounting impairment disposal longlived assets” sfas 144 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets segment information statement financial accounting standards 131 disclosures segments enterprise related information “sfas 131” establishes standards reporting information operating segments interim annual financial statements company’s chief operation decisionmakers review profit loss company aggregate basis manage operation company within two operating segments company operates primarily within two segments within electronics industry imaging technology products signal processing technology products imaging technology products consist primarily electronic systems subsystems medical imaging equipment advanced explosive detection systems signal processing technology products consist analog digital ad converters supporting modules highspeed digital signal processors u translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables investments included operations period occur foreign exchange transaction gains losses included results operations income net company foreign exchange gains totaling 3941 904 2003 2002 respectively foreign exchange losses totaling 263 fiscal 2001 2 business combinations october 2002 anrad corporation company’s wholly owned subsidiary located saintlaurent quebec purchased remaining 52 outstanding common stock ftni inc “ftni” 2407 cash ftni founded three canadian companies april 1997 develop products medical industrial applications noranda advanced materials one ftni founders 48 ownership interest acquired company 1999 renamed anrad purchase remaining shares ftni anrad full ownership rights access ftni’s basic technology analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data intellectual property upon completion transaction anrad’s total investment ftni amounted approximately 2746 approximately 2019 determined intellectual property 727 represented fair value tangible net assets primarily cash intellectual property amortized estimated useful life five years supplemental proforma information disclosing results operations company ftni combined basis presented due immateriality november 6 2002 company’s newly formed subsidiary sound technology inc “sti” acquired certain assets liabilities sound technology business unit located state college pa acuson corporation wholly owned subsidiary siemens corporation approximately 10100 cash sti produces linear tightly curved array ultrasound transducers probes broad range clinical applications supplied medical equipment companies worldwide company’s acquisition cost 10100 subsequently reduced approximately 200 reflecting postclosing purchase price adjustments result net investment 9900 consists approximately 2800 tangible net assets acquired approximately 7100 intellectual property intangible assets intellectual property intangible assets amortized estimated useful life five years supplemental proforma information disclosing results operations company sti combined basis presented due immateriality also november 6 2002 company’s subsidiary camtronics medical systems ltd acquired shares vmi medical inc “vmi” ottawa canada vmi medical information software company specializing clinical database workflow automation business improvement solutions children’s heart centers vmi acquired approximately 2000 cash payable two year period future contingent consideration based upon combined companies achieving certain performance criteria specific time periods future contingent purchase price date acquisition estimated range 50007000 company recognized future contingent purchase price books investment future liability contingency resolved consideration determinable company record purchase price adjustment company paid 2000 cash related acquisition assumed approximately 1400 net liabilities acquired intellectual property valued 3400 supplemental proforma information disclosing results operations company vmi combined basis presented due immateriality 3 marketable securities marketable securities categorized availableforsale securities summarized follows analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data cost estimated fair value current debt securities july 31 2003 contractual maturity shown expected maturities differ contractual maturities issuers securities may right repay obligations without prepayment penalties realized gains losses marketable securities company sold marketable securities periods presented cost approximated fair value maturity dates 4 explosive assessment computed tomography “exact” systems agreement company announced april 2002 entered agreement supply 1000 exact systems l3 communications’ security detection system division “l3” exact core system l3’s examiner 3dx6000 certified explosive detection system purchased united states transportation security administration “tsa” installed major airports across united states company recognized product revenue upon shipment exact systems spare parts l3 time revenue recognition criteria met first quarter fiscal 2003 company received firm orders l3 245 additional systems orders brought total number systems ordered l3 delivery tsa 425 company shipped 425 exact systems december 31 2002 54 systems fourth quarter fiscal 2002 371 systems first second quarters fiscal year 2003 addition december 2002 company received purchase order l3 deliver additional 75 exact systems remainder fiscal 2003 foreign anticipated orders company shipped systems july 31 2003 company recorded cash received l3 purchase longleadtime inventory components advance payments within liabilities section balance sheet payments recognized revenue systems inventory components relate shipped july 31 2003 company remaining balance recorded within advance payments related longlead purchases agreement also provided company receive 22000 rampup funds purpose leasing fitting facility ensuring availability key critical raw material inventory components suppliers meet production volume requirements contract costs incurred assets purchased fully reimbursed l3 company recorded revenues costs assets related rampup funds cash received rampup activities recorded within advance payments deferred revenue account within liability section balance sheet liabilities reduced cash spent activities july 31 2003 company balance 3650 unexpended rampup funds recorded within advance payments deferred revenue account addition 22000 rampup funds provided l3 behalf tsa company spent approximately 5700 funds purchase manufacturing office equipment capitalized fiscal year 2003 analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data 5 balance sheet information additional information certain balance sheet accounts follows years ended increase building improvements primarily due construction addition company’s headquarters increase manufacturing equipment primarily due production requirements exact contract acquired companies depreciation expense 16809 14380 14148 fiscal years 2003 2002 2001 respectively decrease longleadtime components due advance payments received l3 recognized revenue systems components relate shipped analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data 6 goodwill intangible assets august 1 2002 analogic adopted statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” sfas 142 goodwill certain intangible assets indefinite lives longer amortized instead reviewed impairment annually frequently impairment indicators arise connection adoption sfas 142 company required perform transitional impairment assessment goodwill within six months adoption standard sfas 142 requires company identify reporting units determine carrying value reporting units assigning assets liabilities including existing goodwill intangible assets reporting units company assigned entire balance goodwill imaging technology products purpose performing transitional impairment test company completed transitional impairment assessment goodwill october 31 2002 determined goodwill impaired company perform assessment goodwill annually october 31 goodwill increased 258 july 31 2002 3596 july 31 2003 due goodwill arising acquisition 100 vmi 873 19 cedara 1290 remaining 52 ftni 687 remaining 18 camtronics 488 entire goodwill balance included within imaging technology products segment none goodwill deductible tax purposes following table reflects net income adjusted company giving effect sfas 142 adopted august 1 2001 goodwill july 31 2003 july 31 2002 changes carrying amount fiscal years follows analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data intangible assets july 31 2003 july 31 2002 continue amortized consisted following software technology increase july 31 2002 relates technology acquired part vmi medical inc acquisition intellectual property increase july 31 2002 relates intellectual property acquired part sti acquisition approximately 7100 ftni acquisition approximately 2100 estimated future amortization expense related current intangible assets five succeeding years expected follows 7 investment advances affiliated companies company 446 equity ownership interest shenzhen anke hightech co ltd sahco located people’s republic china fiscal 2003 company recorded 1125 share losses sahco compared 1320 fiscal 2002 carrying value investment 840 july 31 2003 1965 july 31 2002 fiscal 2003 company recorded provision bad debt 1587 certain old invoices sahco company deemed uncollectible july 31 2003 2002 net receivable affiliate 963 4092 respectively sales sahco fiscal years 2003 2002 2001 approximately 3677 4037 and3237 respectively company along another investor owned 50 interest private company design development medical imaging equipment upon completion research development phase private company sold intellectual property form license newly formed limited liability company called enhanced ct technology llc “ectt” distributed assets company original investor ceased operations company conjunction original investor retains 50 interest ectt receive license related royalties based upon future sales medical imaging equipment company accounted distribution assets historical cost continue account investment using equity method accounting company’s share profit newly formed limited partnership 159 fiscal 2003 1429 fiscal 2002 addition ectt made cash distribution form return investment owners 516 2302 fiscal 2003 2002 respectively carrying value company’s investment ectt 0 357 july 31 2003 2002 respectively analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 photodetection systems inc “pds” acton massachusetts pds privately held company developed proprietary detection systems highperformance position emission tomography “pet” rapidly growing medical diagnostic imaging modality pet scanning tool diagnosis management cancer specifically detecting earlystage tumors determining tissue characteristics treatment addition company also received convertible promissory note principal amount 1367 exclusive license pds technology nonpet products convertible promissory note convertible company 1025559 shares series b convertible participating preferred stock converted company’s equity interest would increase 9 upon pds achieving certain milestones exclusive license pds technology revert back pds company receive warrant purchase 2250563 shares series b convertible participating preferred stock exercise warrant would increase company’s equity interest 20 company connection transaction expended total 6035 cash company’s current equity interest potential conversion promissory note series b convertible participating preferred stock potential reversion exclusive technology license pds warrant could potentially result company 40 equity interest pds additionally certain circumstances future company may discretion may required purchase remaining 60 equity fair value company three seats pds’s sevenperson board directors company accounts investment equity method due company’s ability exercise significant influence operating financial policies september 2001 company acquired 19 interest cedara software corporation mississauga ontario canada return equity investment 75 million considerations cedara premier independent provider imaging software technology custom imaging software development leading original equipment manufactures oems healthcare industry cedara enables healthcare solution providers integrate better imaging software systems hardware fields computed tomography ct magnetic resonance imaging mri analogic guaranteed debt owed cedara bank lender provision credit facility analogic’s principal bank approximately 107 million analogic two seats cedara’s seven person board directors part company’s original investment agreement cedara agreed grant company preemptive rights whereby right maintain 19 equity interest event certain future issuances stock cedara may 3 2002 company acquires additional 580641 shares common stock cedara approximately 09 million maintain company’s equity interest 19 analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data summarized financial information partiallyowned equity affiliates july 31 years ended follows carrying amount investments approximates underlying ownership net assets partiallyowned equity affiliates include sahco ectt cedara software corporation cardioworks photo detection systems inc fiscal years ended 2003 2002 2001 company recognized foreign exchange gain respect intercompany notes approximately 3900 900 fiscal years ended 2003 2002 respectively loss approximately 300 fiscal year 2001 8 net income per share company’s reported net income number shares utilized net income per share calculations fiscal years ending july 31 2003 2002 2001 follows stock options purchase approximately 74600 73800 90000 shares common stock outstanding years ended july 31 2003 2002 2001 respectively included calculation diluted net income per share options’ exercise prices greater average market price company’s common stock years although stock options antidilutive fiscal 2003 2002 2001 may dilutive future years’ calculations analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data 9 commitments guarantees third quarter fiscal 2003 company commenced construction 100000 square foot addition headquarters building peabody massachusetts twostory addition enable company consolidate existing massachusetts operations expand production capacity medical security imaging system business building including fitup estimated cost approximately 12500 financed internally generated cash november 2002 financial accounting standard board “fasb” issued fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” “fin 45” fin 45 requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee fin 45 also requires additional disclosures made guarantor interim annual financial statements obligations certain guarantees issued accounting requirements initial recognition guarantees applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective guarantees outstanding regardless issued modified financial statements interim annual periods ending december 15 2002 adoption fin 45 material effect company’s consolidated financial statements following summary agreements company determined within scope fin 45 company agreements whereby indemnifies officers directors certain events occurrences officer director serving company’s request capacity term indemnification period officer’s director’s lifetime potential amount future payments company could required make indemnification agreements unlimited also extent permitted massachusetts law company’s articles organization require company indemnify directors company’s bylaws require company indemnify present former directors officers company analogic also permit indemnification employees agents company board directors time authorizes indemnification instance however indemnification granted director otherwise entitled thereto determined committed breach loyalty company stockholders b committed acts omissions good faith involved intentional misconduct knowing violation law c derived improper personal benefit connection particular transaction claim indemnification made person covered said agreements andor relevant provisions company’s articles bylaws company believes estimated exposure indemnification obligations currently minimal accordingly company liabilities recorded indemnity agreements requirements july 31 2003 company’s standard original equipment manufacturing supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2003 fiscal 2002 company acquired 19 interest cedara software corporation “cedara” mississauga ontario canada part company’s investment agreement company guaranteed certain debt owed cedara bank lender provision credit facility company’s principal bank approximately 10700 based upon cedara’s funding requirements date claims asserted company connection guarantee cedara’s debt accordingly company liabilities recorded connection cedara guarantee july 31 2003 company warrants products perform material respects accordance standard published specification effect time delivery products customer period ranging 12 18 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table summarizes activities accrued product warranty reserve year ended july 31 2003 company currently approximately 300 million revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2003 fiscal 2002 however company guaranteed provision credit facility principal bank debt owed cedara bank lender provision credit facility approximately 10700 10 mortgage notes payable mortgage notes payable consists following principal maturities next five fiscal years thereafter notes follows 2004 1277 2005 240 2006 247 2007 254 2008 262 2834 thereafter analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data total interest incurred amounted 360 359 348 fiscal 2003 2002 2001 respectively total interest incurred 0 108 capitalized 11 lease commitments related nonrelated third parties company leased three operating facilities partnership chairman former vice chairman partners leases accounted capital leases one leases expire january 31 2004 two leases expired july 31 2001 lease expiring january 31 2004 renewed leases contain rent escalation clauses based upon costofliving adjustments rent adjustments significant fiscal 2003 2002 2001 property capital leases included property plant equipment follows certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 3278 1986 1423 net sublease income 0 872 fiscal 2003 2002 2001 respectively following schedule year future minimum lease payments july 31 2003 1 lease costs associated haverhill facility funded rampup monies received company connection exact system order 2 commitments represent commitments suppliers production raw materials inventory components related exact system order analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data 12 income expense income consists primarily interest income short long term marketable securities gain loss attributable investments unconsolidated affiliates company accounts equity method foreign exchange gains losses income loss sale property plant equipment fy 2003 company realized foreign exchange gains 3908 gain sale property plant equipment 1561 13 stock option stock bonus plans july 31 2003 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans common stock may granted key employees terms conditions determined board directors generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant upon issuance stock plans unearned compensation equivalent market value date grant charged stockholders’ equity subsequently amortized periods restrictions lapse six years shares granted company’s key employee stock bonus plan 65834 weighted average fair market value 4770 per share fiscal 2003 56500 shares weighted average fair market value 4157 per share fiscal 2002 89000 shares weighted average fair market value 4161 per share fiscal 2001 amortization unearned compensation 1476 1054 976 recorded fiscal 2003 2002 2001 respectively employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25000 calendar year number shares issued pursuant plan totaled 8768 2003 8654 2002 7864 2001 weighted average estimated fair value employees stock purchase rights fiscal 2003 2002 2001 1346 1069 1272 per share respectively july 31 2003 928035 shares reserved grant stock option bonus purchase plans analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data following table sets forth stock option transactions years ended july 31 2003 2002 2001 following table summarizes information stock options outstanding july 31 2003 weightedaverage estimated fair value stock options granted fiscal 2003 2002 2001 1775 1812 1845 per share respectively fair value company’s stock options estimated using blackscholes optionpricing model following weightedaverage assumptions 14 retirement plans company qualified retirement plan analogic corporation profit sharing401k plan provide retirement income eligible employees employee contributions employer contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 compensation plan limited maximum annual amount determined internal revenue service beginning fiscal 2001 company elected match employee contributions dollar basis 3 compensation participant continued december 31 2001 period january 1 2002 july 31 2002 company elected contribute plan fiscal year 2003 company decided contribute 5 net income defined plan company’s contributions plan totaled 2556 916 2009 fiscal years 2003 2002 2001 15 income taxes components provision income taxes follows tax effects principal temporary differences resulting deferred tax expense benefit follows analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data income loss income taxes minority interest domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data reconciliation income taxes united states statutory rate effective tax rate follows july 31 2003 company capital loss carryforward 353 expire 2005 company foreign net operating loss carryforwards approximately 1667 expire 2010 management determined likely company recognize benefit certain foreign losses result valuation allowance established july 31 2003 company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data 16 quarterly results operations unaudited following summary unaudited quarterly results operations years ended july 31 2003 2002 company recorded asset impairment losses pretax basis 8883 first quarter fiscal 2002 related anatel company’s telecommunications subsidiary certain old unprofitable product lines within semiconductor test equipment business charges recorded cost sales section company’s consolidated statements income fiscal year 2002 17 supplemental disclosure cash flow information changes operating assets liabilities follows years ended fiscal years 2003 2002 2001 interest paid amounted 308 334 420 respectively analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data income taxes paid fiscal years 2003 2002 2001 amounted 27215 2159 8308 respectively 18 segment geographic information company operates primarily within two segments within electronics industry imaging technology products signal processing technology products imaging technology products consist primarily electronic systems subsystems medical imaging equipment advanced explosive detection systems signal processing technology products consist analog digital ad converters supporting modules highspeed digital signal processors company’s corporate represents primarily company’s hotel business net interest income assets corporate consist primarily company’s cash equivalents marketable securities fixes assets specifically identifiable accounting policies segments described summary significant accounting policies segment information prior years restated conform provision statement financial standards 131 “disclosures segment enterprise related information” table presents information company’s reportable segments includes asset impairment losses pretax basis 8883 fiscal 2002 3200 fiscal 2001 b includes goodwill 3596 258 431 fiscal 2003 2002 2001 respectively c includes cash equivalents marketable securities 167229 174336 114208 fiscal years 2003 2002 2001 respectively analogic corporation subsidiaries notes consolidated financial statementscontinued thousands except per share data information regarding geographic areas years ended july 31 2003 2002 2001 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada analogic corporation subsidiaries schedule ii valuation qualifying accounts thousands represent primarily 1587 related accounts receivable sahco 747 unsecured note unrelated party index exhibitsitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized analogic corporation john w wood jr john w wood jr president chief executive officer date january 26 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a1 restatement described note 1 present fairly material respects financial position analogic corporation subsidiaries july 31 2004 2003 results operations cash flows three years period ended july 31 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 restatements described note 1 presents fairly material respects information set forth therein read conjunction related financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp pricewaterhousecoopers llp boston massachusetts january 28 2005 analogic corporation subsidiaries consolidated balance sheets thousands except share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements income thousands except per share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements stockholders’ equity years ended july 31 2004 2003 thousands except share data accompanying notes integral part financial statements analogic corporation subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements analogic corporation subsidiaries notes consolidated financial statements thousands except share per share data 1 restatement company restating consolidated financial statements fiscal 2002 2003 reflect application appropriate accounting principles recognition software revenue related costs 100 owned us subsidiary camtronics medical systems ltd “camtronics” restatement resulted increase revenue 175 increase net income 36 change diluted earnings per share compared company’s financial results previously reported fiscal 2003 reduction revenue 1268 reduction net income 351 reduction basic diluted earnings per share 03 compared company’s financial results previously reported fiscal 2002 also resulting changes captions within net cash provided operating activities statement cash flows company also intends restate financial statements first three quarters fiscal 2002 2003 2004 reflect application appropriate accounting principles recognition software revenue related costs camtronics periods company intends revise revenue recognized company fiscal 2004 license intellectual property company affiliated entity shenzhen anke hightech ltd “sahco” restatements first three quarters fiscal 2004 effect audited consolidated financial statements included annual report form 10k effect quarterly financial information presented note 17 notes consolidated financial statements summarized detailed discussion restatement along comparison amounts previously reported consolidated balance sheets statements income company’s annual report form 10k fiscal 2003 2002 company also reclassified certain intangibles goodwill balances related company’s ownership cedara software corporation investment advances affiliated companies consolidated balance sheets reclassified consolidated statements income amortization intangible assets related cedara software corporation general administrative expense equity gain loss unconsolidated affiliates software revenue camtronics’ revenues derived primarily sales digital cardiac information systems system sales revenues consist following components computer software licenses computer hardware installation support sublicensed software addition camtronics generates revenues related system sales software support hardware maintenance training consulting professional services camtronics recognizes revenue accordance provisions american institute certified public accountants “aicpa” statement position 972 “software recognition” “sop 972” sop 972 requires revenue earned software arrangements involving multipleelements allocated element based fair values elements use residual method residual method revenue recognized multipleelement arrangement vendorspecific objective evidence “vsoe” fair value exists undelivered elements arrangement determined price charged element sold separately ie professional services software support hardware maintenance hardware sublicensed software exist one delivered elements arrangement ie software solutions specifically camtronics determines vsoe fair value maintenance portion arrangement based renewal price maintenance charged clients determines vsoe fair value professional services portion arrangement installation services based hourly rates camtronics charges service sold apart software license determines vsoe fair value hardware software sublicenses based prices elements sold separately software evidence vsoe fair value cannot established undelivered elements license agreement entire amount revenue analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data arrangement deferred elements delivered vsoe fair value remaining undelivered elements established inherent revenue recognition process significant management estimates judgments influence timing amount revenue recognition particular application sop 972 requires judgment concerning whether software arrangement includes multiple elements whether elements delivered whether vsoe fair value exists undelivered elements restatements required due incorrect application software revenue recognition procedures respect certain camtronic’s transactions software revenue recognition rules revenue cannot recognized multipleelement software arrangement time camtronics delivered performed elements arrangement vsoe fair value undelivered nonperformed element arrangement majority transactions underlying restatement camtronics delivered customer paid software however revenue cannot recognized transactions element transaction delivery software upgrade performance customization services delivered performed vsoe fair value elements cannot determined analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data following tables show effect restatements company’s statements income balance sheets statements income analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data statements income components increased decreased result following analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data statements income analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data statements income components increased decreased result following analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data balance sheets analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data increases decreases balance sheet components due 1 current period recognition effect current period restatement deferral revenue related costs effect current period revenue related license sale 2 cumulative effect beginning quarter restatement prior periods similar matters net basis balance sheet components increased decreased due following analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data license intellectual property first quarter fiscal 2004 company recorded engineering revenue 2775 connection sale license intellectual property company’s affiliate sahco contract agreement company sahco provided extended payment terms whereby sahco required make payment 500 within first 30 days date contract balance next twelve months upon review agreement company determined license revenue recorded payments received sahco entirety date contract collectibility reasonably assured company received total 1750 sahco fiscal 2004 received additional 750 quarter ended october 31 2004 2 summary business operations significant accounting policies business operations analogic corporation subsidiaries “analogic” “company” engaged primarily design manufacture sale high technology high performance highprecision data acquisition conversion analog digital signal processing instruments systems customers manufacture products medical industrial use company subject risks common companies medical security technology industries including limited development competitors new technological innovations dependence key personnel loss significant customer protection proprietary technology compliance regulations domestic foreign regulatory authorities agencies significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries whollyowned investments companies ownership interests range 11 50 percent andor company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b basis presentation certain prior years’ financial statement items reclassified conform current year’s presentation accounting principles generally accepted united states america c inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held forecasted demand changes technology assessments require management judgments estimates valuation adjustments excess obsolete inventory may recorded based assessments property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives assets capital leases leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data accounts gain loss reflected income expenditures maintenance repairs charged expense costs significant improvements extend life underlying asset capitalized annual provisions depreciation amortization computed accordance following ranges estimated useful lives e revenue recognition accounts receivable company recognizes majority revenue accordance sec staff accounting bulletin 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met sales contracts generally provide customer accept title risk loss product leaves facilities shipping terms local laws allow passage title risk loss shipping point defer recognizing revenue title risk loss transfer customer company’s transactions sometimes involve multiple elements ie systems services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined verifiable objective evidence recognized time delivery maintenance service revenues recognized ratably life contracts business units sell software licenses company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence vsoe fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regards installation implementation remain fees fixed determinable collectibility reasonably assured customer acceptance applicable obtained hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term service revenues recognized ratably life contracts company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fees monthly basis utilizing hours incurred date percentage total estimated hours complete project company sufficient analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data basis measure progress towards completion revenue recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately revenue related hotel operations recognized services performed inherent revenue recognition process significant management estimates judgments influence timing amount revenue recognition camtronics one company’s subsidiaries provides several models procurement digital cardiac information systems model management must make significant estimates judgments regarding revenue recognition predominant model includes perpetual software license agreement projectrelated installation services professional consulting services computer hardware sublicensed software support camtronics provides installation services include projectscoping services conducting preinstallation audits detailed installation plans actual installation hardware components testing hardware software installed customer site installation services deemed essential functionality software license installation service revenues recognized upon completion installation camtronics also provides professional consulting services include consulting activities fall outside scope standard installation services vary depending scope complexity requested client examples services include additional database consulting system configuration project management interfacing existing systems network consulting professional consulting services generally deemed essential functionality software camtronics vsoe consulting services timing software license revenue impacted however camtronics performs consulting services company vsoe accordingly software license revenue deferred services completed professional consulting service revenue recognized services performed deferred revenue comprised 1 license fee maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement vendor specific objective evidence fair value determined components yet delivered accepted customer deferred costs represent costs related revenues example costs goods sold services provided sales commission expenses company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customer’s financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collections issues identified f capitalized software costs software development costs incurred subsequent establishing technological feasibility general release software products capitalized accordance sfas 86 “accounting costs computer software sold leased otherwise marketed” capitalized costs amortized straightline basis economic lives related products generally three years amortization expense 1801 1813 1772 fiscal 2004 2003 2002 respectively included product cost sales unamortized balance capitalized software 9502 6339 july 31 2004 2003 respectively analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data g warranty costs company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligation affected product failure rates service delivery costs incurred correcting product failure actual product failure rates service costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results company warrants products perform material respects accordance standard published specification effect time delivery products customer period ranging 12 24 months date delivery h research product development costs research product development costs expensed incurred include primarily engineering salaries overhead materials used connection research development projects income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs j net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock k cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents amounted approximately 150000 137000 july 31 2004 2003 respectively l concentration risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company places cash investments marketable securities high credit quality financial instruments policy limits amount credit exposure one financial institution company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data company depends small number customers large portion business changes customers’ orders may significant impact company’s operating results major customer significantly reduces amount business us would adverse impact company’s operating results one export customer accounted approximately 42000 12 31000 7 total product engineering revenue fiscal 2004 2003 respectively total product engineering revenue one domestic customer accounted approximately 34000 10 fiscal 2004 another domestic customer accounted approximately 200000 43 fiscal 2003 company’s ten largest customers including toshiba general electric siemens accounted approximately 61 product engineering revenue fiscal 2004 company recognized revenue two customers fiscal 2002 accounting total 18 12 total product engineering revenue marketable securities company’s marketable securities categorized availableforsale securities defined statement financial accounting standards 115 “accounting certain investments debt equity securities” unrealized marketable securities gains losses reflected net amount caption accumulated comprehensive income within statement stockholders’ equity realized gains losses recorded within statement income caption income expenses purpose computing realized gains losses cost identified specific identification basis n new accounting pronouncements november 2002 eitf reached consensus issue 0021 “accounting revenue arrangements multiple deliverables” “eitf 0021” eitf 0021 addresses revenue recognition arrangements encompassing multiple elements delivered different points time defining criteria must met elements considered separate unit accounting element determined separate unit accounting revenue element recognized time delivery eitf 0021 effective revenue arrangements entered fiscal periods beginning june 15 2003 adoption eitf 0021 material effect company’s financial position results operations january 2003 financial accounting standards board issued financial accounting standards board interpretation 46 “fin 46” “consolidation variable interest entities” amended issuing fin 46r december 2003 fin 46r requires entity controlling financial interest variable interest entity assets liabilities results activities variable interest entity included consolidated financial statements entity fin 46 effective immediately new variable interest entities created acquired january 31 2003 company create acquire variable interest entities date adoption provisions fin 46r third quarter fiscal 2004 material effect financial position results operations december 2003 securities exchange commission issued staff accounting bulletin 104 “sab 104” “revenue recognition” sab 104 effective upon issuance supersedes staff accounting bulletin 101 “sab 101” “revenue recognition financial statements” sab 104’s primary purpose rescind accounting guidance sab 101 related multipleelement arrangements guidance superseded issuance eitf 0021 adoption sab 104 material effect company’s financial position results operations december 2004 fasb issued revision financial accounting standards 123 “fas 123r” fas 123r focused primarily accounting transactions company obtains employee services exchange stock options sharebased payments company grants stock options employees discloses pro forma effect compensation expense stock options fas 123r company required record compensation expense company’s results analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data operations fas 123r effective beginning first fiscal reporting period begins june 15 2005 adoption fas 123r material effect company’s financial position results operations december 2004 fasb issued financial accounting standards 151 “fas 151” fas 151 clarifies accounting inventory abnormal amounts idle facility expense freight handling costs wasted materials existing gaap items idle facility expense excessive spoilage double freight rehandling costs may “so abnormal” require treatment current period charges rather recorded adjustments value inventory fas 151 requires items recognized currentperiod charges regardless whether meet criterion “so abnormal” addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions statement shall effective inventory costs incurred fiscal years beginning june 15 2005 earlier application permitted inventory costs incurred fiscal years beginning date statement issued adoption fas 151 expected material effect company’s financial position results operations use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates fair value investments privately held companies goodwill intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes actual results could differ estimates p comprehensive income statement financial accounting standards 130 “sfas 130” “reporting comprehensive income” established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders’ equity comprehensive income consists unrealized gains losses marketable securities foreign currency translation adjustments q stockbased compensation company adopted disclosure requirements statement financial accounting standards 148 “sfas 148” “accounting stockbased compensationtransition disclosure amendment fasb statement 123” sfas 148 amends statement financial accounting standards 123 “sfas 123” “accounting stockbased compensation” provide alternative methods transition voluntary change fair value based method accounting stockbased compensation also amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements methods accounting stockbased employee compensation effect method used reported results permitted sfas 148 sfas 123 company continues apply accounting provisions accounting principle board “apb” 25 related interpretations regard measurement compensation cost options granted company’s equity compensation plans analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data permitted current accounting standards compensation cost recognized consolidated statements income company’s stock option plans issued fair market value compensation cost company’s stockbased compensation plans recorded applied accordance sfas 123 accounting stockbased compensation recognized ratably options’ vesting periods company’s proforma information would follows r fair value financial instruments carrying amounts cash equivalents receivables mortgages notes payable approximate fair value fair values marketable securities estimated based quoted market price securities impairment longlived assets company evaluates recoverability longlived assets primarily fixed assets accordance statement financial accounting standards 144 “sfas 144” “accounting impairment disposal longlived assets” sfas 144 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset compared recorded value asset segment information statement financial accounting standards 131 disclosures segments enterprise related information “sfas 131” establishes standards reporting information operating segments interim annual financial statements company’s chief operating decisionmakers review profit loss company aggregate basis manage operation company within operating analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data segments company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consist three reporting segments medical imaging products consist primarily electronic systems subsystems medical imaging equipment patient monitoring camtronics information management systems cardiology market bk medical ultrasound systems probes urology surgery radiology markets security technology products consist advanced weapon threat detection systems subsystems u translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables investments included operations period occur foreign exchange transaction gains losses included results operations income net company foreign exchange losses totaling 147 fiscal 2004 foreign exchange gains totaling 3941 904 fiscal 2003 2002 respectively 3 business combinations october 2002 anrad corporation company’s 100 owned subsidiary located saintlaurent quebec purchased remaining 52 outstanding common stock ftni inc “ftni” 2407 cash ftni founded three canadian companies april 1997 develop products medical industrial applications noranda advanced materials one ftni founders 48 ownership interest acquired company 1999 renamed anrad purchase remaining shares ftni anrad full ownership rights access ftni’s basic technology intellectual property upon completion transaction anrad’s total investment ftni amounted approximately 2746 approximately 2019 determined intellectual property 727 represented fair value tangible net assets primarily cash intellectual property amortized estimated useful life five years supplemental proforma information disclosing results operations company ftni combined basis presented due immateriality november 6 2002 company’s newly formed subsidiary sound technology inc “sti” acquired certain assets liabilities sound technology business unit located state college pa acuson corporation wholly owned subsidiary siemens corporation approximately 10100 cash sti produces linear tightly curved array ultrasound transducers probes broad range clinical applications supplied medical equipment companies worldwide company’s acquisition cost 10100 subsequently reduced approximately 200 reflecting postclosing purchase price adjustments result net investment 9900 consists approximately 2800 tangible net assets acquired approximately 7100 intellectual property intangible assets intellectual property intangible assets amortized estimated useful life five years supplemental proforma information disclosing results operations company sti combined basis presented due immateriality november 6 2002 company’s camtronics subsidiary acquired shares vmi medical inc “vmi” ottawa canada vmi medical information software company specializing clinical analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data database workflow automation business improvement solutions children’s heart centers vmi acquired approximately 2000 cash payable two year period future contingent consideration based upon combined companies achieving certain performance criteria specific time periods company paid 2000 cash related acquisition assumed approximately 500 net liabilities acquired intellectual property valued 2500 supplemental proforma information disclosing results operations company vmi combined basis presented due immateriality october 20 2003 camtronics acquired certain assets quinton inc “qtn” washington corporation primarily related intellectual property rights interests associated qtn’s qcath hemodynamics monitoring system business camtronics’ decision acquire assets liabilities based desire expand current product offerings gain access qtn’s existing customer base company’s total investment amounted 1750 payments 1000 due closing 750 due one year closing date connection transaction parties also entered cooperative marketing agreement cooperative marketing agreement term four years provides qtn potentially earn additional 1500 commissions upon successful conversion qtn qcath systems camtronics’ physiolog vericis products addition qtn market electronic medical records products camtronics specialized sales force primary care market company allocated purchase price 1750 acquired assets included 274 inventory 1476 customer list based relative fair value customer list amortized estimated useful life four years 4 marketable securities marketable securities categorized availableforsale securities summarized follows costs estimated fair value current debt securities july 31 2004 contractual maturity shown expected maturities differ contractual maturities issuers securities may right repay obligations without prepayment penalties realized gains losses marketable securities company sold marketable securities periods presented cost approximated fair value maturity dates analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data 5 explosive assessment computed tomography “exact” systems agreement company announced april 2002 entered agreement supply 1000 exact systems l3 communications’ security detection system division “l3” exact core system l3’s examiner 3dxr 6000 certified explosive detection system purchased united states transportation security administration “tsa” installed major airports across united states company recognized product revenue upon shipment exact systems spare parts l3 time revenue recognition criteria met first quarter fiscal 2003 company received firm orders l3 245 additional systems orders brought total number systems ordered l3 delivery tsa 425 company shipped 425 exact systems december 31 2002 54 systems fourth quarter fiscal 2002 371 systems first second quarters fiscal 2003 addition december 2002 company received purchase order l3 deliver additional 75 exact systems remainder fiscal 2003 foreign anticipated orders company shipped systems july 31 2003 fiscal 2004 company received orders 50 additional units exact systems l3 40 units shipped july 31 2004 september 2004 company received additional order 50 units company recorded cash received l3 purchase longleadtime inventory components advance payments within liabilities section balance sheet payments recognized revenue systems inventory components relate shipped july 31 2004 advance payments balance related longlead purchases 1500 versus remaining balance july 31 2003 agreement also provided company receive 22000 rampup funds purpose leasing fitting facility ensuring availability key critical raw material inventory components suppliers meet production volume requirements contract costs incurred assets purchased fully reimbursed l3 company recorded revenues costs assets related rampup funds cash received rampup activities recorded within advance payments deferred revenue account within liability section balance sheet liabilities reduced cash spent activities july 31 2004 company balance 1849 unexpended rampup funds recorded within advance payments deferred revenue account addition 22000 rampup funds provided l3 behalf tsa company spent approximately 5700 funds purchase manufacturing office equipment capitalized fiscal 2003 june 16 2004 l3 communications corporation l3 communication security systems corporation filed complaint company court chancery state delaware complaint asserted agreement l3 communications corporation company “teaming agreement” requires company team exclusively l3 communications corporation development sale automatic explosives detection systems “edss” used airports detect explosives dangerous materials checked baggage complaint alleged company breached teaming agreement among things developing submitting us transportation security administration “tsa” research development proposals relating edss checked baggage third party without l3 communications corporation company denied material allegations set forth complaint company l3 communications corporation l3 communications security systems corporation agreed settlement litigation november 8 2004 court chancery state delaware dismissed complaint without prejudice respect analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data certain claims prejudice respect remaining claims settlement entail payment either party 6 balance sheet information additional information certain balance sheet accounts follows years ended increase building improvements fiscal 2004 primarily due construction addition company’s headquarters depreciation expense 15840 16809 14380 fiscal 2004 2003 2002 respectively analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data 7 goodwill intangible assets august 1 2002 analogic adopted statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” result company discontinued amortizing goodwill beginning august 1 2002 adopted policy evaluate goodwill annual basis potential impairment first quarter fiscal year time events changes circumstances suggest carrying amount may recoverable estimated future cash flows required sfas 142 intangible assets meet criteria separate recognition must reclassified goodwill company revised classification certain goodwill intangibles balances related company’s ownership cedara software corporation investment advances affiliated companies consolidated balance sheets see note 1 information goodwill july 31 2004 july 31 2003 changes carrying amount fiscal years follows fiscal 2004 company recorded goodwill 819 acquired future contingent consideration connection acquisition vmi camtronics addition vmi’s goodwill adjusted preacquisition loss carryforwards reducing goodwill 873 also time acquisition remaining 52 ftni deferred tax asset created offsetting valuation allowance account tax loss credit carryovers existing time acquisition ftni’s profits current past year caused valuation allowance reversed situation sfas 109 requires tax benefits recognized reduction elimination valuation allowance acquisition date applied first reduce goodwill related acquisition second reduce noncurrent intangible assets related acquisition third reduce income tax expense release valuation allowance credited goodwill amount 687 represents entire amount goodwill related transaction balance valuation allowance reduction treated reduction noncurrent intangible assets discussed analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data intangible assets july 31 2004 july 31 2003 continue amortized consisted following increase 494 intangibles relates customer list acquired camtronics connection acquisition certain assets quinton inc 1476 offset aforementioned reduction 982 relating release ftni valuation allowance reduction related deferred tax liability amortization acquired intangible assets 3217 2348 442 fiscal 2004 2003 2002 respectively amortization lives intangibles range two five years estimated future amortization expense related current intangible assets five succeeding years expected follows 8 investment advances affiliated companies company 446 equity ownership interest sahco located people’s republic china fiscal 2004 company recorded 584 share losses sahco compared 1125 fiscal 2003 carrying value investment 256 july 31 2004 840 july 31 2003 july 31 2004 2003 net receivables affiliate 1015 963 respectively sales sahco fiscal 2004 2003 2002 approximately 6695 4257 4037 respectively may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 photodetection systems inc “pds” acton massachusetts pds privately held company developed proprietary detection systems highperformance position emission tomography “pet” rapidly growing medical diagnostic imaging modality pet scanning tool diagnosis management cancer specifically detecting earlystage tumors determining tissue characteristics treatment addition company also received convertible promissory note principal amount 1367 exclusive license pds technology nonpet products convertible promissory note convertible company 1025559 shares series b convertible participating preferred stock converted company’s equity interest would increase 9 upon pds achieving certain milestones exclusive license pds technology revert back pds company receive warrant purchase 2250563 shares series b convertible participating preferred stock exercise warrant would increase company’s equity interest 20 company connection transaction expended analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data total 6035 cash company’s current equity interest potential conversion promissory note series b convertible participating preferred stock potential reversion exclusive technology license pds warrant could potentially result company 40 equity interest pds additionally certain circumstances future company may discretion may required purchase remaining 60 equity fair value company three seats pds’s sevenperson board directors company accounts investment equity method due company’s ability exercise significant influence operating financial policies carrying value company’s investment pds 593 4232 july 31 2004 2003 respectively september 2001 company acquired 19 interest cedara software corporation “cedara” mississauga ontario canada return equity investment 75 million considerations cedara premier independent provider imaging software technology custom imaging software development leading original equipment manufactures “oems” healthcare industry cedara enables healthcare solution providers integrate better imaging software systems hardware fields computed tomography “ct” magnetic resonance imaging “mri” analogic guaranteed debt owed cedara bank lender provision credit facility analogic’s principal bank approximately 107 million analogic two seats cedara’s seven person board directors part company’s original investment agreement cedara agreed grant company preemptive rights whereby right maintain 19 equity interest event certain future issuances stock cedara may 3 2002 company acquired additional 580641 shares common stock cedara approximately 09 million maintain company’s equity interest 19 fiscal 2004 company’s investment cedara percentage cedara’s total shares outstanding decreased 19 146 reduction investment result company’s decision exercise preemptive right maintain ownership interest 19 time cedara completed equity offering common shares also third quarter fiscal 2004 company’s guarantee certain debt owed cedara lender cancelled along security agreement company cedara’s lending bank july 31 2004 company payable 1361 cedara development certain software 1211 recorded capitalized software carrying value company’s investment cedara 8212 6990 july 31 2004 2003 respectively summarized financial information partiallyowned equity affiliates july 31 years ended follows analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data carrying amount investments approximates underlying ownership net assets partiallyowned equity affiliates include sahco enhanced ct technology llc cedara software corporation see note 1 background reclassification cedara investment cardioworks photodetection systems inc fiscal 2004 company recognized foreign exchange loss respect intercompany transaction notes approximately 147 gain 3941 900 fiscal 2003 2002 respectively 9 net income per share company’s reported net income number shares utilized net income per share calculations fiscal 2004 2003 2002 follows stock options purchase approximately 154397 74600 73800 shares common stock outstanding 2004 2003 2002 respectively included calculation diluted net income per share options’ exercise prices greater average market price company’s common stock years although stock options antidilutive fiscal 2004 2003 2002 may dilutive future years’ calculations 10 commitments guarantees november 2002 financial accounting standard board “fasb” issued fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” “fin 45” fin 45 requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee fin 45 also requires additional disclosures made guarantor interim annual financial statements obligations certain guarantees issued accounting requirements initial recognition guarantees applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective guarantees outstanding regardless issued modified financial statements interim annual periods ending december 15 2002 adoption fin 45 material effect company’s consolidated financial statements following summary agreements company determined within scope fin 45 company agreements whereby indemnifies officers directors certain events occurrences officer director serving company’s request capacity analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data term indemnification period officer’s director’s lifetime potential amount future payments company could required make indemnification agreements unlimited also extent permitted massachusetts law company’s articles organization require company indemnify directors company’s bylaws require company indemnify present former directors officers company also permit indemnification employees agents company board directors time authorizes indemnification instance however indemnification granted director otherwise entitled thereto determined committed breach loyalty company stockholders b committed acts omissions good faith involved intentional misconduct knowing violation law c derived improper personal benefit connection particular transaction claim indemnification made person covered said agreements andor relevant provisions company’s articles organization bylaws company believes estimated exposure indemnification obligations currently minimal accordingly company liabilities recorded indemnity agreements requirements july 31 2004 company’s standard original equipment manufacturing supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2004 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table summarizes activities accrued product warranty reserve years ended company currently approximately 235 million revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2004 fiscal 2003 analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data 11 mortgage notes payable mortgage notes payable consists following total interest incurred amounted 294 360 359 fiscal 2004 2003 2002 respectively total interest incurred none capitalized fiscal years 12 leases commitments related nonrelated third parties company leased three operating facilities partnership owned mr bernard gordon director company leases accounted capital leases one leases expired january 31 2004 two leases expired july 31 2001 leases contained rent escalation clauses based upon costofliving adjustments rent adjustments significant fiscal 2004 2003 certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 3514 3278 1986 fiscal 2004 2003 2002 respectively analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data following schedule year future minimum lease payments july 31 2004 lease costs associated haverhill facility funded rampup monies received company connection exact system order 13 income expense income consists primarily interest income short long term marketable securities gain loss attributable investments unconsolidated affiliates company accounts equity method foreign exchange gains losses income loss sale property plant equipment fiscal 2004 company foreign exchange losses 147 fiscal 2003 company realized foreign exchange gains 3941 gain sale property plant equipment 1561 14 stock option stock bonus plans july 31 2004 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans common stock may granted key employees terms conditions determined board directors generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant upon issuance stock plans unearned compensation equivalent market value analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data date grant charged stockholders’ equity subsequently amortized periods restrictions lapse six years shares granted company’s key employee stock bonus plan 75666 weighted average fair market value 4188 per share fiscal 2004 65834 shares weighted average fair market value 4770 per share fiscal 2003 56500 shares weighted average fair market value 4157 per share fiscal 2002 amortization unearned compensation 1652 1476 1054 recorded fiscal 2004 2003 2002 respectively employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25000 calendar year number shares issued pursuant plan totaled 15739 2004 8768 2003 8654 2002 weightedaverage estimated fair value employees stock purchase rights fiscal 2004 2003 2002 1106 1346 1069 per share respectively july 31 2004 951596 shares reserved grant stock option bonus purchase plans following table sets forth stock option transactions fiscal 2004 2003 2002 following table summarizes information stock options outstanding july 31 2004 weightedaverage estimated fair value stock options granted fiscal 2004 2003 2002 1653 1775 1812 per share respectively analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data fair value company’s stock options estimated using blackscholes optionpricing model following weightedaverage assumptions 15 retirement plans company qualified retirement plan analogic corporation profit sharing401k plan provide retirement income eligible employees employee contributions employer contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service beginning fiscal 2001 company elected match employee contributions dollar basis 3 compensation participant continued december 31 2001 period january 1 2002 july 31 2002 company elected contribute plan fiscal 2003 2004 company decided contribute 5 net income defined plan company’s contributions plan totaled 602 2556 916 fiscal 2004 2003 2002 16 income taxes components provision income taxes follows analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data income loss income taxes domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data reconciliation income taxes united states statutory rate effective tax rate follows company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs july 31 2004 company capital loss carryforward 353 expires 2005 analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data company net operating loss tax credit carryforwards canada approximately 11351 expire 2005 2011 company net operating loss carryforwards belgium germany approximately 4713 expiration date company also state tax credit carryforwards approximately 1572 405 expires 2007 balance expires 2019 management determined likely company recognize benefit certain foreign losses tax credits result valuation allowance established july 31 2004 july 31 2003 decrease valuation allowance primarily due release valuation allowance ftni’s tax loss credit carryforwards reversal valuation allowance germany use net operating loss carryforwards likely additionally total valuation allowance 919 resulted acquired losses credited noncurrent intangible assets extent exist income recognized 17 quarterly results operations unaudited see note 1 discussion restatement following summary unaudited quarterly results operations fiscal 2004 2003 analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data following summary previously reported unaudited results first three quarters fiscal 2004 quarters fiscal 2003 18 supplemental disclosure cash flow information changes operating assets liabilities follows fiscal 2004 2003 2002 fiscal 2004 2003 2002 interest paid amounted 294 308 334 respectively income taxes paid fiscal 2004 2003 2002 amounted 2835 27215 2159 respectively 19 segment geographic information company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consist three reporting segments medical imaging products consist primarily electronic systems subsystems medical imaging equipment patient monitoring camtronics information management systems cardiology market bk medical ultrasound systems probes urology surgery analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data radiology markets security technology products consist advanced weapon threat detection systems subsystems company’s corporate represents company’s hotel business net interest income company operations primarily analog digital converters supporting modules high speed digital processing meet materiality requirements separate disclosure accounting policies segments described summary significant accounting policies segment information prior years restated conform provision statement financial standards 131 “disclosures segment enterprise related information” table presents information company’s reportable segments includes cash equivalents marketable securities 156753 167763 174935 fiscal 2004 2003 2002 respectively analogic corporation subsidiaries notes consolidated financial statements continued thousands except share per share data information regarding geographic areas fiscal 2004 2003 2002 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada 20 stockholders’ equity effective july 1 2004 companies incorporated massachusetts became subject chapter 156d massachusetts business corporation act chapter 156d eliminates concept treasury shares provides shares reacquired company treated authorized unissued shares common stock result change company reclassified balance sheets presented shares previously classified treasury shares authorized unissued shares common stock analogic corporation subsidiaries schedule ii valuation qualifying accounts thousands represents primarily 1587 related account receivable sahco reserved fiscal 2003 written fiscal 2004 b represents primarily 1587 related accounts receivable sahco 747 unsecured note unrelated party index exhibitsitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized analogic corporation john w wood jr john w wood jr president chief executive officer date october 14 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation completed integrated audit analogic corporation’s 2005 consolidated financial statements internal control financial reporting july 31 2005 audits 2004 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed accompanying index present fairly material respects financial position analogic corporation subsidiaries july 31 2005 2004 results operations cash flows three years period ended july 31 2005 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also audited management’s assessment included management’s report internal control financial reporting appearing item 9a analogic corporation maintain effective internal control financial reporting july 31 2005 company maintain effective controls completeness accuracy software revenue related deferred revenue whollyowned subsidiary camtronics medical systems ltd based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim financial statements prevented detected following material weakness identified included management’s assessment july 31 2005 company maintain effective controls software revenue related deferred revenue specifically company’s review approval controls completeness accuracy revenue deferred revenue multipleelement software arrangements whollyowned subsidiary camtronics medical systems ltd ineffective ensure revenues recorded correct period control deficiency resulted restatement company’s 2003 2002 annual interim financial statements restatement 2004 fiscal year interim financial statements first three quarters audit adjustments 2005 annual financial statements additionally control deficiency could result misstatement revenue deferred revenue would result material misstatement annual interim financial statements would prevented detected accordingly company determined control deficiency constitutes material weakness material weakness considered determining nature timing extent audit tests applied audit 2005 consolidated financial statements opinion regarding effectiveness company’s internal control financial reporting affect opinion consolidated financial statements opinion management’s assessment analogic corporation maintain effective internal control financial reporting july 31 2005 fairly stated material respects based criteria established internal control integrated framework issued coso also opinion effect material weakness described achievement objectives control criteria analogic corporation maintained effective internal control financial reporting july 31 2005 based criteria established internal control integrated framework issued coso pricewaterhousecoopers llp boston massachusetts october 13 2005 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements stockholders’ equity years ended july 31 2005 2004 2003 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation incorporated commonwealth massachusetts november 1967 analogic corporation subsidiaries “analogic” “company” engaged primarily design manufacture sale high technology high performance highprecision data acquisition conversion analogdigital signal processing instruments systems customers manufacture products medical industrial use analogic leading designer manufacturer advanced health security systems subsystems sold primarily original equipment manufactures “oems” analogic’s principal customers oems incorporate analogic’s stateoftheart products systems used health security applications several analogic’s subsidiaries divisions sell products names directly niche enduser markets significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries whollyowned investments companies ownership interests range 11 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b basis presentation certain prior years’ financial statement items reclassified conform current year’s presentation reclassifications impact net income c inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives assets capital leases leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued thousands except share per share data annual provisions depreciation amortization computed accordance following ranges estimated useful lives e revenue recognition accounts receivable company recognizes majority revenue accordance sec staff accounting bulletin 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling costs cost sales company’s transactions sometimes involve multiple elements ie systems services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined verifiable objective evidence recognized time delivery arrangement undelivered element company ensures objective reliable evidence fair value undelivered element fair value determined based upon price charged element sold separately maintenance service revenues recognized ratably life contracts business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regards installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained allocate revenue first fair value undelivered elements allocate residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term analogic corporation notes consolidated financial statements continued thousands except share per share data relates services camtronics may also provide services vary depending scope complexity requested customer examples services include additional database consulting system configuration project management interfacing existing systems network consulting services generally deemed essential functionality software camtronics vsoe services timing software license revenue impacted company vsoe service revenue recognized services performed camtronics commonly performs services company vsoe accordingly software license revenue deferred services completed company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fee arrangement monthly basis utilizing costs incurred date percentage total estimated costs complete project company sufficient basis measure progress towards completion revenue recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised 1 license fee maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement vsoe fair value determined components yet delivered accepted customer deferred costs represent costs related revenues example costs goods sold services provided sales commission expenses revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collection issues identified f capitalized software costs software development costs incurred subsequent establishing technological feasibility general release software products capitalized accordance sfas 86 “accounting costs computer software sold leased otherwise marketed” capitalized costs amortized straightline basis economic lives related products generally three years amortization expense 1350 1801 1813 fiscal 2005 2004 2003 respectively included product cost sales unamortized balance capitalized software 12511 9502 july 31 2005 2004 respectively g warranty costs company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance analogic corporation notes consolidated financial statements continued thousands except share per share data standard published specifications effect time delivery products customer period ranging 12 24 months date delivery h research product development costs research product development costs expensed incurred include primarily engineering salaries overhead materials used connection research development projects income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs j net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock k cash equivalents company considers highly liquid investments maturity six months less acquisition date cash equivalents cash equivalents primarily short term investments amounted 158116 149549 july 31 2005 2004 respectively l concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company maintains bond investment portfolio various types maturities high credit quality issuers cash equivalents required working capital purposes placed short term investments original maturities six months less company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition marketable securities company’s marketable securities categorized availableforsale securities defined statement financial accounting standards 115 “accounting certain investments debt equity securities” unrealized marketable securities gains losses reflected net amount caption accumulated comprehensive income within statement stockholders’ equity realized analogic corporation notes consolidated financial statements continued thousands except share per share data gains losses recorded within statements operations caption income expenses purpose computing realized gains losses cost identified specific identification basis n new accounting pronouncements june 2005 financial accounting standards board “fasb” issued fas 154 “accounting changes error corrections” statement replaces apb opinion 20 “accounting changes” fas 3 “reporting accounting changes interim financial statements” statement applies voluntary changes accounting reporting changes accounting principles fas 154 requires retrospective application prior periods’ financial statements voluntary change accounting principles unless practical apb 20 previously required voluntary changes accounting principles recognized including net income period change cumulative effect changing new accounting principle fas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 earlier application permitted accounting changes errors made occurring fiscal years beginning may 31 2005 adoption fas 154 expected material impact company’s financial position results operations december 16 2004 fasb issued sfas 123 revised 2004 sharebased payment “sfas 123r” revision sfas 123 sfas 123r supersedes apb opinion 25 accounting stock issued employees “apb 25” amends sfas 95 statement cash flows generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees including grants employee stock options recognized income statement based fair values date grant pro forma disclosure longer alternative sfas 123r must adopted fiscal years beginning june 15 2005 company adopted sfas 123r august 1 2005 commencement first quarter fiscal 2006 company adopted “modified prospective” transition method awards granted modified settled date adoption measured accounted accordance sfas 123r unvested equityclassified awards granted prior effective date continue accounted accordance sfas 123 except amounts must recognized income statement permitted sfas 123 company currently accounts sharebased payments employees using intrinsic value method accordance apb 25 generally recognizes compensation cost employee stock options accordingly adoption sfas 123r’s fair value method significant impact company’s results operations although impact company’s overall financial position march 2005 sec issued staff accounting bulletin 107 sab 107 assist preparers simplifying implementation challenges sfas 123r particular sab 107 provides supplemental implementation guidance sfas 123r including guidance valuation methods classification compensation expense inventory capitalization sharebased compensation cost income tax effects disclosures management’s discussion analysis several issues company apply principles sab 107 conjunction adoption sfas 123r may 2005 fasb issued fasb staff positions fsp eitf 00191 “application eitf 0019 freestanding financial instruments originally issued employee compensation” fsp clarifies requirement deliver registered shares result liability classification freestanding financial instruments originally issued employee compensation adoption fsp eitf 00191 material impact company’s financial position results operation analogic corporation notes consolidated financial statements continued thousands except share per share data december 2004 fasb issued financial accounting standards 151 “inventory costs” “sfas 151” sfas 151 clarifies accounting inventory abnormal amounts idle facility expense freight handling costs wasted materials existing gaap items idle facility expense excessive spoilage double freight rehandling costs may “so abnormal” require treatment current period charges rather recorded adjustments value inventory sfas 151 requires items recognized currentperiod charges regardless whether meet criterion “so abnormal” addition sfas 151 requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions sfas 151 shall effective inventory costs incurred fiscal years beginning june 15 2005 earlier application permitted inventory costs incurred fiscal years beginning date sfas 151 issued adoption sfas 151 expected material impact company’s financial position results operations october 2004 american jobs creation act 2004 “ajca” passed ajca provides deduction income qualified domestic production activities phased 2005 though 2010 ajca also provides twoyear phaseout existing extraterritorial income exclusion foreign sales viewed inconsistent international trade protocols european union december 2004 fasb issued fasb staff position 1091 “application fasb statement 109 accounting income taxes tax deduction qualified production activities american jobs creation act 2004” “fsp 1091” fsp 1091 treats deduction “special deduction” described fasb statement 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed company’s tax return company currently evaluating impact ajca results operations financial position ajca also creates temporary incentive us corporations repatriate accumulated income earned abroad providing 85 dividends received deduction certain dividends received controlled foreign corporations deduction subject number limitations based company’s analysis provision ajca produce benefit company march 2004 fasb approved consensus reached emerging issues task force issue 0301 “the meaning otherthantemporary impairment application certain investment” “eitf 0301” eitf 0301 provides guidance determining investment considered impaired whether impairment temporary measurement impairment loss eitf 0301 also provides new disclosure requirements otherthantemporary impairments debt equity investments september 2004 fasb delayed notice effective date measurement recognition guidance contained eitf 0301 however disclosure requirements eitf 0301 currently effective adoption eitf 0301 expected material impact company’s financial position results operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates percentage completion contracts estimates fair value investments privately held companies goodwill intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes actual results could differ estimates analogic corporation notes consolidated financial statements continued thousands except share per share data p comprehensive income statement financial accounting standards 130 “sfas 130” “reporting comprehensive income” established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders’ equity comprehensive income consists unrealized gains losses marketable securities foreign currency translation adjustments q stockbased compensation company adopted disclosure requirements statement financial accounting standards 148 “sfas 148” “accounting stockbased compensationtransition disclosure amendment fasb statement 123” sfas 148 amends statement financial accounting standards 123 “sfas 123” “accounting stockbased compensation” provide alternative methods transition voluntary change fair value based method accounting stockbased compensation also amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements methods accounting stockbased employee compensation effect method used reported results permitted sfas 148 sfas 123 company continued apply accounting provisions accounting principle board apb 25 related interpretations regard measurement compensation cost options granted company’s equity compensation plans sfas 123r adopted august 1 2005 permitted current accounting standards compensation cost recognized consolidated statements operations company’s stock option plans option exercise price equal fair market value common stock date grant compensation cost company’s stockbased compensation plans recorded applied accordance sfas 123 accounting stockbased compensation recognized ratably options’ vesting periods company’s proforma information would follows analogic corporation notes consolidated financial statements continued thousands except share per share data r fair value financial instruments carrying amounts cash equivalents receivables notes payable approximate fair value fair values marketable securities estimated based quoted market price securities impairment longlived assets company evaluates recoverability longlived assets accordance statement financial accounting standards 144 “sfas 144” “accounting impairment disposal longlived assets” sfas 144 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment annually first quarter fiscal year whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset compared recorded value asset segment information statement financial accounting standards 131 “disclosures segments enterprise related information “sfas 131” establishes standards reporting information operating segments interim annual financial statements company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consist three reporting segments medical imaging products consist primarily electronic systems subsystems medical imaging equipment patient monitoring camtronics information management systems cardiology market bk medical ultrasound systems probes urology surgery radiology markets security technology products consist advanced weapon threat detection systems subsystems u translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables investments included operations period occur foreign exchange transaction gains losses included results operations income net company foreign exchange gains totaling 83 fiscal 2005 foreign exchange losses totaling 147 fiscal 2004 foreign exchange gains totaling 3941 fiscal 2003 analogic corporation notes consolidated financial statements continued thousands except share per share data 2 assets impairment charges fiscal 2005 company recorded asset impairment charges operating expense company’s consolidated statements operations follows asset impairment charges recorded twelve months ended july 31 2004 2003 investment photodetection systems inc may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 photodetection systems inc “pds” acton massachusetts pds privately held company developed proprietary detection systems highperformance positron emission tomography rapidly growing medical diagnostic imaging modality company accounted investment equity method due company’s ability exercise significant influence pds’s operating financial policies since investment pds form common stock effective second quarter fiscal 2005 company changed accounting method investment pds equity method cost method accounting accordance eitf 0214 “whether investor apply equity method accounting investments common stock” “eitf 0214” subsequently company reviewed investment otherthantemporary impairment accordance financial accounting standard 115 “accounting certain investments debt equity security” “fas 115” company determined july 31 2005 investment pds impaired based current fair value therefore recorded asset impairment charge 2160 fiscal 2005 july 31 2005 company’s investment pds recorded net impairment charges 0 value prior effective date eitf 0214 company recorded share pds losses 759 research product development expenses fiscal 2005 capitalized software company capitalized 479 software development costs related medical imaging project fiscal 2005 company determined project meet anticipated future market requirements decided focus effort existing development projects result company recorded impairment charge 479 represents total amount capitalized company project analogic corporation notes consolidated financial statements continued thousands except share per share data intangible asset related manufacturing license january 24 2003 company purchased manufacturing license 500 would allow company utilize mobile portable xray technology fiscal 2005 management decided longer pursue research development efforts area due limited resources accordingly company put project hold uncertain whether company able utilize technology future company amortizing cost license five year period company determined intangible asset impaired recorded impairment charge 361 fiscal 2005 goodwill november 6 2002 company’s whollyowned subsidiary camtronics purchased stock vmi medical inc “vmi” 2000 future consideration based vmi achieving certain performance criteria specified periods total goodwill associated acquisition 819 july 31 2004 fiscal 2005 company decided make required significant additional investment research development order reporting unit realize potential market opportunities due changes circumstance company performed impairment test company’s goodwill accordance financial accounting standard 142 “goodwill intangible assets” “sfas 142” third quarter fiscal 2005 estimated fair value reporting unit less book value assets company recorded impairment charge 434 fiscal 2005 related balance sheet reclass reduce goodwill accrued liabilities unpaid contingent consideration longer owed intangible asset camtronics acquired software technology product line echo ims cardio ims november 6 2002 conjunction acquisition vmi software technology products currently utilized pediatric market initial budgeting process fiscal year 2006 company initiated april 2005 became apparent camtronics market penetration software technology products less anticipated due limited number pediatric hospitals able make capital investment needed implement products also camtronics determined significant additional investment would required complete development efforts products result company performed assessment recoverability camtronics’ long lived assets related acquired software technology products echo ims company evaluated future undiscounted cash flows attributable software technology products net fair book value exceeding estimated future undiscounted cash flows camtronics recorded asset impairment charge 1535 related acquired software technology products echo ims cardio ims fiscal 2005 leaving balance zero july 31 2005 investment cardioworks inc august 30 2001 camtronics invested 2000 cardioworks inc “cardioworks” exchange 15 equity position seat board directors company accounted investment equity method due company’s ability exercise significant influence operating financial policies cardioworks used company’s investment proceeds establish technical framework perform clinical data research analysis treatment protocols outcomes order create revenue generating opportunities pharmaceutical device manufactures due delays availability front end data collection software cardioworks experienced delays bringing product market expended majority working capital based upon uncertainty cardioworks funding analogic corporation notes consolidated financial statements continued thousands except share per share data working capital needs well inability company recover investment company determined investment cardioworks impaired accordingly company recorded impairment charge 1630 fiscal 2005 company investment balance 0 cardioworks july 31 2005 3 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals customers company depends small number customers large portion business changes customers’ orders may significant impact operating results major customer significantly reduces amount business company would adverse impact company’s operating results following table sets forth percentages company’s net product engineering revenue five largest customers last three fiscal years percentage product engineering sales ten largest customers periods company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected suppliers raw materials components general company’s products composed companydesigned proprietary integrated circuits printed circuit boards precision resistor networks manufactured others accordance specifications well standard electronic integrated circuits transistors displays components company orders raw materials components complete customers’ orders raw materials components ordered solesource suppliers may longlead times delivery although company works customers suppliers minimize impact shortages raw materials components sometimes experiences shortterm adverse effects due price fluctuations delayed shipments failure supplier deliver schedule could delay interrupt company’s analogic corporation notes consolidated financial statements continued thousands except share per share data delivery products thereby adversely affecting company’s operating results company always able pass price increases customers accordingly raw material component price increases could adversely affect operating results addition might become necessary given component ceases available analogic modify product design adapt substitute component purchase new tooling enable new supplier manufacture component could result additional expense andor delay product sales company also depends small number suppliers affiliated customers competitors others may small poorly financed companies many raw materials components company uses business unable continue purchase raw materials components suppliers company’s operating results could adversely affected many company’s costs fixed margins depend volume output facilities reduction volume could adversely affect margins united states foreign regulatory clearances approvals company’s products used number customers production medical devices subject high level regulatory oversight delay inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained might withdrawn modified medical devices cannot marketed united states without clearance fda medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling state may also regulate manufacture sale use medical devices medical devices also subject approval regulation foreign regulatory safety agencies 4 acquisition assets october 20 2003 camtronics acquired certain assets quinton inc “qtn” washington corporation primarily related intellectual property rights interests associated qtn’s qcath hemodynamics monitoring system business camtronics’ decision acquire assets liabilities based desire expand current product offerings gain access qtn’s existing customer base company’s total investment amounted 1750 payments 1000 due closing 750 due one year closing date connection transaction parties also entered cooperative marketing agreement cooperative marketing agreement term four years provides qtn potentially earn additional 1500 commissions upon successful conversion qtn qcath systems camtronics’ physiolog vericis products addition qtn market electronic medical records products camtronics specialized sales force primary care market company allocated purchase price 1750 acquired assets included 274 inventory 1476 customer list based relative fair value intangible asset related customer list amortized estimated useful life four years analogic corporation notes consolidated financial statements continued thousands except share per share data 5 marketable securities marketable securities categorized availableforsale securities summarized follows costs estimated fair value current debt securities july 31 2005 contractual maturity shown expected maturities differ contractual maturities issuers securities right repay obligations without prepayment penalties therefore company classified debt securities listed current assets realized gains losses marketable securities company sold marketable securities included periods presented cost approximated fair value maturity dates 6 explosive assessment computed tomography “exact” systems agreement company announced april 2002 entered agreement supply 1000 exact systems l3 communications’ security detection system division “l3” exact core system l3’s examiner 3dxr 6000 certified explosive detection system purchased united states transportation security administration “tsa” installed major airports across united states company recognizes product revenue upon shipment exact systems spare parts l3 time revenue recognition criteria met company shipped cumulative total 617 units july 31 2005 company recorded cash received l3 purchase longleadtime inventory components certain orders advance payments within liabilities section balance sheet payments recognized revenue systems inventory components relate shipped advance payments balance related longlead purchases 6170 1500 july 31 2005 2004 respectively agreement also provided company receive 22000 rampup funds purpose leasing fitting facility ensuring availability key critical raw material inventory components suppliers meet production volume requirements contract costs incurred assets purchased fully reimbursed l3 company recorded analogic corporation notes consolidated financial statements continued thousands except share per share data revenues costs assets related rampup funds cash received rampup activities recorded within advance payments account within liability section balance sheet liabilities reduced cash spent activities fiscal 2005 company vacated leased facility relocated operation newly completed 100000 square foot addition headquarters july 31 2005 company balance 475 unexpended rampup funds recorded within advance payments account 7 balance sheet information additional information certain balance sheet accounts follows years ended analogic corporation notes consolidated financial statements continued thousands except share per share data depreciation expense 14729 15840 16809 fiscal 2005 2004 2003 respectively longlead time components increase represents advance payments received l3 communications based orders received company’s exact system 8 goodwill intangible assets company discontinued amortizing goodwill august 1 2002 accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” adopted policy evaluating goodwill potential impairment annual basis first quarter fiscal year time events changes circumstances suggest carrying amount may recoverable estimated future cash flows required sfas 142 intangible assets meet criteria separate recognition must reclassified goodwill company reclassified certain goodwill intangibles balances july 31 2004 related company’s ownership cedara software corporation investments advances affiliated companies consolidated balance sheets goodwill july 31 2005 july 31 2004 changes carrying amount fiscal years follows fiscal 2005 company performed assessment recoverability camtronics’ goodwill related acquired software technology products echo ims cardio ims acquired future contingent consideration connection acquisition vmi initial budgeting process fiscal year 2006 became apparent camtronics market penetration software technology analogic corporation notes consolidated financial statements continued thousands except share per share data products less anticipated due limited number pediatric hospitals able make capital investment needed implement products also camtronics determined significant additional investment would required complete development efforts products company decided make required significant additional investment research development order reporting unit realize potential market opportunities due changes circumstance company performed impairment test company’s goodwill accordance sfas 142 company evaluated future undiscounted cash flows attributable software technology products net fair book value exceeding estimated future undiscounted cash flows fiscal 2005 company recorded impairment charge 434 adjustment unpaid contingent consideration 76 related balance sheet reclassification 309 reduce goodwill accrued liabilities unpaid contingent consideration longer owed fiscal 2004 company recorded goodwill 819 acquired future contingent consideration connection acquisition vmi camtronics addition vmi’s goodwill adjusted preacquisition loss carryforwards reducing goodwill 873 also time acquisition remaining 52 ftni inc “ftni” deferred tax asset created offsetting valuation allowance account tax loss credit carryovers existing time acquisition ftni’s profits current past year caused valuation allowance reversed situation sfas 109 requires tax benefits recognized reduction elimination valuation allowance acquisition date applied first reduce goodwill related acquisition second reduce noncurrent intangible assets related acquisition third reduce income tax expense release valuation allowance credited goodwill amount 687 represents entire amount goodwill related transaction balance valuation allowance reduction treated reduction noncurrent intangible assets intangible assets july 31 2005 july 31 2004 continue amortized consisted following fiscal 2005 company recorded asset impairment charge 1535 related software technology echo ims cardio ims products accounted changes intangible assets related software technology see note 2 notes consolidated financial statements amortization acquired intangible assets 2910 3217 2348 fiscal 2005 2004 2003 respectively amortization lives intangible assets range two five years analogic corporation notes consolidated financial statements continued thousands except share per share data estimated future amortization expense related current intangible assets five succeeding years expected follows 9 investments advances affiliated companies company 446 equity ownership interest sahco located people’s republic china fiscal 2005 company recorded 474 share gains sahco compared share losses 584 fiscal 2004 carrying value investment 730 july 31 2005 256 july 31 2004 july 31 2005 2004 net receivables affiliate 725 1015 respectively sales sahco fiscal 2005 2004 2003 approximately 3546 6695 4257 respectively may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 photodetection systems inc “pds” acton massachusetts pds privately held company developed proprietary detection systems highperformance positron emission tomography “pet” rapidly growing medical diagnostic imaging modality pet scanning tool diagnosis management cancer specifically detecting earlystage tumors determining tissue characteristics treatment addition company also received convertible promissory note principal amount 1367 exclusive license pds technology nonpet products convertible promissory note convertible company 1025559 shares series b convertible participating preferred stock converted company’s equity interest would increase 9 fiscal 2005 upon pds’ achievement technology milestone exclusive license pds technology reverted back pds company received warrant purchase 2250563 shares series b convertible participating preferred stock exercise warrant would increase company’s equity interest 20 company’s current equity interest potential conversion promissory note series b convertible participating preferred stock potential exercise warrant could result company 40 equity interest pds additionally certain circumstances future company may discretion may required purchase remaining 60 equity fair value company three seats pds’s sevenperson board directors company connection transaction expended total 8358 cash period may 21 2003 july 31 2005 company accounted investment equity method due company’s ability exercise significant influence operating financial policies since investment pds form common stock effective second quarter fiscal 2005 company changed accounting method investment pds equity method cost method accounting accordance eitf 0214 “whether investor apply equity method accounting investments common stock” “eitf 0214” subsequently company reviewed investment otherthantemporary impairment accordance financial accounting standard 115 “accounting certain investments debt equity security” “fas 115” company determined investment pds impaired based current fair value therefore recorded asset impairment charge totaling 2160 second third fourth quarters fiscal 2005 prior effective date eitf 0214 company recorded share pds losses 759 research product development expenses fiscal 2005 july 31 2005 analogic corporation notes consolidated financial statements continued thousands except share per share data company’s investment pds recorded net impairment charges 0 value versus carrying value 593 july 31 2004 fiscal year 2005 company 146 equity interest cedara software corporation “cedara” publiclytraded canadian company april 1 2004 company’s guarantee certain debt owed cedara lender cancelled along security agreement company cedara’s lending bank november 8 2004 two affiliates company appointed cedara board directors resigned cedara board result company november 8 2004 changed accounting investment equity method cost method accounting company’s ability exercise significant influence operating financial policies cedara ceased february 17 2005 company sold equity interest cedara 50752 realized gain approximately 43829 sale fiscal 2005 company entered six year license agreement cedara 6000 allows company incorporate cedara’s software products company’s equipment resell equipment company’s customers company entered maintenance contract amount 150 first year company’s option maintenance contract may renewed year 150 company option extend license agreement additional four years similar terms company capitalized costs license agreement amortizing cost ratably life agreement company’s product cost sales summarized financial information partiallyowned equity affiliates july 31 years ended follows carrying amount investments approximates underlying ownership net assets partiallyowned equity affiliates include sahco enhanced ct technology llc cardioworks information includes company’s investment photodetection systems inc prior change accounting method cedara prior company’s sale equity interest company recognized result foreign exchange gain losses respect intercompany transactions gain approximately 83 fiscal 2005 loss 147 fiscal 2004 gain 3941 fiscal 2003 analogic corporation notes consolidated financial statements continued thousands except share per share data 10 net income per share company’s reported net income number shares utilized net income per share calculations fiscal 2005 2004 2003 follows antidilutive shares related outstanding stock options may become dilutive future years 11 commitments guarantees company agreements whereby indemnifies officers directors certain events occurrences officer director serving company’s request capacity term indemnification period officer’s director’s lifetime potential amount future payments company could required make indemnification agreements unlimited also extent permitted massachusetts law company’s articles organization require company indemnify directors company’s bylaws require company indemnify present former directors officers company also permit indemnification employees agents company board directors time authorizes indemnification instance however indemnification granted director otherwise entitled thereto determined committed breach loyalty company stockholders b committed acts omissions good faith involved intentional misconduct knowing violation law c derived improper personal benefit connection particular transaction claim indemnification made person covered said agreements andor relevant provisions company’s articles organization bylaws company believes estimated exposure indemnification obligations currently minimal accordingly company liabilities recorded indemnity agreements requirements july 31 2005 november 2002 financial accounting standard board “fasb” issued fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” “fin 45” fin 45 requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee following summary agreements company determined within scope fin 45 company’s standard original equipment manufacturing supply agreements entered ordinary course business typically contain indemnification provision pursuant company analogic corporation notes consolidated financial statements continued thousands except share per share data indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2005 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents company’s product warranty liability years ended company currently approximately 23500 revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2005 fiscal 2004 12 notes payable notes payable consists following total interest incurred amounted 54 294 360 fiscal 2005 2004 2003 respectively total interest incurred none capitalized fiscal years 13 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant analogic corporation notes consolidated financial statements continued thousands except share per share data rent expense associated company’s operating leases approximately 2588 3514 3278 fiscal 2005 2004 2003 respectively following schedule year future minimum lease payments july 31 2005 14 income expense income consists primarily interest income short long term marketable securities gain loss attributable investments unconsolidated affiliates company accounts equity method foreign exchange gains losses income loss sale property plant equipment fiscal 2005 company foreign exchange gains 83 versus foreign exchange losses 147 fiscal 2004 also fiscal 2005 company realized gain 43829 sale marketable securities related company’s sale equity interest cedara 15 stock option stock bonus plans july 31 2005 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant tax benefits early disposition stock optionees incentive stock options exercise nonqualified options credited capital excess par value options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans common stock may granted key employees terms conditions determined board directors generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date analogic corporation notes consolidated financial statements continued thousands except share per share data grant upon issuance stock plans unearned compensation equivalent market value date grant charged stockholders’ equity subsequently amortized periods restrictions lapse six years shares granted company’s key employee stock bonus plan 25762 weighted average fair market value 4187 per share fiscal 2005 75666 shares weighted average fair market value 4188 per share fiscal 2004 65834 shares weighted average fair market value 4770 per share fiscal 2003 amortization unearned compensation 1915 1652 1476 recorded fiscal 2005 2004 2003 respectively employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25000 calendar year number shares issued pursuant plan totaled 13368 2005 15739 2004 8768 2003 weightedaverage estimated fair value employees stock purchase rights fiscal 2005 2004 2003 1100 1106 1346 per share respectively july 31 2005 880028 shares reserved grant stock option bonus purchase plans following table sets forth stock option transactions fiscal 2005 2004 2003 following table summarizes information stock options outstanding july 31 2005 weightedaverage estimated fair value stock options granted fiscal 2005 2004 2003 1509 1653 1775 per share respectively analogic corporation notes consolidated financial statements continued thousands except share per share data fair value company’s stock option stock purchase plans estimated using blackscholes optionpricing model following weightedaverage assumptions 16 retirement plans company qualified retirement plan analogic corporation profit sharing401k plan provide retirement income eligible employees employee contributions employer contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service beginning fiscal 2001 company elected match employee contributions dollar basis 3 compensation participant continued december 31 2001 period january 1 2002 july 31 2002 company elected contribute plan beginning fiscal 2003 company decided contribute 5 net income defined plan company’s contributions plan totaled 1493 602 2556 fiscal 2005 2004 2003 respectively 17 income taxes components provision income taxes follows analogic corporation notes consolidated financial statements continued thousands except share per share data income loss income taxes domestic foreign operations follows components deferred tax assets liabilities follows analogic corporation notes consolidated financial statements continued thousands except share per share data reconciliation income taxes united states statutory rate effective tax rate follows company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs july 31 2005 company net operating loss credit carryforwards canada approximately 7413 expire 2006 2012 july 31 2005 company net operating loss carryforwards belgium singapore germany approximately 4112 expiration analogic corporation notes consolidated financial statements continued thousands except share per share data date july 31 2005 company state net operating losses 9018 728 expire fiscal 2009 7585 expire 2019 706 expire 2024 july 31 2005 company also tax credit carryforwards 796 expire 2020 management determined likely company recognize benefit certain foreign losses tax credits result valuation allowances established july 31 2005 july 31 2004 increase valuation allowance fiscal 2005 result additional losses canada belgium losses singapore fiscal 2005 company identified potential additional tax benefits realized fiscal years 2000 2004 related federal state tax credits research development expenditures study completed amended returns filed fiscal 2000 fiscal 2001 prior july 31 2005 amended returns fiscal 2002 fiscal 2003 filed subsequent july 31 2005 amount federal state credits claimed net thirdparty costs incurred related tax study approximately 6150 date 645 received related fiscal 2000 fiscal 2001 fully reserved fiscal 2004 return amended returns expected subject substantial scrutiny irs state revenue departments accordingly company recognize tax benefits related tax credits completion irs state revenue tax audits expiration respective statutes limitations contingent thirdparty costs incurred related refunds recognized benefit recognized approximately 1200 deferred tax assets include us federal state net operating losses returns filed subsequent july 31 2005 federal net operating loss carried back offset fiscal 2002 fiscal 2003 federal income tax returns expected generate refund 4918 addition state tax credits net federal tax cost 236 claimed amended state tax returns additional credits addition rd credits discussed 18 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal 2005 fiscal 2004 analogic corporation notes consolidated financial statements continued thousands except share per share data 19 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows 20 segment geographic information company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consist three reporting segments medical imaging products consist primarily electronic systems subsystems medical imaging equipment patient monitoring camtronics information management systems cardiology market bk medical ultrasound systems probes urology surgery radiology markets security technology products consist advanced weapon threat detection systems subsystems company’s corporate represents company’s hotel business net interest income company operations primarily analog digital ad converters supporting modules embedded multiprocessing equipment meet materiality requirements separate disclosure accounting policies segments described summary significant accounting policies analogic corporation notes consolidated financial statements continued thousands except share per share data table presents information company’s reportable segments includes gain 43829 related company’s sale equity interest cedara asset impairment charge 3000 fiscal 2005 b includes asset impairment charge 3599 fiscal 2005 c includes cash equivalents marketable securities 195321 156753 167763 fiscal 2005 2004 2003 respectively analogic corporation notes consolidated financial statements continued thousands except share per share data information regarding geographic areas fiscal 2005 2004 2003 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada 21 common stock repurchase plan june 7 2005 company announced board directors authorized repurchase 25000 company’s common stock brokers dealers public market privately negotiated transactions stock repurchase funded using company’s working capital expected completed fiscal 2006 july 31 2005 company repurchased common stock program 22 subsequent events september 27 2005 company announced board directors september 20 2005 declared dividend 008 per common share payable october 18 2005 shareholders record october 4 2005 september 28 2005 company made decision restructure business operations whollyowned subsidiary sky computers inc “sky” result company terminate employment approximately forty 40 employees sky october 14 2005 july 31 2006 half employees terminated october 2005 engaged product development sales administrative activities employees remain october 2005 continue engaged principally manufacturing sale sky’s legacy products supporting sky’s installed customer base decision restructure sky based continued lower expected sales expected completion date restructuring july 31 2006 three major types costs associated restructuring personnelrelated costs severance pay writedown certain capital assets writedown certain inventory amount estimated company categories ranges 09 million 10 million 035 million 04 million 11 million 13 million respectively company estimates total costs incurred related plan 235 million 27 million company record charges incurred connection restructuring approximately 19 million 225 million quarter ending october 31 2005 company estimates 045 million personnelrelated charges incurred recorded nine month period ending july 31 2006 company believes cash expenditures incurred subsequent quarter ending october 31 2005 approximate 045 million personnelrelated charges analogic corporation schedule ii valuation qualifying accounts thousands represents primarily 1587 related account receivable sahco reserved fiscal 2003 written fiscal 2004 b represents primarily 1587 related accounts receivable sahco 747 unsecured note unrelated party represents increase valuation allowance resulting additional losses canada belgium losses singapore b represents release valuation allowance ftni germany c represents release portion ftni valuation allowance represents establishment valuation allowance losses canada belgium germany index exhibitsitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated management’s annual report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect interim annual consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management participation chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting july 31 2006 based framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment company’s management concluded july 31 2006 company’s internal control financial reporting effective based criteria management’s assessment effectiveness company’s internal control financial reporting july 31 2006 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors stockholders analogic corporation completed integrated audits analogic corporation’s 2006 2005 consolidated financial statements internal control financial reporting july 31 2006 audit 2004 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position analogic corporation subsidiaries july 31 2006 july 31 2005 results operations cash flows three years period ended july 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 3 consolidated financial statements company changed manner accounts sharebased compensation fiscal 2006 internal control financial reporting also opinion management’s assessment included management’s report internal control financial reporting appearing page 40 company maintained effective internal control financial reporting july 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting july 31 2006 based criteria established internal controlintegrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts october 16 2006 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements stockholders’ equity years ended july 31 2006 2005 2004 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation incorporated commonwealth massachusetts november 1967 analogic corporation subsidiaries “analogic” “company” engaged primarily design manufacture sale high technology high performance highprecision data acquisition signal processing instruments systems customers manufacture products medical industrial use analogic designer manufacturer advanced health security systems subsystems sold primarily original equipment manufacture’s “oems” analogic’s principal customers oems incorporate analogic’s products systems used health security applications several analogic’s subsidiaries divisions sell products names directly niche enduser markets significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries whollyowned investments companies ownership interests range 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method november 1 2005 company sold wholly owned subsidiary camtronics business reported discontinued operation accordance statement financial accounting standards “sfas” 144 “accounting impairment disposal longlived assets” periods presented restated accordingly reflect operations discontinued intercompany accounts transactions eliminated b basis presentation certain prior years’ financial statement items reclassified conform current year’s presentation reclassifications impact net income c inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory recorded inventory valuation provisions subsequently reversed inventory used disposed property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives assets capital leases leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued annual provisions depreciation amortization computed accordance following ranges estimated useful lives company reviews property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following total depreciation property plant equipment 11809 12776 14068 fiscal 2006 2005 2004 respectively company capitalize interest fiscal 2006 2005 2004 e revenue recognition accounts receivable company recognizes majority revenue accordance sec staff accounting bulletin “sab” 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves analogic corporation notes consolidated financial statements continued company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies customer invoiced shipping handling revenue shipping handling costs cost sales company’s transactions sometimes involve multiple elements ie systems services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined vendor objective evidence “voe” recognized time delivery arrangement includes undelivered elements essential functionality delivered elements company defers fair value undelivered elements residual revenue allocated delivered elements fair value determined based upon price charged element sold separately company fair value undelivered element recognizes revenue upon delivery undelivered element maintenance service revenues recognized ratably life contract business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position 972 “software revenue recognition” “sop 972” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regard installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained allocate revenue first fair value undelivered elements allocate residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue typically recognized ratably contracted maintenance term company provides engineering services customers contractual basis recognizes revenue using percentage completion method company estimates percentage completion contracts fixed fee arrangement monthly basis utilizing costs incurred date percentage total estimated costs complete project company sufficient basis measure progress towards completion revenue related costs deferred recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised 1 maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement voe vsoe fair value determined components yet delivered accepted customer revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon historical experience specific customer collection issues identified determined current quarter sale collectable recognition revenue sale deferred collection made analogic corporation notes consolidated financial statements continued f capitalized software costs software development costs incurred subsequent establishing technological feasibility general release software products capitalized accordance sfas 86 “accounting costs computer software sold leased otherwise marketed” capitalized costs amortized straightline basis economic lives related products generally three years assets reviewed impairment annually whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique amortization expense 1157 857 1293 fiscal 2006 2005 2004 respectively included product cost sales unamortized balance capitalized software 2670 8463 july 31 2006 2005 respectively g warranty costs company provides estimated cost product warranties time products shipped although company engages extensive product quality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery h research product development costs research product development costs expensed incurred include primarily engineering salaries stock based compensation overhead materials used connection research development projects income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs j net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock analogic corporation notes consolidated financial statements continued k cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents primarily short term investments government agencies discounted notes amounted 252407 208116 july 31 2006 2005 respectively l concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company maintains bond investment portfolio various types maturities high credit quality issuers cash equivalents required working capital purposes placed short term investments original maturities three months less company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition marketable securities company’s marketable securities categorized availableforsale securities defined sfas 115 “accounting certain investments debt equity securities” unrealized marketable securities gains losses reflected net amount caption accumulated comprehensive income within statement stockholders’ equity realized gains losses recorded within statements operations caption income expenses purpose computing realized gains losses cost identified specific identification basis n new accounting pronouncements june 2005 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 154 “accounting changes error corrections” statement replaces apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” statement applies voluntary changes accounting reporting changes accounting principles sfas 154 requires retrospective application prior periods’ financial statements voluntary change accounting principles unless practical apb 20 previously required voluntary changes accounting principles recognized including net income period change cumulative effect changing new accounting principle sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 earlier application permitted accounting changes errors made occurring fiscal years beginning may 31 2005 adoption sfas 154 material impact company’s financial position results operations november 2005 fasb issued fasb staff position fsp fas 1151 “the meaning otherthantemporary impairment application certain investments” fsp nullifies certain requirements issue 031 supersedes eitf topic d44 “recognition otherthantemporary impairment upon planned sale security whose cost exceeds fair value” fsp establishes steps required determining investment considered impaired whether impairment temporary measurement impairment loss fsp impairment shall assessed individual security level assessment whether investment shall assessed individual security level assessment whether investment impaired shall performed reporting period analogic corporation notes consolidated financial statements continued impairment determined temporary impairment loss recognized impairment loss equal difference investment’s cost fair value provisions fsp 1151 shall effective reporting periods beginning december 15 2005 adoption fsp 1151 material impact company’s financial position results operations june 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxes” interpretation fasb statement 109 “accounting income taxes” fin 48 requires managements perform twostep evaluation tax positions ensuring tax return positions meet “morelikely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns company still evaluating impact pronouncement fin 48 effective company’s fiscal year ending july 31 2008 september 2006 sec issued staff accounting bulletin 108 sab 108 sab 108 addresses effects prior year uncorrected misstatements considered quantifying misstatements current year financial statements sab 108 requires companies quantify misstatements using balance sheet income statement approach evaluate whether either approach results quantifying error material light relevant quantitative qualitative factors effect initial adoption material companies record effect cumulative effect adjustment beginning year retained earnings provisions sab 108 effective company’s interim reporting period beginning august 1 2007 company believe adoption sab 108 material impact financial position results operations september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 prescribes single definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date company believe adoption sfas 157 material impact financial condition results operations sfas 157 effective company’s interim reporting period beginning august 1 2008 september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” sfas 158 requires employer recognize statement financial position asset plan’s overfunded status liability plan’s underfunded status b measure plan’s assets obligations determine funded status end employer’s fiscal year limited exceptions c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income business entity changes net assets notforprofit organization requirement recognize funded status benefit plan disclosure requirements effective company fiscal year ending july 31 2007 requirement measure plan assets benefit obligations date fiscal yearend balance sheet effective company fiscal year ending july 31 2009 company still evaluating impact pronouncement use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial analogic corporation notes consolidated financial statements continued statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates percentage completion contracts estimates fair value investments privately held companies goodwill intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes various estimates used calculation stock based compensation actual results could differ estimates p comprehensive income sfas 130 “reporting comprehensive income” established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders’ equity comprehensive income consists unrealized gains net taxes marketable securities 18 117 fiscal 2006 2005 respectively foreign currency translation gains net taxes 5941 2769 fiscal 2006 2005 respectively q stock based compensation effective august 1 2005 company adopted provisions sfas 123r “sharebased payment” established accounting equity instruments exchanged employee services provisions sfas 123r sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant prior august 1 2005 company accounted sharebased compensation employees accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” related interpretations company also followed disclosure requirements sfas 123 “accounting stockbased compensation” therefore stockbased employee compensation expense recorded connection issuance employee director stock options stock options granted plans fixed awards exercise price equal market value common stock time grant stockbased compensation expenses related restricted stock granted cost employees reflected net income company elected adopt modified prospective transition method provided sfas 123r accordingly financial statement amounts prior periods presented form 10k revised reflect fair value method expensing sharebased compensation r fair value financial instruments carrying amounts cash equivalents receivables approximate fair value fair values marketable securities estimated based quoted market price securities impairment longlived assets company evaluates recoverability longlived assets accordance sfas 144 “accounting impairment disposal longlived assets” sfas 144 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset compared recorded value asset analogic corporation notes consolidated financial statements continued segment information sfas 131 “disclosures segments enterprise related information” establishes standards reporting information operating segments interim annual financial statements company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consist two reporting segments medical imaging products consist primarily electronic systems subsystems medical imaging equipment patient monitoring bk medical ultrasound systems probes urology surgery radiology markets security technology products consist advanced weapon threat detection systems subsystems u translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables investments included operations period occur foreign exchange transaction gains losses included results operations income net company foreign exchange losses totaling 161 fiscal 2006 foreign exchange gains totaling 133 fiscal 2005 foreign exchange losses totaling 190 fiscal 2004 2 discontinued operations second quarter fiscal 2006 company sold wholly owned subsidiary camtronics medical systems ltd “camtronics” 40000 cash realized net proceeds 38906 transactional costs company recorded net gain sale camtronics 20207 net tax provision 8885 146 per diluted share determining gain company also provided estimated indemnification tax liabilities 1754 subsequent sale fourth quarter fiscal 2006 company determined additional indemnification 652 prior sale camtronics reported separate segment company sold camtronics operating segment better focus core lines business reported discontinued operation accordance sfas 144 “accounting impairment disposal longlived assets” periods presented revised accordingly reflect operations discontinued revenues net income loss camtronics fiscal year 2006 2005 2004 follows analogic corporation notes consolidated financial statements continued following represents detailed listing current assets current liabilities discontinued operations 3 stockbased payment effective august 1 2005 company adopted provisions statement sfas 123r established accounting equity instruments exchanged employee services provisions sfas 123r sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant prior august 1 2005 company accounted sharebased compensation employees accordance apb 25 related interpretations company also followed disclosure requirements sfas 123 therefore stockbased employee compensation expense recorded connection issuance employee director stock options stock options granted plans fixed awards exercise price equal market value common stock time grant stockbased compensation expenses related restricted stock granted cost employees reflected net income company elected adopt modified prospective transition method provided sfas 123r accordingly financial statement amounts prior periods presented form 10k revised reflect fair value method expensing sharebased compensation analogic corporation notes consolidated financial statements continued following table presents sharebased compensation expenses continuing operations included company’s consolidated statements operations company estimates fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected forfeiture rate expected volatility company’s stock option’s expected term riskfree interest rate option’s expected term company’s expected annual dividend yield company believes valuation technique approach utilized develop underlying assumptions appropriate calculating fair values company’s stock options granted year ended july 31 2006 estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions 1 option life determined using simplified method estimating expected option life qualifies “plainvanilla” options 2 stock volatility grant determined based review experience weighted average historical weekly price changes company’s common stock recent five years approximates expected option life grant 525 years 3 riskfree interest rate periods equal expected term share option based us treasury yield curve effect time grant company recognize compensation expense employee stock option grants fiscal 2005 2004 exercise price company’s employee stock options equaled market price underlying stock date grant company recognized compensation expense restricted stock grants upon adoption sfas 123r using modified prospective method company recognized benefit 181 120 tax cumulative effect change accounting principle resulting analogic corporation notes consolidated financial statements continued requirement estimate forfeitures company’s restricted stock grants date grant instead recognizing incurred estimated forfeiture rate applied previously recorded compensation expense company’s unvested restricted stock determining cumulative effect change accounting principle cumulative benefit net tax increased basic diluted earnings per share 001 prior adoption sfas 123r company presented tax benefits resulting exercise stock options operating cash flows statements cash flows sfas 123r requires cash flows resulting tax benefits resulting tax deductions excess compensation cost recognized options “excess tax benefits” classified financing cash flows fiscal year 2006 363 excess tax benefit classified financing cash inflow company previously adopted provisions sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” disclosure following table illustrates effects net income earnings per share fiscal 2005 2004 company applied fair value recognition provisions sfas 123 sharebased employee awards fair value option grant estimated grant date using blackscholes option pricing model following assumptions stock incentive plans july 31 2006 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan analogic corporation notes consolidated financial statements continued options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board directors generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions july 31 2006 1026386 shares reserved grant stock option bonus purchase plans analogic corporation notes consolidated financial statements continued following table sets forth stock option restricted stock transactions fiscal 2006 weighted average fair value stock options granted fiscal year 2006 2005 2004 1533 1509 1653 per share respectively twelve months ended july 31 2006 total intrinsic value options exercised ie difference market price paid employee exercise options 4009 total amount cash received exercise options 8772 total fair value restricted stock grants vested year ended july 31 2006 2410 following table summarizes information stock options outstanding july 31 2006 july 31 2006 7728 total unrecognized compensation cost related nonvested sharebased compensation arrangements granted company’s stock option restricted stock bonus plans cost expected recognized weightedaverage period 25 years company amortizes stockbased compensation straightline method actual tax benefit realized tax deductions option exercises totalled 1402 year ended july 31 2006 analogic corporation notes consolidated financial statements continued 4 restructuring asset impairment charges fiscal 2006 company incurred asset impairment charges cost sales operating expenses company’s consolidated statements operations cost sales following table summarizes impairment charges cost sales follows asset impairment charges recorded cost sales fiscals year ended july 31 2005 2004 conjunction ongoing discussions company oem customer significant uncertainty arose respect viability ct medical development program realizability related assets result company recorded asset impairment charges 5772 fourth quarter fiscal 2006 writedown inventories see note 21 fiscal 2006 company decided close sky computers inc sky based continued lower expected sales restructuring charges related closure involved writedowns certain inventory 1589 operating expenses fiscal 2006 2005 company recorded restructuring asset impairment charges operating expense company’s consolidated statements operations follows asset impairment charges recorded fiscal year ended july 31 2004 analogic corporation notes consolidated financial statements continued shenzhen anke hightech co ltd “sahco” company 446 equity interest sahco located people’s republic china company reviewed investment otherthantemporary impairment accordance accounting principles board opinion “apb” 18 “the equity method accounting investment common stock” determined january 31 2006 investment sahco impaired based current fair value second quarter fiscal 2006 company recorded asset impairment charge related investment 275 represented remaining book value investment photodetection systems inc may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 photodetection systems inc “pds” acton massachusetts pds privately held company developed proprietary detection systems highperformance positron tomography rapidly growing medical diagnostic imaging modality addition company also received convertible promissory note principal amount 1367 exclusive license pds technology nonpet products convertible promissory note convertible company 1025559 shares series b convertible participating preferred stock fiscal 2005 upon pds’ achievement technology milestone exclusive license pds technology reverted back pds company received warrant purchase 2250563 shares series b convertible participating preferred stock since second quarter fiscal year 2005 company accounting investment cost method accounting accordance eitf 0214 “whether investor apply equity method accounting investments common stock” eitf 0214 company reviewed investment otherthantemporary impairment accordance sfas 115 “accounting certain investments debt equity securities” determined october 31 2005 investment pds impaired based current fair value therefore recorded asset impairment charge 216 quarter ended october 31 2005 fiscal 2005 company recorded asset impairment charges pds 2160 based current fair value see note 11 discussion regarding pds capitalized software company capitalized 5808 software development costs 3850 related medical ct workstation project 1958 related medical ct development program objective medical ct workstation program broaden current market opportunity company’s ct medical scanner back end subsystem developing front end system would provide complete solution customers fourth quarter fiscal 2006 management concluded significant additional investment would required complete development efforts front end system decided longer pursue development efforts recorded impairment charge 3850 regard medical ct development program fourth quarter 2006 company evaluated viability capitalized software respect future use realizability based evaluation company recorded impairment charge 1958 company previously capitalized 479 software development costs related medical imaging project fiscal 2005 company determined project meet anticipated future market requirements decided focus effort existing development projects result company recorded fiscal 2005 impairment charge 479 represents total amount capitalized company project analogic corporation notes consolidated financial statements continued manufacturing license january 24 2003 company purchased manufacturing license 500 would allow company utilize mobile portable xray technology fiscal 2005 management decided longer pursue research development efforts area due limited resources accordingly company put project hold uncertain whether company able utilize technology future company amortizing cost license five year period company determined intangible asset impaired recorded impairment charge 361 fiscal 2005 sky computers inc fiscal 2006 company decided close business operations whollyowned subsidiary sky based continued lower expected sales closing sky involved 1 termination approximately 40 employees engaged product development sales administrative activities 2 writedown certain capital assets 3 writedown certain inventory accordance sfas 146 “accounting costs associated exit disposal activities” fiscal 2006 company recorded 2805 asset impairment restructuring costs related sky severance charge 906 310 writedown capital assets charges recorded within operating expenses consolidated statements operations caption “restructuring asset impairment charges” 1589 writedown inventory recorded asset impairment charges consolidated statements operations within cost sales summary costs incurred restructuring activities follows cash expenditures subsequent july 31 2006 approximate 262 involuntary employee severance 5 net income per share basic earnings per share computed using weighted average number common shares outstanding period diluted earnings per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method analogic corporation notes consolidated financial statements continued following table sets forth computation basic diluted earnings per share fiscal 2006 2005 2004 antidilutive shares related outstanding stock options may become dilutive future years 6 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals customers company depends small number customers large portion business changes customers’ orders may significant impact operating results major customer significantly reduces amount business company would adverse impact company’s operating results following table sets forth percentages company’s net product engineering analogic corporation notes consolidated financial statements continued revenue five largest customers last three fiscal years percentage product engineering sales ten largest customers periods company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected suppliers raw materials components general company’s products composed companydesigned proprietary integrated circuits printed circuit boards precision resistor networks manufactured others accordance specifications well standard electronic integrated circuits transistors displays components company orders raw materials components complete customers’ orders raw materials components ordered solesource suppliers may longlead times delivery although company works customers suppliers minimize impact shortages raw materials components sometimes experiences shortterm adverse effects due price fluctuations delayed shipments failure supplier deliver schedule could delay interrupt company’s delivery products thereby adversely affecting company’s operating results company always able pass price increases customers accordingly raw material component price increases could adversely affect operating results addition might become necessary given component ceases available analogic modify product design adapt substitute component purchase new tooling enable new supplier manufacture component could result additional expense andor delay product sales company also depends small number suppliers affiliated customers competitors others may small poorly financed companies many raw materials components company uses business unable continue purchase raw materials components suppliers company’s operating results could adversely affected many company’s costs fixed margins depend volume output facilities reduction volume could adversely affect margins united states foreign regulatory clearances approvals company’s products used number customers production medical devices subject high level regulatory oversight delay inability obtain necessary united states analogic corporation notes consolidated financial statements continued foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained might withdrawn modified medical devices cannot marketed united states without clearance fda medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling state may also regulate manufacture sale use medical devices medical devices also subject approval regulation foreign regulatory safety agencies 7 marketable securities marketable securities categorized availableforsale securities summarized follows costs estimated fair value current debt securities july 31 2006 contractual maturity shown expected maturities differ contractual maturities issuers securities right repay obligations without prepayment penalties therefore company classified debt securities listed current assets debt securities greater one year classified current since company ability liquidate investments working capital purposes necessary realized gains losses marketable securities company sold marketable securities included periods presented cost approximated fair value maturity dates 8 explosive assessment computed tomography “exact” systems agreement company announced april 2002 entered agreement supply 1000 exact systems l3 communications’ security detection system division “l3” exact core system l3’s examiner 3dxr 6000 certified explosive detection system purchased united states transportation security administration “tsa” installed major airports across united states analogic corporation notes consolidated financial statements continued company recognizes product revenue upon shipment exact systems spare parts l3 time revenue recognition criteria met company shipped cumulative total 724 units july 31 2006 company recorded cash received l3 purchase longleadtime inventory components certain orders advance payments within liabilities section balance sheet payments recognized revenue systems inventory components relate shipped advance payments balance related longlead purchases 0 6170 july 31 2006 2005 respectively agreement also provided company receive 22000 rampup funds purpose leasing fitting facility ensuring availability key critical raw material inventory components suppliers meet production volume requirements contract costs incurred assets purchased fully reimbursed l3 company recorded revenues costs assets related rampup funds cash received rampup activities recorded within advance payments account within liability section balance sheet liabilities reduced cash spent activities fiscal 2005 company vacated leased facility relocated operation newly completed 100000 square foot addition headquarters july 31 2006 company balance 469 unexpended rampup funds recorded within advance payments account 9 balance sheet information additional information certain balance sheet accounts follows years ended longlead time components represent advance payments received l3 communications based certain orders received company’s exact systems analogic corporation notes consolidated financial statements continued 10 goodwill intangible assets company discontinued amortizing goodwill august 1 2002 accordance sfas 142 “goodwill intangible assets” adopted policy evaluating goodwill potential impairment annual basis first quarter fiscal year time events changes circumstances suggest carrying amount may recoverable estimated future cash flows required sfas 142 intangible assets meet criteria separate recognition must reclassified goodwill company goodwill recorded financial statements periods ended july 31 2006 2005 intangible assets july 31 2006 july 2005 continue amortized consisted following amortization expense related acquired intangible assets 1626 1612 1899 fiscal 2006 2005 2004 respectively estimated life intangible assets five years estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows 11 investments advances affiliated companies company 446 equity ownership interest sahco located people’s republic china fiscal 2006 company recorded 455 expense share equity losses 474 income share gains sahco fiscal 2005 also fiscal 2006 company reviewed investment otherthantemporary impairment accordance apb 18 determined investment sahco impaired based fair value company recorded asset impairment charge related investment 275 represented company’s book value carrying value company’s investment sahco 0 july 31 2006 730 july 31 2005 july 31 2006 2005 net receivable affiliate 37 725 respectively sales sahco fiscal 2006 2005 2004 approximately 1102 3546 6695 respectively may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 pds privately held company developed proprietary detection systems highperformance positron emission tomography “pet” rapidly growing medical analogic corporation notes consolidated financial statements continued diagnostic imaging modality pet scanning tool diagnosis management cancer specifically detecting earlystage tumors determining tissue characteristics treatment addition company also received convertible promissory note principal amount 1367 exclusive license pds technology nonpet products convertible promissory note convertible company 1025559 shares series b convertible participating preferred stock converted company’s equity interest would increase 9 fiscal 2005 upon pds’ achievement technology milestone exclusive license pds technology reverted back pds company received warrant purchase 2250563 shares series b convertible participating preferred stock exercise warrant would increase company’s equity interest 20 company’s current equity interest potential conversion promissory note series b convertible participating preferred stock potential exercise warrant could result company 40 equity interest pds additionally certain circumstances future company may discretion may required purchase remaining 60 equity fair value company accounted investment equity method due company’s ability exercise significant influence operating financial policies effective second quarter fiscal 2005 company changed accounting method investment pds equity method cost method accounting accordance eitf 0214 “whether investor apply equity method accounting investments common stock” “eitf 0214” subsequently company reviewed investment otherthantemporary impairment accordance financial accounting standard 115 “accounting certain investments debt equity security” “fas 115” company determined investment pds impaired based current fair value therefore recorded asset impairment charge totaling 216 first quarter fiscal 2006 compared 2160 second third fourth quarters fiscal 2005 prior effective date eitf 0214 company recorded share pds losses 759 research product development expenses fiscal 2005 july 31 2005 company’s investment pds recorded net impairment charges 0 value second quarter fiscal 2006 company invested 471 pds company reviewed investment otherthantemporary impairment determined investments pds impaired based current fair value february 2006 company elected convert outstanding principle represented convertible promissory note exercise warrant received shares pds series b convertible participating preferred stock increasing company’s equity interest pds 438 following increase equity interest company reevaluated accounting investment pds including consideration fasb interpretation 46 revised december 2003 “consolidation variable interest entities” interpretation arb 51” eitf 0214 determined investment accounted equity method company evaluated change cost equity method apb 18 determined adjustment required remainder fiscal 2006 company recorded equity share pds losses 332 company’s investments pds net additional investments july 31 2006 667 june 2006 pds signed development agreement large oem customer requiring milestone progress payments 104 million next 16 months company expects funding sufficient offset pds cash expenditures additional funding company required company three seats pds’s sevenperson board directors company connection transaction expended total 9732 cash period may 21 2003 july 31 2006 fiscal year 2005 company 146 equity interest cedara software corporation “cedara” publiclytraded canadian company april 1 2004 company’s guarantee certain analogic corporation notes consolidated financial statements continued debt owed cedara lender cancelled along security agreement company cedara’s lending bank november 8 2004 two affiliates company appointed cedara board directors resigned cedara board result company november 8 2004 changed accounting investment equity method cost method accounting company’s ability exercise significant influence operating financial policies cedara ceased february 17 2005 company sold equity interest cedara 50752 realized gain approximately 43829 sale fiscal 2005 company entered six year license agreement cedara 6000 allows company incorporate cedara’s software products company’s equipment resell equipment company’s customers company entered maintenance contract amount 150 first year company’s option maintenance contract may renewed year 150 company option extend license agreement additional four years similar terms company capitalized costs license agreement amortizing cost ratably life agreement company’s product cost sales summarized financial information partiallyowned equity affiliates july 31 years ended follows carrying amount investments approximates underlying ownership net assets partiallyowned equity affiliates include sahco enhanced ct technology llc information includes company’s investment photodetection systems inc change accounting method cedara prior company’s sale equity interest company recognized result foreign exchange gain losses respect intercompany transactions loss approximately 161 fiscal 2006 gain 133 fiscal 2005 loss 190 fiscal 2004 12 commitments guarantees company agreements whereby indemnifies officers directors certain events occurrences officer director serving company’s request capacity term indemnification period officer’s director’s lifetime potential amount future payments company could required make indemnification agreements unlimited also extent permitted massachusetts law company’s articles organization require company indemnify analogic corporation notes consolidated financial statements continued directors company’s bylaws require company indemnify present former directors officers company also permit indemnification employees agents company board directors time authorizes indemnification instance however indemnification granted director otherwise entitled thereto determined committed breach loyalty company stockholders b committed acts omissions good faith involved intentional misconduct knowing violation law c derived improper personal benefit connection particular transaction claim indemnification made person covered said agreements andor relevant provisions company’s articles organization bylaws company believes estimated exposure indemnification obligations currently minimal accordingly company liabilities recorded indemnity agreements requirements july 31 2006 august 2006 dispute arose company oem customer company development agreement regarding medical ct program dispute relates whether either party breached agreement company customer unable resolve differences respect agreement arbitration may result stage company cannot predict dispute resolved company time accrued expenses related dispute possible company may future incur expenses liabilities oem customer connection matter november 2002 fasb issued fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” “fin 45” fin 45 requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee following summary agreements company determined within scope fin 45 company’s standard original equipment manufacturing supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2006 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable analogic corporation notes consolidated financial statements continued following table presents company’s product warranty liability years ended company currently approximately 23700 revolving credit facilities various banks available direct borrowings direct borrowings fiscal 2006 fiscal 2005 13 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 1418 2307 3261 fiscal 2006 2005 2004 respectively following schedule year future minimum lease payments july 31 2006 14 income expense income consists primarily interest income short long term marketable securities gain loss attributable investments unconsolidated affiliates company accounts equity method foreign exchange gains losses income loss sale property plant equipment fiscal 2006 company foreign exchange losses 161 versus foreign exchange gain 133 fiscal 2005 also fiscal 2005 company realized gain 43829 sale marketable securities related company’s sale equity interest cedara 15 retirement plans company qualified retirement plan analogic corporation profit sharing401k plan provide retirement income eligible employees employee contributions employer contributions company employer contributions discretionary may form direct profit sharing analogic corporation notes consolidated financial statements continued contribution discretionary matching contribution determined approved board directors company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service beginning fiscal 2001 company elected match employee contributions dollar basis 3 compensation participant continued december 31 2001 period january 1 2002 july 31 2002 company elected contribute plan beginning fiscal 2003 company decided contribute 5 net income defined plan company’s contributions plan totaled 1303 1493 602 fiscal 2006 2005 2004 respectively company’s canadian subsidiary anrad corporation sponsors defined benefit retirement plan company recognizes periodic pension expense statement operations associated assets liabilities balance sheet july 31 2006 2005 prepaid accrued benefits 290 57 respectively 16 income taxes components provision income taxes operations follows income loss continuing operations income taxes domestic foreign operations follows analogic corporation notes consolidated financial statements continued components deferred tax assets liabilities follows analogic corporation notes consolidated financial statements continued reconciliation income taxes united states statutory rate effective tax rate follows company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs fiscal 2006 company recognized provisiontoreturn benefit 329 fiscal 2005 returns filed fiscal 2006 thereby providing outofperiod tax benefit july 31 2006 company net operating loss carryforwards belgium approximately 4135 expiration date july 31 2006 company state net operating losses 50 expire fiscal 2014 july 31 2006 company also state tax credit carryforwards 2534 expire 2021 management determined likely company recognize benefit certain foreign losses tax credits result valuation allowances established july 31 2006 july 31 2005 change valuation allowance fiscal 2006 primarily result additional losses belgium determination use state tax credits cannot assured fiscal 2005 company identified potential additional tax benefits realized fiscal years 2000 2004 related federal state tax credits research development expenditures study completed amended returns filed fiscal years 2000 2003 amount federal state credits claimed net thirdparty costs incurred related tax study approximately 6150 date 645 received related fiscal 2000 fiscal 2001 fiscal 2000 332 benefited tax rate 313 received fiscal 2001 fully reserved fiscal 2004 return amended returns currently irs state revenue department audits accordingly company recognize remaining tax benefits related tax credits completion irs state revenue tax audits expiration respective statutes limitations contingent thirdparty costs incurred related refunds recognized benefit recognized approximately 1200 refundable deferred tax assets include us federal state refund claims fiscal 2004 federal net operating loss carried back offset fiscal 2002 fiscal 2003 federal income tax returns expected generate refund 4918 addition state tax credits net federal tax cost 236 claimed amended state tax returns additional credits addition rd credits discussed refunds expected received completion tax audits discussed analogic corporation notes consolidated financial statements continued 17 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal 2006 fiscal 2005 company recorded asset impairment charges 1179 6182 quarters ended october 31 2005 july 31 2006 respectively b company recorded restructuring asset impairment charges 947 1988 2204 503 12085 quarters ended january 31 2005 april 30 2005 october 31 2005 january 31 2006 july 31 2006 respectively also company recorded gain sale marketable securities 27388 quarter ended april 30 2005 related company’s sale equity interest cedara analogic corporation notes consolidated financial statements continued 18 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows 19 segment geographic information company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consist two reporting segments medical imaging products consist primarily electronic systems subsystems medical imaging equipment patient monitoring bk medical ultrasound systems probes urology surgery radiology markets security technology products includes sales advanced weapon threat detection systems subsystems company’s corporate represents company’s hotel business net interest income company operations primarily analog digital converters supporting modules embedded multiprocessing equipment meet materiality requirements separate disclosure accounting policies segments described summary significant accounting policies table presents information company’s reportable segments analogic corporation notes consolidated financial statements continued fiscal 2006 includes asset impairment charges 12071 related 11580 writedown inventories capitalized software two medical ct development programs due uncertainty future use realizability 491 writedown certain assets net realizable values fiscal 2005 includes gain 43829 related company’s sale equity interest cedara asset impairment charge 3000 b includes restructuring asset impairment charges 2805 related restructuring sky computers operations fiscal 2006 c includes cash equivalents marketable securities 232188 195321 156753 fiscal 2006 2005 2004 respectively information regarding geographic areas fiscal 2006 2005 2004 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada analogic corporation notes consolidated financial statements continued 20 common stock repurchase june 7 2005 company’s board directors approved repurchase 25000 company’s common stock repurchase program company authorized repurchase next twelve months outstanding shares common stock brokers dealers public market privately negotiated transactions fiscal 2006 company repurchased 80000 shares common stock plan approximately 3883 average purchase price 4853 per share repurchase program expired june 7 2006 21 subsequent events august 2006 dispute arose company oem customer company development agreement regarding medical ct program dispute relates whether either party breached agreement company customer unable resolve differences respect agreement arbitration may result stage company cannot predict dispute resolved company time accrued expenses related dispute possible company may future incur expenses liabilities oem customer connection matter september 26 2006 company announced board directors september 20 2006 declared dividend 010 per common share payable october 18 2006 shareholders record october 4 2006 analogic corporation schedule iivaluation qualifying accounts thousands represents primarily 1587 related account receivable sahco reserved fiscal 2003 written fiscal 2004 represents increase valuation allowance resulting additional losses belgium establishment valuation allowance state tax credits b represents decrease valuation allowance singapore c represents increase valuation allowance resulting additional losses canada belgium losses singapore represents release valuation allowance ftni germany e represents release portion ftni valuation allowance index exhibits management contract compensatory plan arrangementitem 15 exhibits financial statement schedules page number 1 financial statements management’s annual report internal control financial reporting report independent registered public accounting firm consolidated balance sheets july 31 2008 2007 consolidated statements operations years ended july 31 2008 2007 2006 consolidated statements stockholders’ equity years ended july 31 2008 2007 consolidated statements cash flows years ended july 31 2008 2007 2006 notes consolidated financial statements 2 financial statement schedule iivaluation qualifying accounts schedules omitted required applicable required information furnished consolidated statements notes thereto signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated management’s annual report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect interim annual consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management participation chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting july 31 2008 based framework internal control integrated framework issued committee sponsoring organizations treadway commission company’s assessment include evaluating effectiveness internal control financial reporting recently acquired copley controls corporation “copley” copley’s subsidiary consolidated results included company’s fiscal year 2008 consolidated financial statements constituted 17 total assets july 31 2008 4 revenue year ended based assessment company’s management concluded july 31 2008 company’s internal control financial reporting effective based criteria effectiveness company’s internal control financial reporting july 31 2008 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears herein report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 151 present fairly material respects financial position analogic corporation subsidiaries july 31 2008 july 31 2007 results operations cash flows three years period ended july 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 152 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s annual report internal control financial reporting item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 17 consolidated financial statements company changed method accounting uncertain tax positions august 1 2007 discussed note 16 consolidated financial statements company changed method accounting pension obligations july 31 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements described management’s report internal control financial reporting management excluded copley controls corporation 100 owned subsidiary assessment internal control financial reporting july 31 2008 acquired company business combination fiscal year 2008 excluded elements represent controls accounts approximately 17 consolidated assets 4 consolidated revenues year ended july 31 2008 inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts september 29 2008 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements stockholders’ equity years ended july 31 2008 2007 2006 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation incorporated commonwealth massachusetts november 1967 analogic corporation subsidiaries “analogic” “company” engaged primarily design manufacture sale high performance data acquisition signal processing instruments original equipment manufacturers “oems” use advanced health security systems subsystems addition one analogic’s subsidiaries sells products name directly niche clinical ultrasound enduser markets company reports financial condition results operations fiscal year basis ending july 31st year significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries wholly owned investments companies ownership interests range 20 50 percent company exercises significant influence investee’s operating financial policies accounted using equity method investments accounted using cost method november 1 2005 company sold wholly owned subsidiary camtronics business reported discontinued operation accordance statement financial accounting standards “sfas” 144 “accounting impairment disposal longlived assets” periods presented restated accordingly reflect operations discontinued intercompany accounts transactions eliminated b inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory recorded inventory valuation provisions subsequently reversed unless inventory used disposed c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued annual provisions depreciation amortization computed accordance following ranges estimated useful lives buildings 35 40 years manufacturing equipment 4 7 years furniture fixtures computer equipment 3 8 years leasehold improvements shorter useful life lease term motor vehicles 3 5 years company reviews property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following total depreciation property plant equipment 12209 11766 11809 fiscal years 2008 2007 2006 respectively company capitalize interest fiscal years 2008 2007 2006 revenue recognition accounts receivable company recognizes product revenue accordance securities exchange commission staff accounting bulletin “sab” 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue analogic corporation notes consolidated financial statements continued recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification company’s transactions sometimes involve multiple elements ie products services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined vendor objective evidence “voe” recognized time delivery arrangement includes undelivered elements essential functionality delivered elements company defers fair value undelivered elements residual revenue allocated delivered elements fair value determined based upon price charged element sold separately sufficient evidence fair value undelivered elements revenue allocated delivered elements total consideration received deferred delivery elements objective reliable evidence fair value available maintenance service revenues recognized ratably life contract business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position “sop” 972 “software revenue recognition” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regard installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained company allocates revenue first fair value undelivered elements allocates residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term company provides engineering services customers contractual basis recognizes revenue using percentage completion method company generally estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis appropriate company sufficient basis measure progress towards completion revenue related costs deferred recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised 1 maintenance service revenues payment received services yet performed 2 revenues related delivered components analogic corporation notes consolidated financial statements continued multipleelement arrangement voe vsoe fair value available components yet delivered accepted customer revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified e warranty costs company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery f research development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries sharebased compensation overhead materials used connection research product development projects software development costs incurred subsequent establishing technological feasibility general release software products capitalized accordance sfas 86 “accounting costs computer software sold leased otherwise marketed” technological feasibility demonstrated completion detailed program design capitalized costs amortized straightline basis economic lives related products generally three years amortization expense software development expense 926 739 1157 fiscal years 2008 2007 2006 respectively included product cost sales unamortized balance capitalized software 4422 2319 july 31 2008 2007 respectively g income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs analogic corporation notes consolidated financial statements continued h net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents primarily shortterm investments government agencies discounted notes amounted 173912 226545 july 31 2008 2007 respectively j concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable cash equivalents required working capital purposes placed shortterm investments government agency discounted notes company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition k marketable securities company’s marketable securities categorized availableforsale heldtomaturity securities defined sfas 115 “accounting certain investments debt equity securities” unrealized marketable securities gains losses reflected net amount caption accumulated comprehensive income within statement stockholders’ equity realized gains losses recorded within statements operations caption income expenses purpose computing realized gains losses cost identified specific identification basis l use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates percentage completion contracts estimates fair value investments privately held companies intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes various estimates used calculation stockbased compensation actual results could differ estimates comprehensive income sfas 130 “reporting comprehensive income” established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders’ equity comprehensive income consists reported net income plus foreign currency translation gains net analogic corporation notes consolidated financial statements continued taxes changes unrealized value marketable securities net taxes actuarial gains pension plan assets net taxes july 31 2008 2007 accumulated comprehensive income stockholders equity totaled 18572 10225 respectively n sharebased compensation effective august 1 2005 company adopted provisions sfas 123r “sharebased payment” established accounting equity instruments exchanged employee services provisions sfas 123r sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant prior august 1 2005 company accounted sharebased compensation employees accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” related interpretations company also followed disclosure requirements sfas 123 “accounting stockbased compensation” therefore stockbased employee compensation expense recorded connection issuance employee director stock options stock options granted plans fixed awards exercise price equal market value common stock time grant stockbased compensation expenses related restricted stock granted cost employees reflected net income company elected adopt modified prospective transition method provided sfas 123r company estimates fair value stock options using blackscholes optionpricing model fair value company’s restricted stock awards based quoted market price common stock company recognizes associated sharebased compensation straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures fair value financial instruments carrying amounts cash equivalents receivables approximate fair value fair values marketable securities estimated based quoted market price securities p impairment longlived assets company evaluates recoverability longlived assets accordance sfas 144 “accounting impairment disposal longlived assets” sfas 144 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset compared recorded value asset q segment information company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consists three reporting segments medical imaging products consists primarily electronic systems subsystems analogic corporation notes consolidated financial statements continued medical imaging equipment patient monitoring digital radiography products consists primarily xray detectors direct digital radiography systems diagnostic interventional applications mammography orthopedic general radiology applications bk medical aps “bk medical” ultrasound systems probes urology surgery radiology markets security technology products consists advanced weapon threat detection systems subsystems r translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables payables investments included operations period occur reflected results operations income net company foreign exchange gains totaling 440 fiscal year 2008 foreign exchange gains totaling 63 fiscal year 2007 foreign exchange losses totaling 161 fiscal year 2006 business combinations accordance purchase method accounting sfas 141 “business combinations” fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business including transaction costs allocated fair value net assets acquired excess purchase price estimated fair value net assets acquired recorded goodwill part allocation purchase price company records liabilities including idle facility space certain employee severance costs accordance eitf issue 953 “recognition liabilities connection purchase business combination” intangible assets goodwill intangible assets consist intellectual property licenses capitalized software certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations analogic corporation notes consolidated financial statements continued company performs annual reviews second quarter fiscal year impairment goodwill related acquisitions whenever events changes circumstances indicate carrying value may recoverable goodwill may considered impaired company determines carrying value reporting unit including goodwill exceeds reporting unit’s fair value assessing impairment goodwill requires company make assumptions judgments regarding fair value net assets reporting units company estimates fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compares values estimated overall market capitalization u new accounting pronouncements september 2006 financial accounting standards board “fasb” issued sfas 157 “fair value measurements” sfas 157 prescribes single definition fair value price received asset sold paid transfer liability orderly transaction market participants measurement date sfas 157 effective company’s interim reporting period beginning august 1 2008 february 2008 fasb issued staff position 1 partially deferred effective date sfas 157 one year certain nonfinancial assets nonfinancial liabilities 2 removed certain leasing transactions scope sfas 157 company currently evaluating potential impact adoption sfas 157 consolidated financial position results operations cash flows february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment sfas 115” new statement allows entities choose specified election dates measure eligible financial assets liabilities fair value otherwise required measured fair value company elects fair value option eligible item changes item’s fair value subsequent reporting periods must recognized current earnings sfas 159 effective fiscal years beginning november 15 2007 company’s fiscal year ending july 31 2009 company currently evaluating potential impact adoption sfas 159 consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations” sfas 141r requires acquiring entity business combination record assets acquired liabilities assumed respective acquisition date fair values changes recognition assets acquired liabilities assumed arising contingencies changes recognition measurement contingent consideration requires expensing acquisitionrelated costs incurred sfas 141r also requires additional disclosure information surrounding business combination users entity’s financial statements fully understand nature financial impact business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company’s fiscal year ending july 31 2010 entity may apply date provisions sfas 141r impact company party business combination july 31 2009 december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners statement effective analogic corporation notes consolidated financial statements continued company beginning august 1 2009 company currently evaluating potential impact adoption sfas 160 consolidated financial position results operations cash flows april 2008 fasb issued fasb staff position “fsp” fas 1423 “determining useful life intangible assets” fsp fas 1423 amends factors entity consider developing renewal extension assumptions used determining useful lives recognized intangible assets fsp fas 1423 effective fiscal years beginning december 15 2008 company believe adoption fsp fas 1423 material impact consolidated results operations financial position cash flows may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” provide framework selecting accounting principles used preparing financial statements presented conformity us generally accepted accounting principles gaap nongovernmental entities prior issuance sfas 162 gaap hierarchy defined american institute certified public accountants’ aicpa statement auditing standards sas 69 “the meaning present fairly conformity generally accepted accounting principles” issuance sfas 162 gaap hierarchy nongovernmental entities move auditing literature accounting literature sfas 162 effective 60 days following sec’s approval public company accounting oversight board pcaob amendments au section 411 “the meaning present fairly conformity generally accepted accounting principles” company currently evaluating potential impact sfas 162 financial position results operations june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” classifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities requires included computation earnings per share pursuant twoclass method described sfas 128 “earnings per share” staff position effective financial statements issued fiscal years beginning december 15 2008 interim periods within years priorperiod earnings per share data presented adjusted retrospectively including interim financial statements summaries earnings selected financial data conform provisions staff position early application permitted company currently evaluating effect adoption fsp eitf 0361 financial position results operations cash flows v basis presentation certain prior years’ financial statement items reclassified conform current year’s presentation reclassifications impact net income 2 discontinued operations second quarter fiscal year 2006 company sold wholly owned subsidiary camtronics 40000 cash realized net proceeds 38906 transactional costs company recorded net gain sale camtronics 20207 net tax provision 8885 146 per diluted share determining gain company also provided estimated indemnification tax liabilities 2406 prior sale camtronics reported separate segment company sold camtronics operating segment better focus core lines business reported discontinued operation accordance sfas 144 “accounting impairment disposal longlived assets” periods presented revised accordingly reflect operations discontinued analogic corporation notes consolidated financial statements continued revenues net income camtronics fiscal year 2006 follows 3 sharebased payment following table presents sharebased compensation expenses continuing operations included company’s consolidated statements operations fiscal years 2008 2007 2006 company estimates fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected volatility company’s stock option’s expected term riskfree interest rate option’s expected term company’s expected annual dividend yield company believes valuation technique approach utilized develop underlying assumptions appropriate calculating fair values company’s outstanding stock options granted fiscal years 2008 2007 2006 estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions fiscal years 2008 2007 2006 follows 1 option life determined estimating expected option life using either historical data simplified method sab 107 “sharebased payment” 2 stock volatility grant determined based review experience weighted average historical daily price changes company’s common stock recent five years approximates expected option life grant analogic corporation notes consolidated financial statements continued 3 riskfree interest rate periods equal expected term share option based us treasury yield curve effect time grant stock incentive plans january 28 2008 company’s stockholders approved new sharebased director compensation plan nonemployee members company’s board directors “board” named “analogic corporation nonemployee director stock plan” “director plan” fiscal year 2008 1104 shares granted plan director plan provides annual share retainer granted participant february 1 annual share retainer calendar year 2008 value 35 participant may elect receive annual share retainer given calendar year ii annual cash retainer consists annual base cash compensation receives service board committees board applicable compensation received service chairman board committee chairman form “deferred stock units” elected participant later december 15 preceding calendar year value deferred stock units credited account change relation changes value share company’s common stock additional deferred stock units credited account based value dividend equivalents earned deferred stock units equal dividends paid corresponding number shares common stock payout deferred stock units value shall made single cash payment within thirty days following director’s termination service board sooner elected director fiscal year 2008 approximately 245 annual share retainers 13 annual cash retainers deferred approximately 4065 deferred stock units weighted average price 6335 per share dividend equivalents deferred stock units deferred approximately 13 deferred stock units fiscal year 2008 fiscal year 2007 company’s stockholders approved two sharebased compensation plans named “2007 stock option plan” “2007 restricted stock plan” company’s 2007 stock option plan options may either nonqualified options incentive stock options may granted exercise price less 100 fair market value common stock date grant less 110 fair market value case incentive stock options granted optionees holding 10 voting power company options may granted term excess ten years five years case incentive stock options granted optionees holding 10 voting power company except certain circumstances options vest based continued service optionee may vest earlier one year date grant unless otherwise provided compensation committee board “committee” specific option agreement option vest 25 number shares common stock underlying option second third fourth fifth anniversaries date grant company’s 2007 restricted stock plan recipients awarded shares common stock subject right company repurchase part shares recipient event conditions specified applicable award satisfied prior end applicable restriction period established award conditions may include achievement performance goals continued service company except certain circumstances awards vest based continued service may vest earlier three equal installments first three anniversaries date grant committee may condition award recipient competing company oneyear period following termination recipient’s employment company analogic corporation notes consolidated financial statements continued fiscal year 2008 committee granted target awards 100183 shares “20082010 award” performance contingent restricted stock company’s 2007 restricted stock plan 2111 shares forfeited shares vest specific preestablished levels performance achieved end threeyear performance cycle performance goal 20082010 award based solely cumulative growth adjusted earnings per share metric actual number shares issued determined end threeyear performance cycle range zero 200 target award 200366 shares also includes payment dividend equivalents actual number shares earned maximum compensation expense 20082010 award 11599 based weightedaverage grant date fair value 5913 per share compensation expense recognized performance period based number shares deemed probable vesting end threeyear performance cycle since still early threeyear performance cycle 63316 shares value 3744 deemed probable vesting july 31 2008 compared target award 100183 shares fiscal year 2008 1020 compensation expense recognized 20082010 award based amount shares deemed probable vesting prior fiscal year 2007 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions analogic corporation notes consolidated financial statements continued july 31 2008 1496353 shares reserved grant stock option bonus purchase plans following table sets forth stock option restricted stock transactions fiscal year 2008 weighted average fair value stock options granted fiscal years 2008 2007 2006 2246 2149 1533 per share respectively fiscal years 2008 2007 2006 total intrinsic value options exercised ie difference market price paid employee exercise options 1750 2890 4009 respectively total amount cash received exercise options 2661 5133 8772 respectively total fair value restricted stock grants vested fiscal years 2008 2007 2006 1774 2109 2410 respectively following table summarizes information stock options outstanding july 31 2008 analogic corporation notes consolidated financial statements continued july 31 2008 5812 total unrecognized compensation cost related nonvested sharebased compensation arrangements granted company’s stock option restricted stock bonus plans cost expected recognized weightedaverage period 26 years company amortizes stockbased compensation straightline method actual tax benefit realized tax deductions option exercises totaled 366 818 1402 fiscal years 2008 2007 2006 respectively 4 business combination april 14 2008 company acquired outstanding capital stock copley controls corporation “copley” copley leading supplier gradient amplifiers magnetic resonance imaging “mri” precision motion control systems used computercontrolled automation systems acquisition enable company expand product offerings oem customers pursue new opportunities asia enhance position leading provider medical subsystems mri scanners provide additional opportunities hightechnology automation market estimated purchase price net cash acquired approximately 74682 consisted 76875 cash paid upon closing 734 transaction costs primarily consisted fees incurred company financial advisory legal accounting services 1066 estimated working capital adjustment payments entire amount paid prior july 31 2008 current estimate 1000 due former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes net cash acquired 4993 reconciliation total estimated purchase price net cash acquired total amount paid july 31 2008 net cash acquired 73682 company’s consolidated financial statements include results copley date acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date analogic corporation notes consolidated financial statements continued following represents purchase price allocation april 14 2008 determining purchase price allocation company considered among factors intention use acquired assets historical estimated future demand copley products services fair value developed technology tradename intangible assets based upon relief royalty approach customer relationship backlog intangible assets based income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital ranging 155 200 discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired copley total weighted average amortization period intangible assets approximately 12 years intangible assets amortized straightline basis consistent pattern economic benefits intangible assets expected utilized based upon estimated cash flows generated assets goodwill classified within company’s medical imaging products segment connection acquisition copley company commenced integration activities resulted recognizing 1276 liabilities personnelrelated costs 150 idle facility space company expects pay liabilities associated personnelrelated costs idle facility space fiscal year 2009 approximately 50 payments made july 31 2008 following pro forma information gives effect acquisition copley acquisition occurred beginning period pro forma results shown pro forma results necessarily indicative actually would occurred acquisition effect periods presented pro forma results fiscal years 2008 2007 include 3661 expenses related amortization backlog intangible asset inventory fair value adjustment purchase accounting backlog inventory valuation adjustment completely amortized 6 3 months respectively date acquisition analogic corporation notes consolidated financial statements continued 5 voluntary retirement restructuring costs may 2008 company notified approximately 32 employees various departments organization would terminated july 31 2008 cost associated terminations included severance personnel related costs 597 recorded voluntary retirement restructuring cost fiscal year 2008 june 4 2008 company announced voluntary retirement program us employees retirements expected substantially completed september 30 2008 total costs program 52 employees participated program including severance personnel related costs approximately 3419 recorded voluntary retirement restructuring cost fiscal year 2008 part program edmund f becker jr former executive vice president chief operating officer company voluntarily retired employment company july 31 2008 4016 voluntary retirement restructuring costs totaling fiscal year 2008 3624 46 77 269 recorded medical imaging products digital radiography products bk medical security technology products respectively fiscal year 2006 company decided close business operations wholly owned subsidiary anasky based continued lower expected sales closing anasky involved termination approximately 40 employees engaged product development sales administrative activities accordance sfas 146 “accounting costs associated exit disposal activities” company recorded voluntary retirement restructuring cost 906 fiscal year 2006 severance following table summarizes accrued voluntary retirement restructuring costs activity july 31 2005 july 31 2008 1426 copley acquisition restructuring accrual included copley purchase price allocation included operating expenses company’s consolidated statements operations caption “voluntary retirement restructuring costs” analogic corporation notes consolidated financial statements continued cash expenditures subsequent july 31 2008 approximate 4980 employee severance paid within next 12 months 6 asset impairment charges cost sales fiscal years 2007 2006 company incurred asset impairment charges cost sales company’s consolidated statements operations caption “asset impairment charges” follows assets related digital radiography systems business result continuing losses digital radiography systems business related business outlook company evaluated net realizability assets related business october 31 2006 result company recorded asset impairment charge 9705 associated writedown company’s digital radiography systems business assets estimated fair values group based upon present value estimated future cash flows business 9705 asset impairment charges 8625 recorded cost sales 1080 recorded operating expenses amounts recorded cost sales included 4144 related inventory 4191 related software license 290 related assets fiscal year 2007 company continued consider several alternatives regarding reduce future losses digital radiography systems business august 2007 company notified customers subsidiary anexa corporation “anexa” part digital radiography products segment sales marketing anexa products would cease immediately new enduser customers analogic would continue service support products currently existing customers inventory ct medical program conjunction ongoing discussions company oem customer fiscal year 2006 significant uncertainty arose respect viability ct medical development program realizability related assets result company recorded asset impairment charges 5772 fourth quarter fiscal year 2006 writedown inventories inventory anasky fiscal year 2006 company decided close business operations anasky based continued lower expected sales closing anasky involved writedown certain inventory analogic corporation notes consolidated financial statements continued accordance sfas 146 company recorded total asset impairment charge 1589 fiscal year 2006 writedown inventory within cost sales consolidated statements operations caption “asset impairment charges” operating expenses fiscal years 2007 2006 company recorded asset impairment charges operating expense company’s consolidated statements operations caption “asset impairment charges” follows assets related digital radiography systems business 9705 asset impairment charges related digital radiography systems business 1080 recorded operating expenses 1080 asset impairment charge included 696 related capitalized software development time 384 related assets sahco company 25 45 equity interest sahco located people’s republic china july 31 2008 2007 respectively company reviewed investment otherthantemporary impairment accordance apb 18 “the equity method accounting investment common stock” determined january 31 2006 investment sahco impaired based current fair value second quarter fiscal year 2006 company recorded asset impairment charge 275 related investment represented remaining book value investment see note 12 discussion regarding sahco pds company reviewed investment pds otherthan temporary impairment accordance sfas 115 “accounting certain investments debt equity securities” determined october 31 2005 investment pds impaired based current fair value therefore recorded asset impairment charge 216 quarter ended october 31 2005 fiscal year 2005 company recorded asset impairment charges pds 2160 based current fair value see note 12 discussion regarding pds analogic corporation notes consolidated financial statements continued capitalized software ct medical program company capitalized 5808 software development costs 3850 related medical ct workstation project 1958 related medical ct development program objective medical ct workstation program broaden current market opportunity company’s ct medical scanner back end subsystem developing front end system would provide complete solution customers fourth quarter fiscal year 2006 management concluded significant additional investment would required complete development efforts frontend system decided longer pursue development efforts recorded impairment charge 3850 regard medical ct development program fourth quarter fiscal year 2006 company evaluated viability capitalized software respect future use realizability based evaluation company recorded impairment charge 1958 anasky fiscal year 2006 company decided close business operations anasky based continued lower expected sales closing anasky involved writedown certain capital assets accordance sfas 146 company recorded total asset impairment charge 310 fiscal year 2006 writedown capital assets within operating expenses consolidated statements operations caption “asset impairment charges” november 1 2006 company sold certain assets liabilities anasky including obligation service previously sold products 405 includes 225 cash paid closing 150 cash paid december 2006 assumption 30 liabilities company recorded gain 205 sale fiscal year 2007 7 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method analogic corporation notes consolidated financial statements continued following table sets forth computation basic diluted net income per share fiscal years 2008 2007 2006 antidilutive shares related outstanding stock options may become dilutive future years 8 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals analogic corporation notes consolidated financial statements continued customers company two customers set forth table accounted 10 net product engineering revenue fiscal years 2008 2007 2006 customer 1’s product engineering revenues medical imaging products digital radiography products segment customer 2’s product engineering revenues security technology products segment company’s ten largest customers group accounted 67 68 70 company’s net product engineering revenue fiscal years 2008 2007 2006 respectively customers accounted 10 company’s net accounts receivable july 31 2008 2007 although company seeking broaden customer base company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected united states foreign regulatory clearances approvals company’s products used number customers production medical devices subject high level regulatory oversight delay obtaining inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained might withdrawn modified medical devices cannot marketed united states without clearance fda medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling state may also regulate manufacture sale use medical devices medical devices also subject approval regulation foreign regulatory safety agencies analogic corporation notes consolidated financial statements continued 9 marketable securities marketable securities categorized availableforsale securities summarized follows investments held july 31 2008 due within one year realized gains losses marketable securities company sold marketable securities periods presented cost approximated fair value maturity dates 10 balance sheet information additional information certain balance sheet accounts follows years ended inventories balance increase 24784 79197 july 31 2008 54413 july 31 2007 due primarily acquisition copley accounted 17493 inventories july 31 2008 also contributing increase increased production volumes foreign currency exchange analogic corporation notes consolidated financial statements continued 11 goodwill intangible assets carrying amount goodwill july 31 2008 3534 acquisition copley completed april 14 2008 increase intangible assets 54905 july 31 2008 8264 july 31 2007 due acquisition copley april 14 2008 intangible assets include value assigned intellectual property technology patents customer contracts relationships trade name estimated useful lives intangible assets excluding trade name considered indefinite life 05 14 years intangible assets july 31 2008 2007 consisted following amortization expense related acquired intangible assets 2441 1662 1626 fiscal years 2008 2007 2006 respectively estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows 12 investments advances affiliated companies sahco january 30 2008 company entered shares purchase agreement “shares purchase agreement” chonqing anke medical equipment co “ca” pursuant company agreed sell ca 20 existing 45 equity interest sahco aggregate cash consideration us 2000 upon conclusion transaction july 2008 analogic held 25 equity interest sahco company recognized 2000 gain investment fiscal year 2008 received july 2008 prior fiscal year 2008 company determined 275 receivables due sahco probable collected result recorded bad debt expense 275 december 2007 company collected approximately 132 original receivable due sahco reduced bad debt allowance analogic corporation notes consolidated financial statements continued 132 fiscal year 2008 january 30 2008 conjunction shares purchase agreement company ca entered debt repayment agreement remaining outstanding receivable 143 additional 500 due license agreement company recorded revenue prior period due uncertainty collected 643 received company february 2008 company recorded reduction bad debt allowance 143 revenue 500 fiscal year 2008 fiscal year 2006 company recorded 455 expense share equity losses 474 income share gains sahco fiscal year 2005 also fiscal year 2006 company reviewed investment otherthantemporary impairment accordance apb 18 determined investment sahco impaired based fair value company recorded asset impairment charge related investment 275 represented company’s book value carrying value company’s investment sahco 0 july 31 2008 2007 pds privately held company develops proprietary detection systems highperformance positron emission tomography “pet” rapidly growing medical diagnostic imaging modality pet scanning tool diagnosis management cancer specifically detecting earlystage tumors determining tissue characteristics treatment prior february 2006 company accounted investment pds cost method february 2006 company elected convert outstanding principal represented convertible promissory note exercise warrant received shares pds series b convertible participating preferred stock increasing company’s equity interest pds 44 following increase equity interest company reevaluated accounting investment pds including consideration fasb interpretation “fin” 46 revised december 2003 “consolidation variable interest entities interpretation arb 51” eitf 0214 “whether investor apply equity method accounting investments common stock” determined investment accounted equity method company evaluated change cost equity method apb 18 determined adjustment required carrying value company’s investment pds 0 july 31 2008 2007 fiscal year 2008 company’s equity interest pds declined 26 july 31 2008 due capital restructuring fiscal year 2008 pursuant capital restructuring fiscal year 2008 company surrendered shares pds series b convertible participating preferred stock held company converted remainder pds series b convertible participating preferred stock held company pds common stock converted 4483 outstanding notes pds common stock certain contractual arrangements pursuant company would certain circumstances right could required purchase outstanding equity pds terminated pds company also entered marketing support agreement general release claims subject infusion additional capital third party shareholder pds company’s equity interest could reduced approximately 20 bioimaging research inc “bir” may 23 2007 bir company approximately 17 ownership interest declared dividend 1429 paid company may 24 2007 investment accounted cost method april 30 2007 book value 200 may 24 2007 company sold entire ownership interest bir approximately 3714 2807 paid cash upon closing remaining 907 held escrow period two years date closing secure analogic corporation notes consolidated financial statements continued indemnification claims company recorded income taxes sale related dividend income approximately 4036 fourth quarter fiscal year 2007 based cash received escrowed balance less amounts used satisfy indemnification claims recognized income cash received september 4 2007 company received 84 907 held escrow recorded gain sale investments fiscal year 2008 13 commitments guarantees company agreements whereby indemnifies officers directors certain events occurrences officer director serving company’s request capacity term indemnification period officer’s director’s lifetime potential amount future payments company could required make indemnification agreements unlimited also extent permitted massachusetts law company’s articles organization require company indemnify directors company’s bylaws require company indemnify present former directors officers company also permit indemnification employees agents company board time authorizes indemnification instance however indemnification granted director otherwise entitled thereto determined committed breach loyalty company stockholders b committed acts omissions good faith involved intentional misconduct knowing violation law c derived improper personal benefit connection particular transaction claim indemnification made person covered said agreements andor relevant provisions company’s articles organization bylaws company believes estimated exposure indemnification obligations currently minimal accordingly company liabilities recorded indemnity agreements requirements july 31 2008 november 2002 fasb issued fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” fin 45 requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee following summary agreements company determined within scope fin 45 company’s standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2008 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable analogic corporation notes consolidated financial statements continued following table presents company’s product warranty liability years ended company currently approximately 24800 revolving credit facilities various banks available direct borrowings direct borrowings fiscal years 2008 2007 2006 14 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 2205 1625 1418 fiscal years 2008 2007 2006 respectively following schedule year future minimum lease payments july 31 2008 july 31 2008 company outstanding noncancelable purchase orders aggregating 46991 purchase orders manufacturing nonmanufacturing related goods services 15 income expense income consists primarily interest income short longterm marketable securities gain loss attributable investments unconsolidated affiliates company accounts cost equity method foreign exchange gains losses income loss sale property plant equipment company recorded gain sale investments fiscal year 2008 2000 sale 20 45 equity interest sahco remaining interest 25 company recorded income taxes sale investment bir related dividend income approximately 84 4036 fiscal years 2008 2007 respectively based cash received see note 12 discussion transactions analogic corporation notes consolidated financial statements continued fiscal years 2008 2007 company foreign exchange gains 440 63 respectively versus foreign exchange loss 161 fiscal year 2006 respect intercompany transactions 16 retirement plans 401k plan company qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions employer contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service beginning fiscal year 2003 company decided contribute 5 net income defined plan beginning fiscal year 2007 company decided contribute plan greater 5 net income defined plan 1200 company review plan board approval made decision increase contribution fiscal year 2007 1200 1471 company’s contributions plan totaled 1285 1471 1303 fiscal years 2008 2007 2006 respectively beginning fiscal year 2009 company begin matching employee contributions 4 eligible compensation defined benefit retirement plan company’s canadian subsidiary anrad corporation sponsors defined benefit retirement plan called anrad retirement plan “anrad plan” anrad plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 company recognizes periodic pension expense consolidated statement operations associated assets liabilities consolidated balance sheet effective july 31 2007 company adopted sfas 158 “employer’s accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” incremental effects initial adoption sfas 158 company’s consolidated balance sheet july 31 2007 follows analogic corporation notes consolidated financial statements continued fiscal year 2008 balance accumulated comprehensive income increased 271 net tax provision 178 due actuarial gains anrad plan participants number participants follows july 31 2008 estimated net prior service cost net transition asset net actuarial loss anrad plan expected amortized stockholders’ equity pension cost fiscal year 2009 9 26 0 respectively comparable amortized amounts net prior service cost net transition asset net actuarial loss fiscal year 2008 9 25 15 respectively net periodic benefit cost actuarial assumptions actuarial assumptions anrad plan described discount rates july 31 used measure yearend benefit obligations earnings effects subsequent year determine expected longterm rate return anrad plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company amortizes experienced gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees analogic corporation notes consolidated financial statements continued funding policy funding policy anrad plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts company may determine appropriate fiscal years 2008 2007 2006 company made contributions anrad plan 1275 1531 1045 respectively made payments benefits administrative expenses 449 687 288 respectively fiscal year 2009 company expects make contributions payments benefits administrative expenses 1219 147 respectively benefit obligations benefit obligations described following tables accumulated projected benefit obligations “abo” “pbo” represent obligations pension plan past service measurement date abo present value benefits earned date benefits computed based current compensation levels pbo abo increased reflect expected future compensation projected benefit obligation accumulated benefit obligation abo balances anrad plan 2438 2433 july 31 2008 2007 respectively fair value plan assets analogic corporation notes consolidated financial statements continued plan asset allocation anrad plan assets held trust follows pension committee anrad plan sets investment policies strategies anrad plan longterm strategic investment objectives include preserving funded status anrad plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range estimated future benefit payments estimated future benefit payments anrad plan follows prepaid pension asset company’s recorded assets liabilities anrad plan follows analogic corporation notes consolidated financial statements continued 17 income taxes components provision benefit income taxes operations follows income loss continuing operations income taxes domestic foreign operations follows analogic corporation notes consolidated financial statements continued components deferred tax assets liabilities follows analogic corporation notes consolidated financial statements continued reconciliation income taxes united states statutory rate effective tax rate follows company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs july 31 2008 company net operating loss carryforwards belgium germany approximately 5201 360 respectively expiration date july 31 2008 company also state tax credit carryforwards 4348 expire 2023 management determined likely company recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2008 july 31 2007 change valuation allowance fiscal year 2008 primarily result income belgium currency effects weaker us dollar addition state tax credits use cannot assured reasonably possible valuation allowance belgium could reverse within next twelve months company adopted fin 48 “accounting uncertainty income taxes” interpretation sfas 109 “accounting income taxes” beginning fiscal year 2008 fin 48 requires management perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns result implementation fin 48 company recognized net increase 2239 august 1 2007 retained earnings balance consisted noncurrent asset accrued income taxes 3806 1567 respectively adoption date august 1 2007 total amount gross unrecognized tax benefits excludes interest penalties discussed approximately 17359 unrecognized tax benefits increased 18296 july 31 2008 recognized future period timing estimable net unrecognized tax benefit approximately 18296 would reduce company’s effective tax rate analogic corporation notes consolidated financial statements continued following table summarizes changes company’s unrecognized income tax benefits fiscal year 2008 refundable deferred income taxes july 31 2008 consisted deferred tax assets 6742 refundable income tax assets 10687 refundable income tax assets include federal state refunds expected received within next twelve months noncurrent assets include receivable 1105 state tax refunds result rd credit claims expected received within next twelve months analogic subsidiaries subject us federal income tax well income tax multiple state foreign jurisdictions company concluded us federal income tax matters fiscal year 2002 july 31 2008 analogic audit internal revenue service fiscal years 2003 2004 2007 yet known audits completed although audits fiscal years 2003 2004 reasonably expected completed within next twelve months company also unresolved state tax audit currently appeal reasonably possible reduction unrecognized tax benefits may occur result one matters concluding quantification estimated range cannot made time next four fiscal quarters statute limitations may close 2005 federal state income tax returns reasonably expected net unrecognized benefits 420 jurisdictions may recognized within next four quarters within next four fiscal quarters statute limitations close 2003 2004 tax returns filed various foreign jurisdictions result reasonably expected net unrecognized tax benefits foreign jurisdictions may recognized within next four fiscal quarters recognition tax benefits expected material impact company’s financial statements company accrues interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense date adoption fin 48 august 1 2007 july 31 2008 company approximately 1025 1460 respectively accrued interest unrecognized tax benefits analogic corporation notes consolidated financial statements continued 18 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal year 2008 fiscal year 2007 company recorded asset impairment charge 8625 quarter ended october 31 2006 b company recorded asset impairment charge 9705 quarter ended october 31 2006 voluntary retirements restructuring costs 4016 quarter ended july 31 2008 also company recorded gains sale investments follows • 4036 84 quarters ended july 31 2007 october 31 2007 related company’s sale equity interest bir • 2000 quarter ended july 31 2008 related sale 20 company’s 45 equity interest sahco remaining interest 25 19 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows analogic corporation notes consolidated financial statements continued supplemental disclosure noncash investing activities connection acquisition copley company currently estimates pay 1000 former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes payment made within ten business days copley files tax return tax period ended acquisition date april 14 2008 20 segment geographic information company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consists three reporting segments medical imaging products consists primarily electronic systems subsystems medical imaging equipment patient monitoring digital radiography products consists primarily xray detectors direct digital radiography systems diagnostic interventional applications mammography orthopedic general radiology applications bk medical ultrasound systems probes urology surgery radiology markets security technology products consists advanced weapon threat detection systems subsystems company’s corporate segment represents company’s hotel business net interest income analogic corporation notes consolidated financial statements continued table presents information company’s reportable segments includes copley revenues 18300 fiscal year 2008 b includes voluntary retirement restructuring costs 3624 fiscal year 2008 fiscal year 2006 includes asset impairment charges 12071 related writedown 11580 inventories capitalized software two medical ct development programs due uncertainty future use realizability 491 related writedown certain assets net realizable values includes copley loss income taxes 2328 fiscal year 2008 c includes voluntary retirement restructuring costs 46 fiscal year 2008 includes asset impairment charges 9705 related company’s digital radiography systems business fiscal year 2007 includes voluntary retirement restructuring costs 77 fiscal year 2008 e includes voluntary retirement restructuring costs 269 fiscal year 2008 analogic corporation notes consolidated financial statements continued f includes gains sales interests sahco bir 2000 84 respectively well interest income 6699 fiscal year 2008 includes gains sales anasky assets interest bir 205 4036 respectively well interest income 12155 fiscal year 2007 includes interest income 9643 partially offset restructuring asset impairment charges 2805 related restructuring anasky operations fiscal year 2006 g includes copley assets 88732 july 31 2008 includes 44574 net intangible assets 3534 goodwill h includes cash equivalents marketable securities 132433 193654 july 31 2008 2007 respectively information regarding geographic areas fiscal years 2008 2007 2006 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada 21 common stock repurchases june 7 2005 board approved repurchase 25000 company’s common stock repurchase program company authorized repurchase next twelve months outstanding shares common stock brokers dealers public market privately negotiated transactions fiscal year 2006 company repurchased 80000 shares common stock plan approximately 3883 average purchase price 4853 per share repurchase program expired june 7 2006 june 7 2007 company announced board june 5 2007 authorized repurchase 60000 company’s common stock repurchase program funded using company’s available cash fourth quarter fiscal year 2007 company repurchased 818030 shares common stock repurchase program 60000 average purchase price 7335 per share repurchase program completed july 26 2007 analogic corporation notes consolidated financial statements continued 22 related party transactions july 31 2008 2007 company net receivable 245 0 respectively affiliate sahco sales sahco fiscal years 2008 2007 2006 approximately 989 94 1102 respectively fiscal years 2008 2007 2006 ross brown serves board received payments company 4 216 40 respectively consulting services provided company fiscal year 2007 john tarello served board received payment 200 company consulting services provided company fiscal years 2007 2006 company received approximately 2 59 respectively neurologica corporation bernard gordon member board executive chairman related primarily certain contract manufacturing activities 23 subsequent events september 25 2008 company announced board september 22 2008 declared dividend 010 per common share payable october 20 2008 shareholders record october 6 2008 analogic corporation schedule iivaluation qualifying accounts thousands represents increase valuation allowance belgium losses state tax credits b represents decrease valuation allowance state tax losses c represents increase valuation allowance resulting additional unused state tax credits represents decrease valuation allowance belgium e represents increase valuation allowance resulting additional losses belgium establishment valuation allowance state tax credits f represents decrease valuation allowance singapore index exhibits management contract compensatory plan arrangementitem 15 exhibits financial statement schedules page number 1 financial statements report independent registered public accounting firm consolidated balance sheets july 31 2010 2009 consolidated statements operations years ended july 31 2010 2009 2008 consolidated statements changes stockholders’ equity years ended july 31 2010 2009 2008 consolidated statements cash flows years ended july 31 2010 2009 2008 notes consolidated financial statements 2 financial statement schedule iivaluation qualifying accounts schedules omitted required applicable required information furnished consolidated statements notes hereto b index exhibits immediately following company’s financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position analogic corporation subsidiaries july 31 2010 july 31 2009 results operations cash flows three years period ended july 31 2010 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 present fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts september 23 2010 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2010 2009 2008 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation “company” incorporated commonwealth massachusetts november 1967 company high technology company designs manufactures advanced medical imaging security systems subsystems sold original equipment manufacturers “oems” end users primarily healthcare airport security markets company recognized worldwide advancing stateoftheart technology areas medical computed tomography “ct” magnetic resonance imaging “mri” digital mammography specialized ultrasound automatic explosives detection systems airport security company’s oem customers incorporate technology systems turn sell various medical security applications company also sells ultrasound products directly specialized clinical enduser markets direct worldwide sales force brand name bk medical “bk medical” company reports financial condition results operations fiscal year basis ending july 31 st year significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries wholly owned investments companies ownership interests range 10 50 percent company exercises significant influence investee’s operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory reserves based upon age inventory lower cost market along significant management judgments concerning future demands inventory recorded inventory valuation provisions subsequently reversed unless inventory used disposed c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued annual provisions depreciation amortization computed accordance following ranges estimated useful lives company reviews property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following total depreciation property plant equipment 12717 13373 12209 fiscal years 2010 2009 2008 respectively company capitalize interest fiscal years 2010 2009 2008 revenue recognition accounts receivable company recognizes revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title analogic corporation notes consolidated financial statements continued risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification company’s transactions sometimes involve multiple elements ie products services inception agreement company allocates arrangement consideration deliverable qualifying separate unit accounting arrangement based relative selling price company determines selling price using vendor specific objective evidence “vsoe” exists otherwise third party evidence “tpe” neither vsoe tpe selling price exists unit accounting company uses estimated selling price “esp” company generally expects able establish tpe due nature markets company competes company typically determine selling price using vsoe available esp vsoe generally limited price charged similar product service sold separately applicable stated substantive renewal rate agreement product service seldom sold separately unlikely company determine vsoe product service company defines vsoe median price recent standalone transactions priced within narrow range defined company stated renewal rates contracts tpe determined based prices charged competitors company similar deliverable sold separately noted company typically able use tpe company usually able obtain sufficient information competitor pricing substantiate tpe company unable establish selling price using vsoe tpe order received materially modified july 31 2009 company use esp allocation arrangement consideration objective esp determine price company would transact product service sold company standalone basis company’s determination esp involves weighting several factors based specific facts circumstances arrangement specifically company consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts company’s ongoing pricing strategy policies company determine esp deliverables future agreements based specific facts circumstances arrangement company plans analyze selling prices used allocation arrangement consideration least annually selling prices analyzed frequent basis significant change company’s business necessitates timely analysis company experiences significant variances selling prices maintenance service revenues recognized ratably life contract company provides engineering services customers contractual basis recognizes revenue using percentage completion method completed contract method company generally analogic corporation notes consolidated financial statements continued estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues company accrues estimated losses immediately unbilled receivables included within accounts receivable noncurrent assets consolidated balance sheets deferred revenue comprised maintenance service revenues payment received services yet performed revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified e warranty costs company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery f research development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries sharebased compensation overhead materials used connection research product development activities research product development costs related nonrecurring engineering projects undertaken customers reclassified engineering cost sales project accounted percentage completion method deferred costs project accounted completed contract method software development costs incurred subsequent establishing technological feasibility general release software products capitalized technological feasibility demonstrated completion detailed program design capitalized costs amortized straightline basis economic lives related products generally three years amortization expense software development expense 1921 809 926 fiscal years 2010 2009 2008 respectively included product cost sales unamortized balance capitalized software 3223 5037 july 31 2010 2009 respectively g income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences analogic corporation notes consolidated financial statements continued events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs h net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents primarily shortterm investments certificates deposit 100 insured federal depository insurance corporation “fdic” july 31 2010 government agency discounted notes july 31 2009 amounted 169254 119855 july 31 2010 2009 respectively j concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable cash equivalents required working capital purposes placed shortterm investments government agency discounted notes certificates deposit instruments 100 insured fdic money market funds banks meet stringent credit rating requirements company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition k marketable securities company’s marketable securities categorized availableforsale heldtomaturity securities unrealized marketable securities gains losses reflected net amount caption “accumulated comprehensive income” within consolidated statements changes stockholders’ equity availableforsale securities realized gains losses recorded within statements operations caption “other income expense” purpose computing realized gains losses cost identified specific identification basis l use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported analogic corporation notes consolidated financial statements continued amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates percentage completion contracts estimates fair value investments privately held companies intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes various estimates used calculation sharebased compensation actual results could differ estimates comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income consists reported foreign currency translation gains losses net taxes changes unrealized value marketable securities net taxes actuarial gains losses pension plan assets net taxes july 31 2010 2009 accumulated comprehensive income stockholders’ equity totaled 4722 10096 respectively n sharebased compensation company accounts sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant company estimates fair value stock options using blackscholes valuation model fair value company’s restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards company recognizes associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date related compensation cost probable amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned fair value financial instruments carrying amounts cash equivalents receivables approximate fair value due shortterm nature fair values marketable securities estimated based quoted market price securities analogic corporation notes consolidated financial statements continued p impairment longlived assets company evaluates recoverability longlived assets recognizing impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset compared recorded value asset q segment information company operates primarily within two major markets medical technology security technology medical technology consists three reporting segments ct mri formerly medical imaging products consists primarily electronic systems subsystems ct mri medical imaging equipment sold primarily original equipment manufacturers oems specialized ultrasound formerly bk medical ultrasound systems probes urology ultrasoundguided surgery anesthesia general radiology markets sold primarily direct sales force digital radiography consists primarily stateoftheart direct conversion amorphous seleniumbased digital flatpanel xray detectors diagnostic interventional applications mammography sold oems security technology consists advanced weapon threat detection aviation security systems subsystems sold primarily oem customer r translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables payables investments included operations period occur reflected results operations caption “other net” company foreign exchange losses totaling 612 828 fiscal years 2010 2009 respectively foreign exchange gains 440 fiscal year 2008 business combinations accordance purchase method accounting fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business prior august 1 2009 including transaction costs allocated fair value net assets acquired excess purchase price estimated fair value net assets acquired recorded goodwill part allocation purchase price company records liabilities include idle facility space certain employee severance costs intangible assets goodwill intangible assets consist intellectual property licenses capitalized software certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog analogic corporation notes consolidated financial statements continued developed technology assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations company performs annual reviews second quarter fiscal year impairment goodwill indefinite lived intangible assets related acquisitions whenever events changes circumstances indicate carrying values may recoverable goodwill may considered impaired company determines carrying value reporting unit including goodwill exceeds reporting unit’s fair value assessing impairment goodwill requires company make assumptions judgments regarding fair value net assets reporting units company estimates fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compares values estimated overall market capitalization indefinite lived intangible asset may considered impaired company determines carrying value exceeds assets fair value assessing impairment indefinite lived intangible asset requires company make assumptions judgments regarding fair value asset using relief royalty approach valuation technique u new accounting pronouncements recently adopted hierarchy generally accepted accounting principles june 2009 financial accounting standards board “fasb” released fasb accounting standards codification hierarchy generally accepted accounting principles “codification” effective financial statements issued interim annual periods ending september 15 2009 codification change gaap significantly change way accounting literature organized combining authoritative standards comprehensive topically organized database existing accounting standards documents superseded accounting literature included codification considered nonauthoritative guidance issued sec company adopted provisions guidance quarter ended october 31 2009 impact company’s financial position results operations cash flows fair value effective august 1 2009 company adopted fasb guidance requiring disclosures fair value financial instruments interim annual reporting periods effective interim reporting periods ending june 15 2009 adoption material impact company’s financial position results operations cash flows analogic corporation notes consolidated financial statements continued august 2009 fasb issued update provides clarification guidance regarding value liability quoted price active market available liability changes result update effective company november 1 2009 company’s adoption changes material effect financial position results operations cash flows january 2010 fasb issued updated guidance related fair value measurements disclosures requires reporting entity disclose separately amounts significant transfers level 1 level 2 fair value measurements describe reasons transfers addition reconciliation fair value measurements using significant unobservable inputs level 3 reporting entity disclose separately information purchases sales issuances settlements gross basis rather one net number updated guidance also requires entity provide fair value measurement disclosures class assets liabilities disclosures valuation techniques inputs used measure fair value recurring nonrecurring fair value measurements level 2 level 3 fair value measurements updated guidance effective interim annual financial reporting periods beginning december 15 2009 except disclosures purchases sales issuances settlements roll forward activity level 3 fair value measurements effective fiscal years beginning december 15 2010 interim periods within fiscal years company expect adoption updated guidance material impact financial position results operations cash flows february 2007 fasb issued guidance allows entities choose specified election dates measure eligible financial assets liabilities fair value otherwise required measured fair value company elects fair value option eligible item changes item’s fair value subsequent reporting periods must recognized current earnings company adopted guidance august 1 2008 without impact company’s financial position results operations cash flows business combinations noncontrolling interests effective august 1 2009 company adopted fasb guidance requires acquiring entity business combination record assets acquired liabilities assumed respective acquisition date fair values changes recognition assets acquired liabilities assumed arising contingencies changes recognition measurement contingent consideration requires expensing acquisitionrelated costs incurred guidance also requires additional disclosure information surrounding business combination users entity’s financial statements fully understand nature financial impact business combination guidance applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company’s fiscal year 2010 effective august 1 2009 company adopted fasb guidance establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated guidance also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners guidance effective beginning first annual reporting period began december 15 2008 adoption guidance material impact company’s financial position results operations cash flows effective august 1 2009 company adopted fasb guidance amending factors considered developing renewal extension assumptions used determine useful life recognized analogic corporation notes consolidated financial statements continued intangible asset requiring enhanced related disclosures guidance improves consistency useful life recognized intangible asset period expected cash flows used measure fair value asset guidance must applied prospectively intangible assets acquired subsequent fiscal years beginning december 15 2008 although future transactions involving intangible assets may affected guidance impact company’s financial position results operations cash flows fiscal year 2010 effective august 1 2009 company adopted fasb guidance amends clarifies initial recognition measurement subsequent measurement accounting related disclosures assets liabilities arising contingencies business combination impact adoption company’s consolidated financial statements largely depend size nature business combinations earnings per share effective august 1 2009 company adopted fasb guidance classifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities requires included computation earnings per share pursuant twoclass method guidance effective financial statements issued fiscal years beginning december 15 2008 interim periods within years priorperiod earnings per share data presented adjusted retrospectively including interim financial statements summaries earnings selected financial data conform guidance early application permitted adoption guidance material impact company’s financial position results operations cash flows revenue recognition october 2009 fasb issued amendment eliminates residual method allocation multipledeliverable revenue arrangements requires arrangement consideration allocated inception arrangement deliverables using relative selling price method amendment also establishes selling price hierarchy determining selling price deliverable includes 1 vendor specific objective evidence “vsoe” available 2 thirdparty evidence “tpe” vsoe evidence available 3 estimated selling “esp” price neither vsoe tpe available additionally amendment expands disclosure requirements related vendor’s multipledeliverable revenue arrangements amendment effective company august 1 2010 however company elected early adopt permitted amendment prospectively applied provisions amendment revenue arrangements entered materially modified july 31 2009 adoption amendment material impact company’s financial position results operations cash flows october 2009 fasb issued amendment accounting model revenue arrangements include tangible products software elements tangible products containing software nonsoftware components function together deliver tangible product’s essential functionality longer within scope software revenue guidance amendment effective company august 1 2010 however company elected early adopt permitted amendment prospectively applied provisions amendment revenue arrangements entered materially modified july 31 2009 adoption amendment material impact company’s financial position results operations cash flows analogic corporation notes consolidated financial statements continued yet effective special purpose entities june 2009 fasb issued guidance eliminates concept qualified specialpurpose entity related guidance creates stringent conditions reporting transfer portion financial asset sale clarifies saleaccounting criteria changes initial measurement transferor’s interest transferred financial assets guidance effective beginning first annual reporting period begins november 15 2009 company expect adoption guidance material impact financial position results operations cash flows june 2009 fasb issued guidance requires former qualified specialpurpose entities evaluated consolidation changes approach determining variable interest entity’s “vie” primary beneficiary requires companies frequently reassess whether must consolidate vies guidance effective beginning first annual reporting period begins november 15 2009 company expect adoption guidance material impact financial position results operations cash flows revenue recognition march 2010 fasb issued guidance related revenue recognition applies arrangements milestones relating research development deliverables guidance provides criteria must met recognize consideration contingent upon achievement substantive milestone entirety period milestone achieved guidance effective company august 1 2010 expected material impact financial position results operations cash flows v basis presentation certain financial statement items reclassified conform current period presentation 2 sharebased payment following table presents sharebased compensation expenses continuing operations included company’s consolidated statements operations fiscal years 2010 2009 2008 analogic corporation notes consolidated financial statements continued company estimates fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected volatility company’s stock option’s expected term riskfree interest rate option’s expected term company’s expected annual dividend yield company believes valuation technique approach utilized develop underlying assumptions appropriate calculating fair values company’s outstanding stock options granted fiscal years 2010 2009 2008 company estimates fair value performance based restricted stock restricted stock units market conditions based use montecarlo simulation model estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions fiscal years 2010 2009 2008 follows 1 option life determined estimating expected option life using historical data 2 stock volatility grant determined based review experience weighted average historical daily price changes company’s common stock recent five years approximates expected option life grant 3 riskfree interest rate periods equal expected term stock option based us treasury yield curve effect time grant stock incentive plans january 29 2010 company’s stockholders approved new sharebased compensation plan named “2009 stock incentive plan” company’s 2009 stock incentive plan 1600000 shares company’s common stock 05 par value per share may awarded awards may form stock options stock appreciation rights “sars” shares restricted stock restricted stock units stockbased awards stock options granted 2009 stock incentive plan may granted exercise price less 100 fair market value common stock date grant options may granted term excess ten years except certain circumstances options vest based continued service optionee may vest earlier one year date grant sars granted 2009 stock incentive plan must measurement price less 100 fair market value date grant sars may granted term excess ten years restricted stock may granted subject company’s right repurchase part shares issue price stated formula price require forfeiture shares issued cost recipient event conditions grant satisfied prior end restriction period conditions may include achievement performance goals continued service company except certain circumstances restricted stock vests solely based passage time vest prior first anniversary date grant onethird vested prior second anniversary date grant twothirds vested prior third anniversary date grant analogic corporation notes consolidated financial statements continued january 28 2008 company’s stockholders approved new sharebased director compensation plan nonemployee members company’s board directors “board” named “analogic corporation nonemployee director stock plan” “director plan” fiscal years 2009 2008 2800 1104 shares respectively granted plan director plan provides annual share retainer granted participant february 1 annual share retainer calendar years 2010 2009 value 3500 participant may elect receive annual share retainer given calendar year ii annual cash retainer consists annual base cash compensation receives service board committees board applicable compensation received service chairman board committee chairman form “deferred stock units” elected participant later december 15 preceding calendar year value deferred stock units credited account changes relation changes value share company’s common stock additional deferred stock units credited account based value dividend equivalents earned deferred stock units equal dividends paid corresponding number shares common stock payout deferred stock units’ value shall made single cash payment within thirty days following director’s termination service board sooner elected director fiscal year 2010 approximately 210 annual share retainers 50 annual cash retainers deferred approximately 6533 deferred stock units weighted average price 3881 per share dividend equivalents deferred stock units deferred approximately 165 deferred stock units fiscal year 2010 fiscal year 2009 approximately 210 annual share retainers 38 annual cash retainers deferred approximately 9580 deferred stock units weighted average price 2583 per share dividend equivalents deferred stock units deferred approximately 99 deferred stock units fiscal year 2009 fiscal year 2007 company’s stockholders approved two sharebased compensation plans named “2007 stock option plan” “2007 restricted stock plan” company’s 2007 stock option plan options may either nonqualified options incentive stock options may granted exercise price less 100 fair market value common stock date grant less 110 fair market value case incentive stock options granted optionees holding 10 voting power company options may granted term excess ten years five years case incentive stock options granted optionees holding 10 voting power company except certain circumstances options vest based continued service optionee may vest earlier one year date grant unless otherwise provided compensation committee board “committee” specific option agreement option vest 25 number shares common stock underlying option second third fourth fifth anniversaries date grant company’s 2007 restricted stock plan recipients awarded shares common stock subject right company repurchase part shares recipient event conditions specified applicable award satisfied prior end applicable restriction period established award conditions may include achievement performance goals continued service company except certain circumstances awards vest based continued service may vest earlier three equal installments first three anniversaries date grant committee may condition award recipient competing company oneyear period following termination recipient’s employment company analogic corporation notes consolidated financial statements continued beginning fiscal year 2008 committee began granting performance contingent restricted stock awards fiscal year 2008 committee granted 100183 performance contingent restricted shares “performance awards” company’s 2007 restricted stock plan 15239 shares since forfeited july 31 2010 shares vested specific preestablished levels performance achieved end threeyear performance cycle july 31 2010 outstanding 84944 shares granted performance goal performance awards based solely compound annual growth rate adjusted earnings per share metric company actual number shares issued determined end threeyear performance cycle could range zero 200 target award actual number shares issued included payment dividends actual number shares earned compensation expense recognized performance period based number shares deemed probable vesting end threeyear performance cycle total number shares vested july 31 2010 approximately 15700 expense income vested shares approximately 1100 429 349 1020 recorded fiscal years 2010 2009 2008 respectively fiscal year 2009 committee granted 45751 performance awards company’s 2007 restricted stock plan 5663 shares since forfeited july 31 2010 shares vest specific preestablished levels performance achieved end threeyear performance cycle july 31 2011 outstanding 40088 shares granted performance goal performance awards based solely compound annual growth rate adjusted earnings per share metric company actual number shares issued determined end threeyear performance cycle range zero 200 target award 80176 shares based upon shares outstanding actual number shares issued also include payment dividends actual number shares earned maximum compensation expense performance awards 4678 based weighted average grant date fair value 5835 per share compensation expense recognized performance period based number shares deemed probable vesting end threeyear performance cycle july 31 2010 company estimated shares deemed probable vesting fiscal years 2010 2009 compensation expense income 63 respectively recognized performance awards based number shares deemed probable vesting fiscal year 2010 committee granted 223834 performance awards form shares restricted stock restricted stock units pursuant company’s 2007 restricted stock plan 2009 stock incentive plan 7960 performance awards since forfeited july 31 2010 awards vest follows 107941 vest based upon achievement certain targets threeyear period ending july 31 2012 respect company’s cumulative nongaap earnings per share 107933 vest based upon achievement certain targets threeyear period ending july 31 2012 respect company’s relative total shareholder return “tsr” determined specified peer group actual number shares issued determined end threeyear performance cycle range zero 200 target award 431748 sharesunits issuance shares accompanied payment accumulated dividends actual number shares earned maximum compensation expense performance awards nongaap earnings per share target 8648 based weighted average grant date fair value 4006 per share determined closing stock price date grant compensation expense recognized performance period performance awards nongaap earnings per share target based number shares deemed probable vesting end threeyear performance cycle july 31 2010 company estimated total nongaap earnings per share awards covering 53090 shares units value 2127 deemed probable vesting fiscal year 2010 company recognized compensation expense 468 performance awards nongaap earnings per share target based number shares deemed analogic corporation notes consolidated financial statements continued probable vesting compensation expense performance awards tsr target 5123 recognized straightline basis net estimated forfeitures derived service period 27 years weighted average grant date fair values awards granted tsr target 4747 per share fiscal year 2010 fair value awards tsr target date grant estimated using montecarlo simulation model following assumptions 1 stock price weighted average closing price company’s common stock dates grant 2 stock volatility grant determined based historical volatility peer group companies period equal remaining term performance period date grant awards 3 riskfree interest rate periods equal performance period based us treasury yield curve effect time grant 4 dividends considered reinvested calculating tsr purpose fair value model dividend yield therefore considered 0 prior fiscal year 2007 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year analogic corporation notes consolidated financial statements continued fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions july 31 2010 2127840 shares reserved grant stock option bonus purchase plans following table sets forth stock option restricted stock awards transactions fiscal year 2010 weighted average fair value stock options granted fiscal years 2010 2009 2008 1539 1814 2246 per share respectively fiscal years 2010 2009 2008 total intrinsic value options exercised ie difference market price paid employee exercise options 80 101 1750 respectively total amount cash received exercise options 693 198 2660 respectively total fair value restricted stock grants vested fiscal years 2010 2009 2008 1379 1580 1774 respectively analogic corporation notes consolidated financial statements continued following table summarizes information stock options outstanding july 31 2010 july 31 2010 10918 total unrecognized compensation cost related nonvested sharebased compensation arrangements granted company’s stock option restricted stock bonus plans cost expected recognized weightedaverage period 171 years company amortizes sharebased compensation straightline method exception performance contingent restricted stock actual tax benefit realized tax deductions option exercises totaled 28 25 366 fiscal years 2010 2009 2008 respectively 3 business combination april 14 2008 company acquired outstanding capital stock copley controls corporation “copley” copley supplier gradient amplifiers mri precision motion control systems used computercontrolled automation systems acquisition enabled company expand product offerings oem customers enhance position provider medical subsystems mri scanners provide additional opportunities hightechnology automation market purchase price net cash acquired 74032 consisted 76875 cash paid upon closing 734 transaction costs primarily consisted fees incurred company financial advisory legal accounting services 1066 working capital adjustment payments entire amount paid prior july 31 2008 350 due former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes net cash acquired 4993 total amount paid july 31 2009 net cash acquired 74032 company’s consolidated financial statements include results copley date acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date analogic corporation notes consolidated financial statements continued following represents purchase price allocation determining purchase price allocation company considered among factors intention use acquired assets historical estimated future demand copley products services fair value developed technology tradename intangible assets based upon relief royalty approach customer relationship backlog intangible assets based income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital ranging 155 200 discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired copley total weighted average amortization period intangible assets approximately 12 years intangible assets amortized straightline basis consistent pattern economic benefits intangible assets expected utilized based upon estimated cash flows generated assets goodwill classified within company’s ct mri segment connection acquisition copley company commenced integration activities resulted recognizing 1276 liabilities personnelrelated costs 150 idle facility space company paid 1025 liabilities associated personnelrelated costs july 31 2009 reduced goodwill remaining 375 paid following pro forma unaudited information gives effect acquisition copley acquisition occurred beginning period pro forma results shown pro forma results necessarily indicative actually would occurred acquisition effect periods presented pro forma results fiscal year 2008 include 3661 expenses related amortization backlog intangible asset inventory fair value adjustment purchase accounting backlog analogic corporation notes consolidated financial statements continued inventory valuation adjustment completely amortized 6 3 months respectively date acquisition 4 restructuring voluntary retirement charges second quarter fiscal year 2010 company reduced workforce 17 employees worldwide total costs plan including severance personnel related costs 764 recorded restructuring charge fiscal year 2010 fourth quarter fiscal year 2010 company recorded additional restructuring charge 420 estimated sublease income longer expected received facility space company exited fourth quarter fiscal year 2010 offsetting expense adjustment severance related benefit expenses 494 related change estimated severance benefits well changes employee population expected receive benefits second quarter fiscal year 2009 company reduced workforce 145 employees worldwide recorded restructuring charge 3488 severance personnel related costs included second quarter restructuring copley 29 employees severance personnel related costs copley employees 323 accrued fiscal year 2008 connection acquisition fourth quarter fiscal year 2009 company recorded restructuring charge 3131 restructuring charge included 2073 severance personnel related costs reduction workforce 85 employees worldwide 1058 facility exit costs due primarily company vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility exit costs consist primarily ongoing lease payments less estimated sublease income vacated portion canton lease remainder lease term ends calendar year 2011 fourth quarter fiscal year 2008 company recorded restructuring voluntary retirement charges 4016 costs included 3419 severance personnel related costs 52 employees participated company’s us voluntary retirement program substantially completed september 30 2008 also included restructuring charge 597 severance personnel related costs 32 employees various departments organization terminated analogic corporation notes consolidated financial statements continued following table summarizes accrued voluntary retirement restructuring costs activity july 31 2007 july 31 2010 1426 copley acquisition restructuring accrual included copley purchase price allocation included operating expenses company’s consolidated statements operations caption “restructuring voluntary retirement charges” cash expenditures subsequent july 31 2010 approximately 153 employee severance 722 facility exit costs paid within next six fifteen months respectively 5 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock awards assumed exercise stock options using treasury stock method analogic corporation notes consolidated financial statements continued following table sets forth computation basic diluted net income per share fiscal years 2010 2009 2008 antidilutive shares related outstanding stock options may become dilutive future years 6 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals customers company three customers set forth table accounted 10 net product engineering revenue fiscal years 2010 2009 2008 note total net product engineering revenue less 10 fiscal year philips’s product engineering revenue ct mri segment toshiba’s product engineering revenue ct mri digital radiography segments l3’s product engineering revenue security technology segment company’s ten largest customers group accounted 66 67 company’s net product engineering revenue fiscal years 2010 2009 2008 respectively philips accounted 16 12 respectively net accounts receivable july 31 2010 2009 respectively l3 accounted 13 net accounts receivable july 31 2010 2009 analogic corporation notes consolidated financial statements continued although company seeking broaden customer base company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large well established corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected 7 marketable securities fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs company uses fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities company’s cash equivalents marketable securities comprised primarily certificates deposits company financial nonfinancial assets liabilities measured fair value july 31 2010 2009 investments held july 31 2010 due within one year 100 insured fdic realized gains losses marketable securities company sold marketable securities periods presented cost approximated fair value maturity dates analogic corporation notes consolidated financial statements continued 8 balance sheet information additional information certain balance sheet accounts follows years ended 9 goodwill intangible assets carrying amount goodwill july 31 2010 july 31 2009 1849 2043 respectively decrease goodwill 194 july 31 2009 july 31 2010 due adjustment purchase price copley released company escrow first quarter fiscal year 2010 intangible assets include value assigned intellectual property technology patents customer contracts relationships trade name inprocess research development estimated useful lives intangible assets excluding tradename considered indefinite life 10 14 years intangible assets july 31 2010 2009 consisted following amortization expense related acquired intangible assets 2931 3782 2441 fiscal years 2010 2009 2008 respectively analogic corporation notes consolidated financial statements continued estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows company’s goodwill indefinite lived intangible assets tested impairment annual basis annual tests event occurs circumstances change would indicate carrying value recoverable goodwill represents purchase price excess net amount assigned assets acquired liabilities assumed company connection acquisition copley april 14 2008 tradename represents value allocated copley tradename connection acquisition copley goodwill copley tradename part oem reporting unit “reporting unit” company tests impairment second quarter fiscal year second quarter fiscal year 2010 company performed first step twostep impairment test goodwill tradename goodwill company compared fair value oem reporting unit carrying value second quarter fiscal year 2010 company’s approach considered market approach income approach equal weight given approach market approach fair value reporting unit based trading multiples market approach company assumed control premium 15 reporting unit determined based analysis control premiums relevant recent acquisitions income approach fair value reporting unit based present value estimated future cash flows income approach dependent number significant management assumptions including estimates future sales future gross margin percentage discount rates discount rate 157 determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales reporting unit company determined fair value reporting unit carrying value net assets reporting unit thus necessary company perform step two impairment test goodwill tradename company compared fair value copley tradename using relief royalty approach carrying value second quarter fiscal year 2010 relief royalty approach utilized 13 aftertax royalty rate discount rate 177 aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales copley tradename company determined fair value copley tradename carrying value given current economic environment uncertainties regarding impact company’s business assurance company’s estimates assumptions regarding duration ongoing economic downturn period strength recovery made purposes goodwill tradename impairment testing second quarter fiscal year 2010 prove accurate predictions future company’s assumptions regarding forecasted revenue margin growth rates reporting analogic corporation notes consolidated financial statements continued unit tradename achieved company may required record impairment charge goodwill tradename future periods whether connection company’s next annual impairment testing second quarter fiscal year ending july 31 2011 prior change constitutes triggering event outside quarter annual goodwill tradename impairment test performed possible time determine future impairment charge would result whether charge would material 10 commitments guarantees contingencies august 2009 company reached settlement related claim associated former distributor medical imaging products cas medical systems inc “cas” company agreed pay cas sum 811 full satisfaction matters dispute 811 recorded general administrative expenses fiscal year 2009 company cas negotiated orderly conclusion contractual relationship allowing cas continue distributing products july 31 2010 connection settlement agreement company also wrote deferred engineering costs 365 engineering cost sales fiscal year 2009 following summary agreements company determined require recognized inception guarantee liability fair value obligation undertaken issuing guarantee company’s standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2010 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents company’s product warranty liability years ended company currently approximately 22500 revolving credit facilities banks available direct borrowings company’s revolving credit facility agreements contains number covenants analogic corporation notes consolidated financial statements continued including covenant requiring company maintain tangible net worth defined revolving credit facility agreement less 255000 end fiscal quarter company compliance covenant july 31 2010 tangible net worth approximately 364000 july 31 2010 direct borrowings offbalance sheet arrangements 11 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 2560 3539 2205 fiscal years 2010 2009 2008 respectively following schedule year future minimum lease payments july 31 2010 july 31 2010 company outstanding noncancelable purchase orders aggregating 62854 purchase orders manufacturing nonmanufacturing related goods services 12 income expense income expense consists primarily interest income short longterm marketable securities gain loss attributable investments unconsolidated affiliates company accounts cost equity method foreign exchange gains losses company recorded gain sale investments fiscal year 2008 2000 sale 20 45 equity interest chinese based company remaining interest 25 company recorded gain sale investments receipt escrows proceeds fiscal years 2009 2008 838 84 respectively relating sale company’s 17 ownership interest another company fiscal year 2007 company foreign exchange losses totaling 612 828 fiscal years 2010 2009 respectively foreign exchange gains totaling 440 fiscal year 2008 13 retirement plans 401k plan company qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions company analogic corporation notes consolidated financial statements continued employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service beginning fiscal year 2003 company decided contribute 5 net income defined plan fiscal years 2008 company decided contribute plan greater 5 net income defined plan 1200 beginning fiscal year 2009 company began matching employee contributions 4 eligible compensation company’s contributions plan totaled 2632 2792 1285 fiscal years 2010 2009 2008 respectively defined benefit retirement plan company’s canadian subsidiary anrad corporation sponsors defined benefit retirement plan called anrad retirement plan “anrad plan” anrad plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 company recognizes periodic pension expense consolidated statement operations associated assets liabilities consolidated balance sheet estimated net prior service cost net transition asset net actuarial loss anrad plan expected amortized stockholders’ equity pension cost fiscal year 2011 9 26 172 respectively comparable amortized amounts net prior service cost net transition asset net actuarial loss fiscal year 2010 9 25 174 respectively amounts recognized accumulated comprehensive loss net periodic benefit cost analogic corporation notes consolidated financial statements continued actuarial assumptions actuarial assumptions anrad plan described discount rates july 31 used measure yearend benefit obligations earnings effects subsequent year determine expected longterm rate return anrad plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company amortizes experienced gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy anrad plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts company may determine appropriate fiscal years 2010 2009 2008 company made contributions anrad plan 1256 1156 1275 respectively made payments benefits administrative expenses 169 363 449 respectively fiscal year 2011 company expects make contributions payments benefits administrative expenses 1002 241 respectively projected benefit obligation accumulated benefit obligation abo balances anrad plan 5532 4510 july 31 2010 2009 respectively analogic corporation notes consolidated financial statements continued fair value plan assets plan assets anrad plan assets held trust follows pension committee anrad plan sets investment policies strategies anrad plan longterm strategic investment objectives include preserving funded status anrad plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range fair value anrad pension assets asset category follows comprises debt equity securities underlying value traded active market based closing price trading day analogic corporation notes consolidated financial statements continued estimated future benefit payments estimated future benefit payments anrad plan follows funded status amounted recognized company’s balance sheet anrad plan follows 14 income taxes reconciliation income taxes united states statutory rate effective tax rate follows analogic corporation notes consolidated financial statements continued components provision benefit income taxes operations follows income loss income taxes domestic foreign operations follows net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs analogic corporation notes consolidated financial statements continued july 31 2010 company net operating loss carryforwards belgium denmark approximately 4133 3454 respectively expiration date losses 1510 china expire 2015 july 31 2010 company also state tax credit carryforwards 6943 expire 2025 management determined likely company recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2010 july 31 2009 change valuation allowance fiscal year 2010 primarily result establishment valuation allowance new operation china 378 addition state tax credits use cannot assured beginning fiscal year 2008 company adopted fasb guidance related accounting uncertainty income taxes guidance requires management perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns result implementation guidance company recognized net increase 2239 august 1 2007 retained earnings balance consisted noncurrent asset accrued income taxes 3806 1567 respectively following table summarizes changes company’s unrecognized income tax benefits fiscal years 2010 2009 unrecognized tax benefits decreased 12124 july 31 2010 recognized future period timing estimable net unrecognized tax benefit approximately 12124 would reduce company’s effective tax rate fiscal year 2009 company received irs refunds 8143 included 1262 interest carryback loss research development credits fiscal year 2004 additional research development tax credits timing items claimed amended income tax returns fiscal years 2001 2006 company recognized 2701 refunds related interest within stockholders’ equity upon adoption guidance impact refunds related interest reduction unrecognized tax benefits approximately 3280 1356 recorded tax benefit fiscal year 2009 company subject us federal income tax well income tax multiple state foreign jurisdictions company concluded us federal income tax matters fiscal year 2002 analogic corporation notes consolidated financial statements continued fiscal years 2004 2006 next four fiscal quarters statute limitations may close 2003 2007 federal state income tax returns reasonably expected net unrecognized benefits 1810 jurisdictions may recognized within next four quarters fiscal year 2010 company reversed 1750 tax reserves due expiration federal state foreign statutes limitation effective settlements foreign domestic tax audits fiscal year 2009 company reversed 920 tax reserves due expiration statutes limitations partially offset additional provisions agreed federal state adjustments typical taxes owed related company’s operations period company accrues interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2010 2009 company approximately 1270 1341 respectively accrued interest unrecognized tax benefits refundable deferred income taxes july 31 2010 consisted deferred tax assets 7672 refundable income tax assets 1188 refundable deferred income taxes july 31 2009 consisted deferred tax assets 6748 refundable income tax assets 4383 refundable income tax assets include expected federal state foreign refunds expected received within next twelve months 15 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2010 2009 analogic corporation notes consolidated financial statements continued 16 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows supplemental disclosure noncash investing activities connection acquisition copley company estimated july 31 2008 would pay 1000 former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes final amount actually paid former stockholders copley additional tax costs third quarter fiscal year 2009 350 17 segment geographic information company operates primarily within two major markets medical technology security technology first quarter fiscal year 2010 part strategic review company evaluated appropriateness naming segments company decided retain composition reporting segments change names accurately depict nature segments medical technology consists three reporting segments ct mri formerly medical imaging products consists primarily electronic systems subsystems ct mri medical imaging equipment sold primarily oems digital radiography consists primarily stateoftheart direct conversion amorphous seleniumbased digital flatpanel xray detectors diagnostic interventional applications mammography sold oems specialized ultrasound formerly bk medical consists ultrasound systems probes urology ultrasoundguided surgery sold primarily direct sales force radiology markets security technology consists advanced weapon threat detection aviation security systems subsystems sold oem customer company’s segment represents company’s hotel business general corporate income expenses analogic corporation notes consolidated financial statements continued table presents information company’s reportable segments copley revenue 18300 fiscal year 2008 includes period april 14 2008 july 31 2008 copley acquired april 14 2008 b includes restructuring voluntary retirement charges 483 fiscal year 2010 includes restructuring voluntary retirement charges 4581 811 settlement dispute customer fiscal year 2009 includes restructuring voluntary retirement charges 3624 fiscal year 2008 copley income taxes 2328 fiscal year 2008 includes period april 14 2008 july 31 2008 copley acquired april 14 2008 c includes restructuring voluntary retirement charges 44 fiscal year 2010 includes restructuring voluntary retirement charges 21 fiscal year 2009 includes restructuring voluntary retirement charges 46 fiscal year 2008 analogic corporation notes consolidated financial statements continued includes restructuring voluntary retirement charges 1591 fiscal year 2009 includes restructuring voluntary retirement charges 77 fiscal year 2008 e includes restructuring voluntary retirement charges 163 fiscal year 2010 includes restructuring voluntary retirement charges 426 fiscal year 2009 includes restructuring voluntary retirement charges 269 fiscal year 2008 f includes gains receipt escrow proceeds 838 84 fiscal years 2009 2008 respectively related sale investment another company fiscal year 2007 includes gains sales portion company’s interest china based company 2000 includes interest income 525 2010 6699 fiscal years 2010 2009 2008 respectively g includes goodwill net intangible assets acquisition copley 1849 37861 respectively july 31 2010 2043 40792 respectively july 31 2009 h includes cash equivalents marketable securities 134219 131084 july 31 2010 2009 respectively information regarding geographic areas fiscal years 2010 2009 2008 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada 18 common stock repurchases october 13 2008 company announced date board authorized repurchase 25000 company’s common stock company completed repurchase program funded using company’s available cash second quarter fiscal year 2009 fiscal year 2009 company repurchased 736694 shares common stock repurchase program 25022 average purchase price per share 3397 included 25022 paid common stock program 22 commissions fees company’s broker 19 related party transactions april 2010 company invested 1900 startup company proprietary technology expected utilized company’s specialized ultrasound business company received 438 engineering services startup company fiscal year 2010 july 31 2010 company net advance payments deferred revenue balance 954 china based affiliate july 31 2009 company net receivable 160 china based affiliate sales china based affiliate fiscal years 2010 2009 2008 approximately 1289 1915 989 respectively analogic corporation notes consolidated financial statements continued fiscal year 2008 ross brown serves board received payments company 4 consulting services provided company 20 subsequent events september 22 2010 company announced board september 17 2010 declared dividend 010 per common share payable october 20 2010 stockholders record october 6 2010 analogic corporation schedule iivaluation qualifying accounts thousands changes valuation allowance represents changes federal state foreign tax attributes company believes likely able utilize index exhibits management contract compensatory plan arrangementitem 15 exhibits financial statement schedules page number 1 financial statements report independent registered public accounting firm consolidated balance sheets july 31 2011 2010 consolidated statements operations years ended july 31 2011 2010 consolidated statements changes stockholders’ equity years ended july 31 2011 2010 2009 consolidated statements cash flows years ended july 31 2011 2010 notes consolidated financial statements 2 financial statement schedule iivaluation qualifying accounts schedules omitted required applicable required information furnished consolidated statements notes hereto b index exhibits immediately following company’s financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a present fairly material respects financial position analogic corporation subsidiaries july 31 2011 july 31 2010 results operations cash flows three years period ended july 31 2011 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts october 4 2011 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2011 2010 2009 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation “company” incorporated commonwealth massachusetts november 1967 company high technology company designs manufactures advanced medical imaging security systems subsystems sold original equipment manufacturers “oems” end users primarily healthcare airport security markets company recognized worldwide advancing stateoftheart technology areas medical computed tomography “ct” ultrasound magnetic resonance imaging “mri” digital mammography automatic explosives detection systems airport security company’s oem customers incorporate technology systems turn sell various medical security applications company also sells ultrasound products directly clinical enduser markets direct worldwide sales force brand name bk medical “bk medical” company reports financial condition results operations fiscal year basis ending july 31st year significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries wholly owned investments companies ownership interests range 10 50 percent company exercises significant influence investee’s operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory reserves necessary excess obsolete inventory reserves based upon age inventory lower cost market along significant management judgments concerning future demands inventory recorded inventory valuation provisions subsequently reversed unless inventory used disposed c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued annual provisions depreciation amortization computed accordance following ranges estimated useful lives company reviews property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following decrease gross property plant equipment related accumulated depreciation amortization due primarily writeoff fully depreciated assets longer service total depreciation property plant equipment 12890 11962 12569 fiscal years 2011 2010 2009 respectively company capitalize interest fiscal years 2011 2010 2009 revenue recognition accounts receivable company recognizes revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated upon shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws analogic corporation notes consolidated financial statements continued allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification company’s transactions sometimes involve multiple elements ie products services inception agreement company allocates arrangement consideration deliverable qualifying separate unit accounting arrangement based relative selling price company determines selling price using vendor specific objective evidence “vsoe” exists otherwise third party evidence “tpe” neither vsoe tpe selling price exists unit accounting company uses estimated selling price “esp” company generally expects able establish tpe due nature markets company competes company typically determine selling price using vsoe available esp vsoe generally limited price charged similar product service sold separately applicable stated substantive renewal rate agreement product service seldom sold separately unlikely company determine vsoe product service company defines vsoe median price recent standalone transactions priced within narrow range defined company stated renewal rates contracts tpe determined based prices charged competitors company similar deliverable sold separately noted company typically able use tpe company usually able obtain sufficient information competitor pricing substantiate tpe company unable establish selling price using vsoe tpe order received materially modified july 31 2009 company use esp allocation arrangement consideration objective esp determine price company would transact product service sold company standalone basis company’s determination esp involves weighting several factors based specific facts circumstances arrangement specifically company consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts company’s ongoing pricing strategy policies company determine esp deliverables future agreements based specific facts circumstances arrangement company plans analyze selling prices used allocation arrangement consideration least annually selling prices analyzed frequent basis significant change company’s business necessitates timely analysis company experiences significant variances selling prices maintenance service revenues recognized ratably life contract company provides engineering services customers contractual basis recognizes revenue using percentage completion method completed contract method company generally analogic corporation notes consolidated financial statements continued estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate shortterm unbilled receivables included accounts receivable longterm unbilled receivables included noncurrent assets consolidated balance sheet total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised maintenance service revenues payment received services yet performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified e warranty costs company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 26 months date delivery f research development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries sharebased compensation overhead materials used connection research product development activities research product development costs related nonrecurring engineering projects undertaken customers reclassified engineering cost sales project accounted percentage completion method deferred costs project accounted completed contract method software development costs incurred subsequent establishing technological feasibility general release software products capitalized technological feasibility demonstrated completion detailed program design capitalized costs amortized straightline basis economic lives related products generally three years amortization expense software development expense 1940 1921 809 fiscal years 2011 2010 2009 respectively included product cost sales unamortized balance capitalized software 1594 3223 july 31 2011 2010 respectively g income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting analogic corporation notes consolidated financial statements continued income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs h net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents amounted 169656 169254 july 31 2011 2010 respectively j concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable cash equivalents required working capital purposes placed primarily shortterm investments government agency discounted notes certificates deposit instruments 100 insured fdic money market funds demand notes financial institutions banks meet stringent credit rating requirements company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition k use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates percentage completion contracts estimates fair value investments privately held companies intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes estimate goodwill indefinite lived intangible asset testing various estimates used calculation sharebased compensation actual results could differ estimates l comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income analogic corporation notes consolidated financial statements continued consists reported foreign currency translation gains losses net taxes changes unrealized value marketable securities net taxes actuarial gains losses pension plan assets net taxes july 31 2011 2010 accumulated comprehensive income stockholders’ equity totaled 11497 4722 respectively sharebased compensation company accounts sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant company estimates fair value stock options using blackscholes valuation model fair value company’s restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards company recognizes associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date probable related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless whether awards ultimately earned n fair value financial instruments carrying amounts cash equivalents receivables approximate fair value due shortterm nature fair values marketable securities estimated based quoted market price securities impairment longlived assets company evaluates recoverability longlived assets recognizing impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset group compared recorded value asset group analogic corporation notes consolidated financial statements continued p segment information company operates primarily within two major markets medical technology security technology first quarter fiscal year 2011 part strategic review company modified segment reporting well names certain segments based information reviewed principal executive officer medical technology consists two reporting segments 1 medical imaging consists primarily systems subsystems ct mri medical imaging equipment direct conversion digital xray detectors mammography sold primarily oem customers current medical imaging segment combines formerly separate segments ct mri digital radiography 2 ultrasound formerly specialized ultrasound consists ultrasound systems probes urology ultrasoundguided surgery radiology markets sold primarily direct sales force security technology consists advanced explosives weapons detection systems utilizing company’s expertise advanced imaging technology ct aviation security periods presented revised accordingly reflect new reporting segments q translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables payables investments included operations period occur reflected results operations caption “other net” company foreign exchange losses totaling 678 612 828 fiscal years 2011 2010 2009 respectively r business combinations accordance purchase method accounting fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business prior august 1 2009 including transaction costs allocated fair value net assets acquired excess purchase price estimated fair value net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain general administrative expenses intangible assets goodwill intangible assets consist intellectual property licenses capitalized software certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment analogic corporation notes consolidated financial statements continued recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations company performs annual reviews second quarter fiscal year impairment goodwill indefinite lived intangible assets related acquisitions frequently whenever events changes circumstances indicate carrying values may recoverable goodwill may considered impaired company determines carrying value reporting unit including goodwill exceeds reporting unit’s fair value assessing impairment goodwill requires company make assumptions judgments regarding fair value net assets reporting units company estimates fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compares values estimated overall market capitalization indefinite lived intangible asset may considered impaired company determines carrying value exceeds assets fair value assessing impairment indefinite lived intangible asset requires company make assumptions judgments regarding fair value asset using relief royalty approach valuation technique new accounting pronouncements recently adopted special purpose entities june 2009 financial accounting standards board “fasb” issued guidance eliminates concept qualified specialpurpose entity related guidance creates stringent conditions reporting transfer portion financial asset sale clarifies saleaccounting criteria changes initial measurement transferor’s interest transferred financial assets guidance effective company august 1 2010 material impact financial position results operations cash flows june 2009 fasb issued guidance requires former qualified specialpurpose entities evaluated consolidation changes approach determining variable interest entity’s “vie” primary beneficiary requires companies frequently reassess whether must consolidate vies guidance effective company august 1 2010 material impact financial position results operations cash flows revenue recognition march 2010 fasb issued guidance related revenue recognition applies arrangements milestones relating research development deliverables guidance provides criteria must met recognize consideration contingent upon achievement substantive milestone entirety period milestone achieved guidance effective company august 1 2010 material impact financial position results operations cash flows analogic corporation notes consolidated financial statements continued yet effective impairment testing december 2010 fasb issued amendment guidance goodwill impairment testing amendment modifies step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists making determination entity consider whether adverse qualitative factors indicating impairment may exist guidance effective company august 1 2011 expected material impact financial position results operations cash flows business combinations noncontrolling interests december 2010 fasb issued guidance specifying public entity presents comparative financial statements entity acquirer disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period also expands supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings guidance effective company prospectively material business combinations acquisition date august 1 2011 fair value measurements may 2011 fasb issued update accounting fair value measurement provide consistent definition fair value ensure fair value measurement disclosure requirements similar us gaap international financial reporting standards “ifrs” update changes certain fair value measurement principles enhances disclosure requirements fair value measurements update extend use fair value accounting provides guidance applied use already required permitted standards within us gaap ifrs update effective interim annual periods beginning december 15 2011 applied prospectively early adoption prohibited guidance effective company august 1 2012 currently evaluating impact new accounting update financial position results operations cash flows presentation comprehensive income june 2011 fasb issued update accounting comprehensive income increase prominence items reported comprehensive income facilitate convergence us gaap ifrs update requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements update change items must reported comprehensive income item comprehensive income must reclassified net income update affect earnings per share calculated presented update effective interim annual periods beginning december 15 2011 applied retrospectively early adoption permitted guidance effective company august 1 2012 expected material impact company’s financial position results operations cash flows analogic corporation notes consolidated financial statements continued u basis presentation certain financial statement items reclassified conform current period presentation first quarter fiscal year 2011 company sold hotel business hotel business reported discontinued operation periods presented revised accordingly reflect operations discontinued 2 discontinued operations first quarter fiscal year 2011 company sold hotel business realized net proceeds 10467 transaction costs company recorded gain sale hotel business 924 net tax provision 505 007 per diluted share fiscal year 2011 former member company’s board directors also serves board directors entity acquired hotel business revenue net income loss hotel business fiscal years 2011 2010 2009 follows following represents detailed listing assets liabilities discontinued operations assets current liabilities discontinued operations july 31 2011 3 sharebased payment following table presents sharebased compensation expenses continuing operations included company’s consolidated statements operations fiscal years 2011 2010 2009 analogic corporation notes consolidated financial statements continued company estimates fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected volatility company’s stock option’s expected term riskfree interest rate option’s expected term company’s expected annual dividend yield company believes valuation technique approach utilized develop underlying assumptions appropriate calculating fair values company’s outstanding stock options granted fiscal years 2011 2010 2009 company estimates fair value performance based restricted stock restricted stock units market conditions based use montecarlo simulation model estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions fiscal years 2011 2010 2009 follows 1 option life determined estimating expected option life using historical data 2 stock volatility grant determined based review experience weighted average historical daily price changes company’s common stock recent five years approximates expected option life grant 3 riskfree interest rate periods equal expected term stock option based us treasury yield curve effect time grant stock incentive plans january 29 2010 company’s stockholders approved new sharebased compensation plan named “2009 stock incentive plan” company’s 2009 stock incentive plan 1600000 shares company’s common stock 05 par value per share may awarded employees awards may form stock options stock appreciation rights “sars” shares restricted stock restricted stock units stockbased awards stock options granted 2009 stock incentive plan may granted exercise price less 100 fair market value common stock date grant options may granted term excess ten years except certain circumstances options vest based continued service option recipient may vest earlier one year date grant sars granted 2009 stock incentive plan must measurement price less 100 fair market value date grant sars may granted term excess ten years restricted stock may granted subject company’s right repurchase part shares issue price stated formula price require forfeiture shares issued cost recipient event conditions grant satisfied prior end restriction period conditions may include achievement performance goals continued service company except certain circumstances restricted stock vests solely based passage time vest prior first anniversary date grant onethird vested prior second anniversary date grant twothirds vested prior third anniversary date grant january 28 2008 company’s stockholders approved new sharebased director compensation plan nonemployee members company’s board directors “board” named “analogic corporation notes consolidated financial statements continued corporation nonemployee director stock plan” “director plan” company’s director plan 100000 shares company’s common stock 05 par value per share may awarded directors fiscal years 2011 2010 2009 3492 2325 2800 shares respectively granted plan director plan provides annual share retainer granted participant february 1 annual share retainer calendar years 2011 2010 2009 value 55 35 respectively participant may elect receive annual share retainer given calendar year ii annual cash retainer consists annual base cash compensation receives service board committees board applicable compensation received service chairman board committee chairman form “deferred stock units” elected participant later december 15 preceding calendar year value deferred stock units credited account changes relation changes value share company’s common stock additional deferred stock units credited account based value dividend equivalents earned deferred stock units equal dividends paid corresponding number shares common stock payout deferred stock units’ value shall made single cash payment within thirty days following director’s termination service board sooner elected director fiscal year 2011 approximately 330 annual share retainers 88 annual cash retainers deferred approximately 8221 deferred stock units weighted average price 5079 per share dividend equivalents deferred stock units deferred approximately 179 deferred stock units fiscal year 2011 fiscal year 2010 approximately 210 annual share retainers 50 annual cash retainers deferred approximately 6533 deferred stock units weighted average price 3980 per share dividend equivalents deferred stock units deferred approximately 117 deferred stock units fiscal year 2010 fiscal year 2009 approximately 210 annual share retainers 38 annual cash retainers deferred approximately 9580 deferred stock units weighted average price 2583 per share dividend equivalents deferred stock units deferred approximately 99 deferred stock units fiscal year 2009 fiscal year 2007 company’s stockholders approved two sharebased compensation plans named “2007 stock option plan” “2007 restricted stock plan” company’s 2007 stock option plan options may either nonqualified options incentive stock options may granted exercise price less 100 fair market value common stock date grant less 110 fair market value case incentive stock options granted optionees holding 10 voting power company’s 2007 stock option plan 250000 shares company’s common stock 05 par value per share may awarded employees options may granted term excess ten years five years case incentive stock options granted optionees holding 10 voting power company except certain circumstances options vest based continued service optionee may vest earlier one year date grant unless otherwise provided compensation committee board “committee” specific option agreement option vest 25 number shares common stock underlying option second third fourth fifth anniversaries date grant company’s 2007 restricted stock plan recipients awarded shares common stock subject right company repurchase part shares recipient event conditions specified applicable award satisfied prior end applicable restriction period established award company’s 2007 restricted stock plan 500000 shares company’s common stock 05 par value per share may awarded employees conditions may include analogic corporation notes consolidated financial statements continued achievement performance goals continued service company except certain circumstances awards vest based continued service may vest earlier three equal installments first three anniversaries date grant committee may condition award recipient competing company oneyear period following termination recipient’s employment company beginning fiscal year 2008 committee began granting performance contingent restricted stock awards fiscal year 2008 committee granted performance contingent restricted shares “performance awards” company’s 2007 restricted stock plan 15239 shares forfeited shares vested specific preestablished levels performance achieved end threeyear performance cycle july 31 2010 84944 shares forfeited performance goal performance awards based solely cumulative growth adjusted earnings per share metric actual number shares issued determined end threeyear performance cycle could range zero 200 target award actual number shares issued included payment dividends actual number shares earned compensation expense recognized performance period based number shares deemed probable vesting end threeyear performance cycle total number shares vested july 31 2010 approximately 15700 expense income vested shares approximately 1100 429 349 recorded fiscal years 2010 2009 respectively fiscal year 2009 committee granted performance awards company’s 2007 restricted stock plan 7280 shares forfeited july 31 2011 shares vested specific preestablished levels performance achieved end threeyear performance cycle july 31 2011 outstanding 38471 shares granted performance goal performance awards based solely cumulative growth adjusted earnings per share metric actual number shares issued determined end threeyear performance cycle could range zero 200 target award actual number shares issued included payment dividends actual number shares earned compensation expense recognized performance period based number shares deemed probable vesting end threeyear performance cycle total number shares vested july 31 2011 approximately 8700 expense income vested shares approximately 498 63 recorded fiscal years 2011 2010 2009 respectively fiscal year 2010 committee granted 223834 performance awards form shares restricted stock restricted stock units pursuant company’s 2007 restricted stock plan 2009 stock incentive plan 28328 performance awards forfeited july 31 2011 awards vest follows 97757 vest based upon achievement certain targets threeyear period ending july 31 2012 respect company’s cumulative nongaap earnings per share 97749 vest based upon achievement certain targets threeyear period ending july 31 2012 respect company’s relative total shareholder return “tsr” determined specified peer group actual number sharesunits issued determined end threeyear performance cycle range zero 200 target award 391012 sharesunits issuance sharesunits accompanied payment accumulated dividends actual number shares earned maximum compensation expense performance awards nongaap earnings per share target 7847 based weighted average grant date fair value 4014 per share determined closing price company’s common stock date grant company recognizing compensation expense performance period performance awards nongaap earnings per share target based number sharesunits deemed probable vesting end threeyear performance cycle analogic corporation notes consolidated financial statements continued july 31 2011 company estimated total nongaap earnings per share awards covering 83672 sharesunits value 3352 deemed probable vesting fiscal years 2011 2010 compensation expense 1656 468 respectively recognized performance awards nongaap earnings per share target based number shares deemed probable vesting fiscal year 2011 committee granted 217233 performance awards form shares restricted stock units pursuant company’s 2009 stock incentive plan 3966 performance awards forfeited july 31 2011 awards vest follows 133660 vest based upon achievement certain targets threeyear period ending july 31 2013 respect company’s cumulative non gaap earnings per share 79607 vest based upon achievement certain targets threeyear period ending july 31 2013 respect company’s relative tsr determined russell 2000 index company member actual number units issued determined end threeyear performance cycle range zero 200 target award 426532 units issuance units accompanied payment accumulated dividends actual number shares earned maximum compensation expense performance awards nongaap earnings per share target 11229 based weighted average grant date fair value 4201 per share determined closing price company’s common stock date grant company recognizing compensation expense performance period performance awards nongaap earnings per share target based number units deemed probable vesting end threeyear performance cycle july 31 2011 company estimated total nongaap earnings per share awards covering 108030 units value 4538 deemed probable vesting fiscal year 2011 compensation expense 1398 recognized performance awards nongaap earnings per share target based number shares deemed probable vesting compensation expense performance awards granted tsr target approximately 3700 4600 awards granted fiscal years 2011 2010 respectively compensation expense recognized straightline basis net estimated forfeitures derived service period 28 27 years awards granted fiscal years 2011 2010 respectively weighted average grant date fair values awards granted tsr target 5427 4747 per share fiscal years 2011 2010 respectively fair value awards tsr target date grant estimated using montecarlo simulation model following assumptions 1 stock price weighted average closing price company’s common stock dates grant 2 stock volatility grant determined based historical volatility peer group companies period equal remaining term performance period date grant awards 3 riskfree interest rate periods equal performance period based us treasury yield curve effect time grant 4 dividends considered reinvested calculating tsr purpose fair value model dividend yield therefore considered 0 analogic corporation notes consolidated financial statements continued prior fiscal year 2007 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions july 31 2011 790739 shares reserved grant stock option bonus purchase plans analogic corporation notes consolidated financial statements continued following table sets forth stock option restricted stock awards transactions fiscal year 2011 1 number performancebased unvested restricted stock awards shown table target july 31 2011 maximum number performancebased unvested restricted stock awards available earned 894488 2 addition vested options company expects portion unvested options vest point future options expected vest calculated applying estimated forfeiture rate unvested options weighted average fair value stock options granted fiscal years 2011 2010 2009 1542 1539 1814 per share respectively fiscal years 2011 2010 2009 total intrinsic value options exercised ie difference market price paid employee exercise options 195 80 101 respectively total amount cash received exercise options 1122 693 198 respectively total fair value restricted stock grants vested fiscal years 2011 2010 2009 4138 1379 1580 respectively following table summarizes information stock options outstanding july 31 2011 analogic corporation notes consolidated financial statements continued july 31 2011 10991 total unrecognized compensation cost related nonvested sharebased compensation arrangements granted company’s stock option restricted stock bonus plans cost expected recognized weightedaverage period 169 years company amortizes sharebased compensation straightline method exception performance contingent restricted stock actual tax benefit realized tax deductions option exercises totaled 49 28 25 fiscal years 2011 2010 2009 respectively 4 business combination november 19 2010 company acquired certain assets oem ultrasound transducer probe business acquisition undertaken company order increase market share transducer probe business expand relationships major customer expand product portfolio acquisition resulted bargain purchase seller motivated sell assets transducer probe business since core part seller’s business acquisition accounted acquisition authoritative guidance business combinations purchase price acquisition allocated net tangible intangible assets acquired excess fair value assets acquired purchase price recorded bargain purchase gain fiscal year 2011 results operations estimated fair value assets acquired liabilities assumed included company’s audited consolidated financial statements beginning november 19 2010 total purchase consideration expected approximately 686 cash approximately 346 paid closing purchase consideration also includes contingent consideration 340 represents fair value future cash payments expected made company based sale certain acquired products two year period commencing november 1 2010 company estimated contingent consideration based probability weighted expected future cash flows included long term liabilities consolidated balance sheet april 30 2011 cash flows discounted rate approximately 221 contingent consideration marked market end fiscal quarter july 31 2011 material change fair value contingent consideration compared fair value estimated november 19 2010 acquisitionrelated costs insignificant final fair value allocated major classes tangible identifiable intangible assets acquired november 19 2010 bargain purchase gain recorded general administrative expenses unaudited consolidated statements operations computed follows analogic corporation notes consolidated financial statements continued deferred tax liability associated estimated fair value adjustments tangible intangible assets acquired recorded estimated weighted average effective tax rate jurisdictions fair value adjustments may occur following table sets forth components identifiable intangible assets acquired amortized estimated useful lives maximum amortization period five years straightline basis determining purchase price allocation company considered among factors intention use acquired assets historical estimated future demand acquired products services fair value developed technology based upon relief royalty approach customer relationship backlog intangible assets based income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital ranging 221 241 discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired company’s results would materially different reported results acquisition occurred beginning fiscal years 2011 2010 2009 5 restructuring voluntary retirement charges first quarter fiscal year 2011 company recorded restructuring charge 3562 severance personnel related costs plan initiated reduce workforce 104 employees worldwide purpose workforce reduction streamline operations consolidate denmark canton massachusetts manufacturing operations existing facilities second quarter 2011 company recorded adjustment 134 change estimate severance related benefit expenses related plan fourth quarter fiscal year 2011 company recorded restructuring charge 3587 severance personnel related costs plan streamline operations reducing workforce 51 employees worldwide second quarter fiscal year 2010 company reduced workforce 17 employees worldwide total costs plan including severance personnel related costs 764 recorded restructuring charge fiscal year 2010 fourth quarter fiscal year 2010 company recorded additional restructuring charge 420 estimated sublease income longer expected received facility space company exited fourth quarter fiscal year 2010 offsetting expense adjustment severance related benefit expenses 494 related change estimated severance benefits well changes employee population expected receive benefits analogic corporation notes consolidated financial statements continued second quarter fiscal year 2009 company reduced workforce 145 employees worldwide recorded restructuring charge 3488 severance personnel related costs included second quarter restructuring copley 29 employees severance personnel related costs copley employees 323 accrued fiscal year 2008 connection acquisition fourth quarter fiscal year 2009 company recorded restructuring charge 3131 restructuring charge included 2073 severance personnel related costs reduction workforce 85 employees worldwide 1058 facility exit costs due primarily company vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility exit costs consist primarily ongoing lease payments less estimated sublease income vacated portion canton lease remainder lease term ends calendar year 2011 following table summarizes accrued voluntary retirement restructuring costs activity july 31 2008 july 31 2011 cash expenditures subsequent july 31 2011 approximately 5035 employee severance 155 facility exit costs paid within next twelve months 6 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock awards assumed exercise stock options using treasury stock method analogic corporation notes consolidated financial statements continued following table sets forth computation basic diluted net income per share fiscal years 2011 2010 2009 antidilutive shares related outstanding stock options may become dilutive future years 7 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals analogic corporation notes consolidated financial statements continued customers company three customers set forth table accounted 10 net product engineering revenue fiscal years 2011 2010 2009 note total net revenue less 10 fiscal year philips’s toshiba’s revenue medical imaging segment l3’s revenue security technology segment company’s ten largest customers group accounted 64 66 67 company’s net product engineering revenue fiscal years 2011 2010 2009 respectively philips accounted 17 16 net accounts receivable july 31 2011 2010 respectively l3 accounted 13 net accounts receivable july 31 2010 although company seeking broaden customer base company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large well established corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected 8 marketable securities fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs company uses fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities company’s cash equivalents july 31 2011 comprised primarily demand deposits highly rated financial institutions analogic corporation notes consolidated financial statements continued company financial nonfinancial assets liabilities measured fair value july 31 2010 following table provides financial nonfinancial assets liabilities carried fair value measured recurring basis july 31 2011 9 balance sheet information additional information certain balance sheet accounts follows years ended total unbilled receivables july 31 2011 2010 11617 6039 respectively july 31 2011 2010 longterm portion unbilled receivables 4373 986 respectively included noncurrent assets analogic corporation notes consolidated financial statements continued 10 goodwill intangible assets carrying amount goodwill july 31 2011 july 31 2010 1849 intangible assets include value assigned intellectual property technology patents customer contracts relationships trade name inprocess research development estimated useful lives intangible assets excluding trade name inprocess research development considered indefinite life 05 14 years intangible assets july 31 2011 2010 consisted following amortization expense related acquired intangible assets 3088 2931 3782 fiscal years 2011 2010 2009 respectively estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows company’s goodwill indefinite lived intangible assets tested impairment reporting unit level annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying value goodwill represents purchase price excess net amount assigned assets acquired liabilities assumed company connection acquisition copley april 14 2008 trade name represents value allocated copley trade name connection acquisition copley goodwill copley trade name part oem reporting unit “reporting unit” company tests impairment second quarter fiscal year second quarter fiscal year 2011 company performed annual impairment test goodwill trade name inprocess research development goodwill company compared fair value oem reporting unit carrying value company’s approach considered market approach income approach equal weight given approach market approach fair analogic corporation notes consolidated financial statements continued value reporting unit based trading multiples market approach company assumed control premium 15 reporting unit determined based analysis control premiums relevant recent acquisitions income approach fair value reporting unit based present value estimated future cash flows income approach dependent number significant management assumptions including estimates future sales future gross margin percentage discount rates discount rate 157 determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales reporting unit company determined fair value reporting unit significantly excess carrying value net assets reporting unit thus necessary company perform step two impairment test goodwill trade name company compared fair value copley trade name using relief royalty approach carrying value second quarter fiscal year 2011 relief royalty approach utilized 13 aftertax royalty rate discount rate 177 aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales copley trade name company determined fair value copley trade name carrying value inprocess research development company compared fair value inprocess research development using income approach carrying value second quarter fiscal year 2011 income approach utilized discount rate 157 determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales inprocess research development company determined fair value inprocess research development carrying value given current economic environment uncertainties regarding impact company’s business company’s estimates assumptions regarding duration ongoing economic downturn period strength recovery made purposes goodwill trade name inprocess research development impairment testing second quarter fiscal year 2011 may accurate predictions future company’s assumptions regarding forecasted revenue margin growth rates reporting unit trade name achieved company may required record impairment charge goodwill trade name future periods whether connection company’s next annual impairment testing second quarter fiscal year ending july 31 2012 prior change constitutes triggering event outside quarter annual goodwill trade name impairment test performed possible time determine future impairment charge would result whether charge would material 11 commitments guarantees contingencies august 2009 company reached settlement related claim associated former distributor medical imaging products cas medical systems inc “cas” company agreed pay cas sum 811 full satisfaction matters dispute 811 recorded general administrative expenses fiscal year 2009 company cas negotiated orderly conclusion contractual relationship allowing cas continue distributing products july 31 2010 connection settlement agreement company also wrote deferred engineering costs 365 engineering cost sales fiscal year 2009 analogic corporation notes consolidated financial statements continued following summary agreements company determined require recognized inception guarantee liability fair value obligation undertaken issuing guarantee company’s standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2011 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 26 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents company’s product general warranty liability years ended july 31 2011 2010 company deferred revenue product extended warranty contracts 6528 4150 respectively company currently approximately 24400 revolving credit facilities banks available direct borrowings company’s revolving credit facility agreements contains number covenants including covenant requiring company maintain tangible net worth defined revolving credit facility agreement less 255000 end fiscal quarter company compliance covenant covenants july 31 2011 tangible net worth approximately 383000 july 31 2011 direct borrowings offbalance sheet arrangements fourth quarter fiscal year 2011 company identified certain transactions involving danish subsidiary bk medical certain foreign distributors respect company raised questions concerning compliance law including danish law united states foreign corrupt practices act company’s business policies company voluntarily disclosed matter danish government united states department justice securities exchange commission company concluded transactions identified date properly accounted reported financial statements material respects company unable estimate potential penalties andor sanctions might assessed connection matter therefore company recorded liability respect matter july 31 2011 analogic corporation notes consolidated financial statements continued 12 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 2623 2560 3539 fiscal years 2011 2010 2009 respectively following schedule year future minimum lease payments july 31 2011 july 31 2011 company outstanding noncancelable purchase orders aggregating 50231 purchase orders manufacturing nonmanufacturing related goods services 13 income expense income expense consists primarily interest income short longterm marketable securities gain loss attributable investments unconsolidated affiliates company accounts cost equity method foreign exchange gains losses company foreign exchange losses totaling 678 612 828 fiscal years 2011 2010 2009 respectively 14 retirement plans 401k plan company qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service analogic corporation notes consolidated financial statements continued beginning fiscal year 2003 company decided contribute 5 net income defined plan fiscal years 2008 company decided contribute plan greater 5 net income defined plan 1200 beginning fiscal year 2009 company began matching employee contributions 4 eligible compensation company’s contributions plan totaled 2729 2632 2792 fiscal years 2011 2010 2009 respectively defined benefit retirement plan company’s canadian subsidiary anrad corporation sponsors defined benefit retirement plan called anrad retirement plan “anrad plan” anrad plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 company recognizes periodic pension expense consolidated statement operations associated assets liabilities consolidated balance sheet estimated net prior service cost net transition asset net actuarial loss anrad plan expected amortized stockholders’ equity pension cost fiscal year 2012 10 28 222 respectively comparable amortized amounts net prior service cost net transition asset net actuarial loss fiscal year 2011 10 28 184 respectively amounts recognized accumulated comprehensive loss net periodic benefit cost analogic corporation notes consolidated financial statements continued actuarial assumptions actuarial assumptions anrad plan described discount rates july 31 used measure yearend benefit obligations earnings effects subsequent year determine expected longterm rate return anrad plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company amortizes experienced gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy anrad plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts company may determine appropriate fiscal years 2011 2010 2009 company made contributions anrad plan 1168 1256 1156 respectively made payments benefits administrative expenses 209 169 363 respectively fiscal year 2012 company expects make contributions payments benefits administrative expenses 966 318 respectively projected benefit obligation accumulated benefit obligation abo balances anrad plan 5952 5532 july 31 2011 2010 respectively analogic corporation notes consolidated financial statements continued fair value plan assets plan assets anrad plan assets held trust follows pension committee anrad plan sets investment policies strategies anrad plan longterm strategic investment objectives include preserving funded status anrad plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range analogic corporation notes consolidated financial statements continued fair value anrad pension assets asset category july 31 2011 2010 follows comprises debt equity securities underlying value traded active market based closing price trading day estimated future benefit payments estimated future benefit payments anrad plan follows analogic corporation notes consolidated financial statements continued funded status amounted recognized company’s balance sheet anrad plan follows 15 income taxes reconciliation income taxes united states statutory rate effective tax rate follows components provision benefit income taxes continuing operations follows analogic corporation notes consolidated financial statements continued income loss continuing operations income taxes domestic foreign operations follows net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs july 31 2011 company net operating loss carryforwards belgium approximately 4465 expiration date losses 591 china expire 2015 july 31 2011 company also state tax credit carryforwards 7722 expire 2026 management determined likely company recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2011 july 31 2010 change valuation allowance fiscal year 2010 primarily result reduction valuation allowance operation china 229 addition state tax credits use cannot assured management performs twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns analogic corporation notes consolidated financial statements continued following table summarizes changes company’s unrecognized income tax benefits fiscal years 2011 2010 unrecognized tax benefits increased 16250 july 31 2011 recognized future period timing estimable net unrecognized tax benefit approximately 16250 would reduce company’s effective tax rate company subject us federal income tax well income tax multiple state foreign jurisdictions company concluded us federal income tax matters fiscal year 2002 fiscal years 2004 2007 next four fiscal quarters statute limitations may close 2003 2008 federal state income tax returns reasonably expected net unrecognized benefits 10831 related interest approximately 1300 jurisdictions may recognized within next four quarters fiscal year 2011 company reversed 498 tax reserves due expiration federal state foreign statutes limitation effective settlements foreign domestic tax audits fiscal year 2010 company reversed 1750 tax reserves due expiration statutes limitations partially offset additional provisions agreed federal state adjustments typical taxes owed related company’s operations period company accrues interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2011 2010 company approximately 1485 1270 respectively accrued interest uncertain tax benefits refundable deferred income taxes july 31 2011 consisted deferred tax assets 8389 refundable income tax assets 1288 refundable deferred income taxes july 31 2010 consisted deferred tax assets 7672 refundable income tax assets 1188 refundable income tax assets include expected federal state foreign refunds expected received within next twelve months analogic corporation notes consolidated financial statements continued 16 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2011 2010 17 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows supplemental disclosure noncash investing activities company accrued milestone payments towards construction manufacturing facility shanghai china 1785 fiscal year 2011 paid july 31 2011 company expects pay 1785 first quarter fiscal year 2012 analogic corporation notes consolidated financial statements continued 18 segment geographic information table presents information company’s reportable segments includes restructuring charges 2829 fiscal year 2011 includes restructuring charges 527 fiscal year 2010 includes restructuring charges 4581 811 settlement dispute customer fiscal year 2009 b includes restructuring charges 3668 fiscal year 2011 includes restructuring charges 1591 fiscal year 2009 c includes restructuring 569 fiscal year 2011 includes restructuring 163 fiscal year 2010 includes restructuring voluntary retirement charges 426 fiscal year 2009 includes gains receipt escrow proceeds 838 fiscal years 2009 related sale investment another company fiscal year 2007 includes interest income 711 633 2564 fiscal years 2011 2010 2009 respectively e includes goodwill net intangible assets acquisitions 1849 35503 respectively july 31 2011 1849 37861 respectively july 31 2010 f includes cash equivalents marketable securities 135069 134219 131084 july 31 2011 2010 2009 respectively analogic corporation notes consolidated financial statements continued information regarding geographic areas fiscal years 2011 2010 2009 follows revenues attributed countries based location company’s customers longlived assets primarily denmark china canada 19 common stock repurchases december 9 2010 company announced board directors authorized repurchase 30000 company’s common stock repurchase program funded using company’s available cash fiscal year 2011 company repurchased retired 300289 shares common stock repurchase program 15187 average purchase price 5057 per share included 15187 paid common stock program 9 commissions fees company’s broker october 13 2008 company announced date board authorized repurchase 25000 company’s common stock company completed repurchase program funded using company’s available cash second quarter fiscal year 2009 fiscal year 2009 company repurchased 736694 shares common stock repurchase program 25022 average purchase price per share 3397 included 25022 paid common stock program 22 commissions fees company’s broker 20 related party transactions july 31 2011 company net advance payments deferred revenue balance 474 chinabased affiliate july 31 2010 company net advance payments deferred revenue balance 954 chinabased affiliate sales chinabased affiliate fiscal years 2011 2010 2009 approximately 2808 1289 1915 respectively july 25 2011 company entered agreement within expected closing date first quarter fiscal year ending july 31 2012 sell remaining interest 25 chinabased affiliate 2500 book value interest chinabased affiliate 0 company expects record gain 2500 april 2010 company invested 1900 startup company proprietary technology expected utilized company’s ultrasound segment company received 2438 438 engineering services startup company fiscal years 2011 2010 respectively 21 subsequent events september 20 2011 company announced board september 15 2011 declared dividend 010 per common share payable october 18 2011 stockholders record october 5 2011 analogic corporation schedule iivaluation qualifying accounts thousands changes valuation allowance represents changes federal state foreign tax attributes company believes likely able utilize index exhibits management contract compensatory plan arrangementitem 15 exhibits financial statement schedules b index exhibits immediately following company’s financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a present fairly material respects financial position analogic corporation subsidiaries july 31 2012 july 31 2011 results operations cash flows three years period ended july 31 2012 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting item 9a responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts october 4 2012 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2012 2011 2010 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic high technology company designs manufactures advanced medical imaging security systems subsystems sold original equipment manufacturers oems end users primarily healthcare airport security markets incorporated commonwealth massachusetts november 1967 recognized worldwide advancing stateoftheart technology areas medical computed tomography ct ultrasound magnetic resonance imaging mri digital mammography ctbased automated explosive detection systems airport security oem customers incorporate technology systems turn sell various medical security applications also sell ultrasound products directly clinical enduser markets direct worldwide sales force brand name bk medical company reports financial condition results operations fiscal year basis ending july 31st year significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries wholly owned investments companies ownership interests range 10 50 percent company exercises significant influence investee’s operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory writedowns recorded subsequently reversed c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized company reviews property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment analogic corporation notes consolidated financial statements continued recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following total depreciation property plant equipment 13439 12770 11962 fiscal years 2012 2011 2010 respectively company capitalize interest fiscal years 2012 2011 2010 revenue recognition accounts receivable company recognizes revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated upon shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification company’s transactions sometimes involve multiple elements ie products services company generally recognize revenue product sales industry specific software accounting analogic corporation notes consolidated financial statements continued guidance since products contain software nonsoftware components function together deliver tangible product’s essential functionality inception agreement company allocates arrangement consideration deliverable qualifying separate unit accounting arrangement based relative selling price company determines selling price using vendor specific objective evidence “vsoe” exists otherwise third party evidence “tpe” neither vsoe tpe selling price exists unit accounting company uses estimated selling price “esp” company generally expects able establish tpe due nature markets company competes company typically determine selling price using vsoe available esp vsoe generally limited price charged similar product service sold separately applicable stated substantive renewal rate agreement product service seldom sold separately unlikely company determine vsoe product service company defines vsoe median price recent standalone transactions priced within narrow range defined company stated renewal rates contracts tpe determined based prices charged competitors company similar deliverable sold separately noted company typically able use tpe company usually able obtain sufficient information competitor pricing substantiate tpe company unable establish selling price using vsoe tpe order received materially modified july 31 2009 company uses esp allocation arrangement consideration objective esp determine price company would transact product service sold company standalone basis company’s determination esp involves weighting several factors based specific facts circumstances arrangement specifically company considers cost produce deliverable anticipated margin deliverable selling price profit margin similar parts company’s ongoing pricing strategy policies company determines esp deliverables future agreements based specific facts circumstances arrangement company analyzes selling prices used allocation arrangement consideration least annually selling prices analyzed frequent basis significant change company’s business necessitates timely analysis company experiences significant variances selling prices maintenance service revenues recognized ratably term contract company provides engineering services customers contractual basis recognizes revenue using percentage completion method completed contract method company generally estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate shortterm unbilled receivables included accounts receivable longterm unbilled receivables included noncurrent assets consolidated balance sheet total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised maintenance service revenues payment received services yet performed analogic corporation notes consolidated financial statements continued company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified e warranty costs company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 26 months date delivery f derivative instruments hedging activities company recognizes derivative instruments either assets liabilities fair value consolidated balance sheets changes fair value derivatives recorded period current earnings accumulated comprehensive income loss depending whether derivative designated part hedge transaction company classifies cash flows instruments category cash flows hedged items company enter derivative transactions trading speculative purposes company assesses inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows fair values hedged items company also assesses hedge ineffectiveness quarterly basis records gain loss related ineffective portion current earnings company determines forecasted transaction longer probable occurring discontinues hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings g research development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries incentive compensation including sharebased compensation overhead materials used connection research product development activities research product development costs related nonrecurring engineering projects funded customers included within engineering cost sales project accounted percentage completion method completed contract method software development costs incurred subsequent establishing technological feasibility capitalized general release products contain embedded software elements technological feasibility demonstrated completion detailed program design capitalized costs amortized straightline basis economic lives related products generally three years amortization expense software development expense 1273 1940 1921 fiscal years 2012 2011 2010 respectively included product cost sales unamortized balance capitalized software 192 1594 july 31 2012 2011 respectively analogic corporation notes consolidated financial statements continued h income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock j cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents amounted 187011 169656 july 31 2012 2011 respectively k concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents accounts receivable cash equivalents required working capital purposes placed primarily shortterm bank deposits 100 insured fdic money market funds demand notes financial institutions banks meet stringent credit rating requirements collateralized securities issued us government agencies company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition l use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include estimates percentage completion contracts allocation consideration multipleelement arrangements allowances doubtful accounts receivable inventory writedowns reflect net realizable value estimates used calculation recognition sharebased compensation accruals product warranty estimates fair value acquired assets liabilities estimate goodwill indefinite lived intangible asset impairment testing valuation allowances deferred tax assets liabilities actual results could differ estimates analogic corporation notes consolidated financial statements continued comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income consists reported foreign currency translation gains losses net taxes actuarial gains losses pension plan assets net taxes changes unrealized value foreign currency forward contracts net taxes components accumulated comprehensive income stockholders’ equity july 31 2012 2011 follows n sharebased compensation company accounts sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant company estimates fair value stock options using blackscholes valuation model fair value company’s restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards company recognizes associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target management evaluates probability meeting performance criteria balance sheet date probable related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed performancebased awards market condition related target related compensation cost amortized performance period straightline basis net estimated forfeitures regardless many ultimately earned fair value financial instruments carrying amounts cash equivalents receivables approximate fair value due shortterm nature fair values marketable securities estimated based quoted market price securities company marketable securities july 31 2012 2011 analogic corporation notes consolidated financial statements continued p impairment longlived assets company evaluates recoverability longlived assets recognizing impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis market value company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset group compared recorded value asset group q segment information company three reportable segments medical imaging ultrasound security technology end fiscal year 2011 company combined oem ultrasound transducer business previously reported medical imaging segment bk medical direct ultrasound systems business ultrasound segment one management team combined business reported ultrasound segment consistent company’s principal executive officer began monitoring business first quarter fiscal year 2012 medical imaging consists primarily electronic systems subsystems ct mri medical imaging equipment direct conversion digital xray detectors mammography sold primarily oem customers ultrasound consists ultrasound systems transducers urology ultrasoundguided surgery anesthesia markets sold primarily company’s direct sales force security technology consists advanced weapon threat detection aviation security systems subsystems sold primarily oem customers periods presented revised accordingly reflect new reporting segments r translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary functional currency excluding longterm intercompany receivables payables investments included operations period occur reflected results operations caption “other net” company foreign exchange gains losses included within consolidated statement operations totaling 668 678 612 fiscal years 2012 2011 2010 respectively business combinations accordance acquisition method accounting fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business prior august 1 2009 including transaction costs allocated fair value net assets acquired excess purchase price estimated fair value net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain general administrative expenses analogic corporation notes consolidated financial statements continued intangible assets goodwill intangible assets consist intellectual property licenses capitalized software certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations company performs annual reviews second quarter fiscal year impairment goodwill indefinite lived intangible assets related acquisitions frequently whenever events changes circumstances indicate carrying values may recoverable goodwill may considered impaired company determines carrying value reporting unit including goodwill exceeds reporting unit’s fair value assessing impairment goodwill requires company make assumptions judgments regarding fair value net assets reporting units company estimates fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compares values estimated overall market capitalization indefinite lived intangible asset may considered impaired company determines carrying value exceeds assets fair value assessing impairment indefinite lived intangible asset requires company make assumptions judgments regarding fair value asset using relief royalty approach valuation technique u new accounting pronouncements recently adopted impairment testing december 2010 financing accounting standards board “fasb” issued guidance modifying step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists guidance effective company august 1 2011 material impact company’s financial position results operations cash flows september 2011 fasb issued accounting standards update provides subject certain conditions option perform qualitative rather quantitative assessment determine whether likely fair value reporting unit less carrying amount guidance effective company august 1 2011 impact company’s financial position results operations cash flows analogic corporation notes consolidated financial statements continued business combinations noncontrolling interests december 2010 fasb issued guidance specifying public entity presents comparative financial statements entity acquirer disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period also expands supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings guidance effective company prospectively material business combinations acquisition date august 1 2011 fair value measurements may 2011 fasb issued update accounting fair value measurement provide consistent definition fair value ensure fair value measurement disclosure requirements similar us gaap international financial reporting standards “ifrs” update changes certain fair value measurement principles enhances disclosure requirements fair value measurements update extend use fair value accounting provides guidance applied use already required permitted standards within us gaap ifrs update effective interim annual periods beginning december 15 2011 applied prospectively early adoption prohibited guidance effective company february 1 2012 impact company’s financial position results operations cash flows yet effective presentation comprehensive income june 2011 fasb issued update accounting comprehensive income increase prominence items reported comprehensive income facilitate convergence us gaap ifrs update requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements update change items must reported comprehensive income item comprehensive income must reclassified net income update affect earnings per share calculated presented update effective annual periods beginning december 15 2011 annual interim periods thereafter update applied retrospectively early adoption permitted subsequently december 2011 fasb issued guidance defers changes relate presentation reclassification adjustments guidance effective company august 1 2012 impact financial position results operations cash flows testing indefinitelived intangible assets impairment july 2012 fasb issued update regarding testing indefinitelived intangible assets impairment update gives entity option first assess qualitative factors determine whether existence events circumstances indicates likely indefinitelived intangible asset impaired assessing totality events circumstances entity concludes likely indefinitelived intangible asset impaired entity required take action however entity concludes otherwise required determine fair value indefinitelived intangible asset perform quantitative impairment test comparing fair value carrying analogic corporation notes consolidated financial statements continued amount entity also option bypass qualitative assessment indefinitelived intangible asset period proceed directly performing quantitative impairment test entity able resume performing qualitative assessment subsequent period guidance effective us august 1 2013 expected material impact financial position results operations cash flows v reclassifications revisions prior period financial statements certain financial statement items reclassified conform current period presentation addition third quarter fiscal year 2012 company identified certain amounts totaling 620 recorded within “effect exchange rate cash” unaudited condensed consolidated statements cash flows first two quarters fiscal year 2012 classified primarily within cash flow operating activities company also identified certain amounts totaling 1685 recorded within “effect exchange rate cash” audited consolidated statements cash flows fiscal year 2011 related quarterly periods classified primarily within cash flow operating activities company determined error classification material audited consolidated statement cash flows fiscal year 2011 unaudited condensed consolidated statement cash flows quarter fiscal years 2012 2011 company corrected unaudited condensed consolidated statement cash flows appropriate classification fiscal year 2011 within form 10k future quarterly annual filings company revise amounts related prior periods correct identified errors result following increase “effect exchange rate changes cash” 910 corresponding decrease “net cash provided operating activities” 910 three months ended october 31 2011 ii increase “effect exchange rate changes cash” 620 corresponding decreases “net cash provided operating activities” “net cash used financing activities” 654 34 respectively six months ended january 31 2012 2 discontinued operations first quarter fiscal year 2011 company sold hotel business realized net proceeds 10467 transaction costs company recorded gain sale hotel business 924 net tax provision 505 007 per diluted share fiscal year 2011 former member company’s board directors also serves board directors entity acquired hotel business revenues net income loss hotel business fiscal years 2011 2010 follows analogic corporation notes consolidated financial statements continued 3 sharebased compensation expense following table presents sharebased compensation expenses continuing operations included company’s consolidated statements operations fiscal years 2012 2011 2010 company recognized compensation expense awards performancebased awards earnings per share “eps”related total shareholder return “tsr”related conditions along timebased stock option restricted stock award conditions follows stock incentive plans january 29 2010 company’s stockholders approved new sharebased compensation plan named “2009 stock incentive plan” company’s 2009 stock incentive plan 1600000 shares company’s common stock 05 par value per share may awarded employees awards may form stock options stock appreciation rights “sars” shares restricted stock restricted stock units stockbased awards stock options granted 2009 stock incentive plan may granted exercise price less 100 fair market value common stock date grant options may granted term excess ten years except certain circumstances options vest based continued service option recipient may vest earlier one year date grant sars granted 2009 stock incentive plan must measurement price less 100 fair market value date grant sars may granted term excess ten years restricted stock may granted subject company’s right repurchase part shares issue price stated formula price require forfeiture shares issued cost recipient event conditions grant satisfied prior end restriction period conditions may include achievement performance goals continued service company except certain circumstances restricted stock vests solely based passage time vest prior first anniversary date grant onethird vested prior second anniversary date grant twothirds vested prior third anniversary date grant plan amended january 23 2012 among things increase number shares available issuance plan 2200000 allow directors participate plan analogic corporation notes consolidated financial statements continued january 28 2008 company’s stockholders approved new sharebased director compensation plan nonemployee members company’s board directors “board” named “analogic corporation nonemployee director stock plan” “director plan” company’s director plan 100000 shares company’s common stock 05 par value per share may awarded directors fiscal years 2012 2011 2010 company granted shares 37107 3492 2325 respectively plan director plan provides annual share retainer granted participant february 1 annual share retainer calendar years 2012 2011 2010 value 70 55 35 respectively participant may elect receive annual share retainer given calendar year ii annual cash retainer consists annual base cash compensation receives service board committees board applicable compensation received service chairman board committee chairman form “deferred stock units” elected participant later december 15 preceding calendar year plan amended january 23 2012 among things payment outstanding deferred stock units future deferred stock units made common stock instead cash future dividends earned deferred stock units paid cash instead additional deferred stock units total number deferred stock units outstanding july 31 2012 2011 28981 25419 respectively fiscal year 2007 company’s stockholders approved two sharebased compensation plans named “2007 stock option plan” “2007 restricted stock plan” company’s 2007 stock option plan options may either nonqualified options incentive stock options may granted exercise price less 100 fair market value common stock date grant less 110 fair market value case incentive stock options granted optionees holding 10 voting power company’s 2007 stock option plan 250000 shares company’s common stock 05 par value per share may awarded employees options may granted term excess ten years five years case incentive stock options granted optionees holding 10 voting power company except certain circumstances options vest based continued service optionee may vest earlier one year date grant unless otherwise provided compensation committee board “committee” specific option agreement option vest 25 number shares common stock underlying option second third fourth fifth anniversaries date grant company’s 2007 restricted stock plan recipients awarded shares common stock subject right company repurchase part shares recipient event conditions specified applicable award satisfied prior end applicable restriction period established award company’s 2007 restricted stock plan 500000 shares company’s common stock 05 par value per share may awarded employees conditions may include achievement performance goals continued service company except certain circumstances awards vest based continued service may vest earlier three equal installments first three anniversaries date grant committee may condition award recipient competing company oneyear period following termination recipient’s employment company prior fiscal year 2007 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date analogic corporation notes consolidated financial statements continued grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant company estimates fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected volatility company’s stock option’s expected term riskfree interest rate option’s expected term company’s expected annual dividend yield company believes valuation technique approach utilized develop underlying assumptions appropriate calculating fair values company’s outstanding stock options granted fiscal years 2012 2011 2010 estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions fiscal years 2012 2011 2010 follows 1 option life determined estimating expected option life using historical data 2 stock volatility grant determined based review experience weighted average historical daily price changes company’s common stock recent five years approximates expected option life grant 3 riskfree interest rate periods equal expected term stock option based us treasury yield curve effect time grant 4 expected annual dividend yield calculated dividing expected annual dividends stock price date grant july 31 2012 july 31 2011 company target performance contingent restricted stock awards outstanding 451450 447244 respectively awards form restricted stock shares units vest specific preestablished levels performance achieved end threeyear performance cycle three year performance cycles awards outstanding july 31 2012 end july 31 2013 2014 three year performance cycles awards outstanding july 31 2011 ended end july 31 2012 2013 2014 actual number sharesunits issued determined end threeyear performance cycle range zero 200 target award company grants performance awards either eps related performance condition tsr determined specified analogic corporation notes consolidated financial statements continued peer group condition july 31 2012 451450 restricted sharesunits outstanding 250891 eps related performance condition 200559 tsr related performance condition company estimates fair value restricted stock restricted stock units based quoted market price common stock company estimates fair value performance based restricted stock restricted stock units market conditions based use montecarlo simulation model estimates fair value intended predict actual future events value ultimately realized persons receive equity awards epsrelated condition company recognizes compensation expense performance period based number shares deemed probable vesting end threeyear performance cycle probability assessment done quarter changes estimates result significant expense fluctuations due cumulative catchup adjustment fair value awards epsrelated condition determined closing price company’s common stock date grant awards tsrrelated condition company recognizes compensation expense straightline basis net estimated forfeitures average derived service period 27 years awards granted fiscal years 2010 2011 2012 weighted average grant date fair values awards granted tsrrelated condition 9731 5427 4747 per share fiscal years 2012 2011 2010 respectively fair value awards tsrrelated condition date grant estimated using montecarlo simulation model following assumptions 1 stock price weighted average closing price company’s common stock dates grant 2 stock volatility grant determined based historical volatility peer group companies period equal remaining term performance period date grant awards 3 riskfree interest rate periods equal performance period based us treasury yield curve effect time grant 4 dividends considered reinvested calculating tsr purpose fair value model dividend yield therefore considered 0 employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year analogic corporation notes consolidated financial statements continued fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions july 31 2012 989093 shares reserved grant stock option bonus purchase plans following table sets forth stock option restricted stock awards transactions fiscal year 2012 1 number performancebased unvested restricted stock awards shown table target july 31 2012 maximum number performancebased unvested restricted stock awards available earned 902900 2 addition vested options company expects portion unvested options vest point future options expected vest calculated applying estimated forfeiture rate unvested options weighted average fair value stock options granted fiscal years 2012 2011 2010 1671 1542 1539 per share respectively fiscal years 2012 2011 2010 total intrinsic value options exercised ie difference market price paid employee exercise options 489 195 80 respectively total amount cash received exercise options 1891 1122 analogic corporation notes consolidated financial statements continued 693 respectively total fair value restricted stock grants vested fiscal years 2012 2011 2010 1867 4138 1379 respectively july 31 2012 12751 total unrecognized compensation cost assumes target performance based epsrelated condition awards related nonvested sharebased compensation arrangements granted company’s stock option restricted stock bonus plans cost expected recognized weightedaverage period 172 years company amortizes sharebased compensation straightline method exception performance contingent restricted stock actual tax benefit realized tax deductions option exercises totaled 26 49 28 fiscal years 2012 2011 2010 respectively 4 business combination november 19 2010 company acquired certain assets oem ultrasound transducer probe business acquisition undertaken company order increase market share transducer probe business expand relationships major customer expand product portfolio acquisition resulted bargain purchase seller motivated sell assets transducer probe business since core part seller’s business purchase price acquisition allocated net tangible intangible assets acquired excess fair value assets acquired purchase price recorded bargain purchase gain fiscal year 2011 results operations estimated fair value assets acquired liabilities assumed included company’s audited consolidated financial statements beginning november 19 2010 total purchase consideration expected approximately 686 cash approximately 346 paid closing purchase consideration also included contingent consideration 340 represents fair value future cash payments expected made company based sale certain acquired products two year period commencing november 1 2010 company estimated contingent consideration based probability weighted expected future cash flows included audited consolidated balance sheet july 31 2012 accrued liabilities july 31 2011 longterm liabilities cash flows discounted rate approximately 221 contingent consideration marked market end fiscal quarter fiscal year 2012 fair value contingent consideration increased 120 460 july 31 2012 acquisitionrelated costs insignificant final fair value allocated major classes tangible identifiable intangible assets acquired november 19 2010 bargain purchase gain recorded general administrative expenses audited consolidated statements operations computed follows analogic corporation notes consolidated financial statements continued deferred tax liability associated estimated fair value adjustments tangible intangible assets acquired recorded estimated weighted average statutory tax rate jurisdictions fair value adjustments may occur following table sets forth components identifiable intangible assets acquired amortized estimated useful lives maximum amortization period five years straightline basis determining purchase price allocation company considered among factors intention use acquired assets historical estimated future demand acquired products services fair value developed technology based upon relief royalty approach customer relationship backlog intangible assets based income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital ranging 221 241 discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired company’s results would materially different reported results acquisition occurred beginning fiscal years 2011 2010 5 restructuring charges first quarter fiscal year 2011 company recorded restructuring charge 3562 severance personnel related costs plan initiated reduce workforce 104 employees worldwide purpose workforce reduction streamline operations consolidate denmark canton massachusetts manufacturing operations existing facilities second quarter 2011 company recorded adjustment 134 change estimate severance related benefit expenses related plan fourth quarter fiscal year 2011 company recorded restructuring charge 3587 severance personnel related costs plan streamline operations reducing workforce 51 employees worldwide second quarter fiscal year 2010 company reduced workforce 17 employees worldwide total costs plan including severance personnel related costs 764 recorded restructuring charge fiscal year 2010 fourth quarter fiscal year 2010 company recorded additional restructuring charge 420 estimated sublease income longer expected received facility space company exited fourth quarter fiscal year 2010 offsetting expense adjustment severance related benefit expenses 494 related change estimated severance benefits well changes employee population expected receive benefits analogic corporation notes consolidated financial statements continued following table summarizes accrued restructuring costs activity july 31 2009 july 31 2012 cash expenditures remaining paid july 31 2012 employee severance paid within next three months 6 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock awards assumed exercise stock options using treasury stock method analogic corporation notes consolidated financial statements continued following table sets forth computation basic diluted net income per share fiscal years 2012 2011 2010 antidilutive shares related outstanding stock options restricted stock awards may become dilutive future years 7 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals analogic corporation notes consolidated financial statements continued customers company three customers set forth table accounted 10 net revenue fiscal years 2012 2011 2010 note total net revenue less 10 fiscal year philips’s toshiba’s revenue medical imaging segment l3’s revenue security technology segment ten largest customers group accounted 68 64 66 net product engineering revenue fiscal years 2012 2011 2010 respectively loss one customers could material adverse effect business philips accounted 13 17 net accounts receivable july 31 2012 2011 respectively ge accounted 10 12 net accounts receivable july 31 2012 2011 respectively july 31 2012 l3 accounted 18 net accounts receivable although company seeking broaden customer base company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large well established corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected 8 derivative instruments certain company’s foreign operations revenues andor expenses transacted currencies us dollar order mitigate foreign currency exchange risk company uses forward contracts lock exchange rates associated portion forecasted international expenses july 31 2012 company forward contracts outstanding notional amounts totaling 5901 canadian dollar contracts designated cash flow hedges unrealized gains 43 net tax july 31 2012 contracts reported accumulated comprehensive income loss significant cash flow hedges outstanding periods prior fiscal year 2012 realized gains losses cash flow hedges recognized income period payment expenses recognized company expects contracts settle first two quarters fiscal year 2013 amounts accumulated comprehensive income loss reported adjustment operating expenses 9 fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants analogic corporation notes consolidated financial statements continued measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs company uses fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities company’s cash equivalents july 31 2012 july 31 2011 comprised primarily demand deposits money market funds highly rated financial institutions following table provides assets liabilities carried fair value measured recurring basis july 31 2012 july 31 2011 company’s level 2 instruments classified cash equivalents consist highly liquid demand deposits fair value deposits deviate face value fair value company’s level 2 instruments classified foreign currency forward contracts determined using valuation models based market observable inputs including forward spot prices currencies implied volatilities analogic corporation notes consolidated financial statements continued 10 balance sheet information additional information certain balance sheet accounts follows years ended total unbilled receivables july 31 2012 2011 7653 11617 respectively july 31 2012 2011 longterm portion unbilled receivables 2678 4373 respectively included noncurrent assets b total deferred revenue july 31 2012 2011 12267 8289 respectively july 31 2012 2011 longterm portion deferred revenue 716 909 respectively included noncurrent liabilities 11 goodwill intangible assets carrying amount goodwill july 31 2012 july 31 2011 1849 company accumulated impairment losses related goodwill intangible assets include value assigned intellectual property technology patents customer contracts relationships trade name inprocess research development estimated useful lives intangible assets excluding trade name inprocess research development analogic corporation notes consolidated financial statements continued considered indefinite life 05 14 years intangible assets july 31 2012 2011 consisted following amortization expense related acquired intangible assets 3063 3088 2931 fiscal years 2012 2011 2010 respectively estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows second quarter fiscal year 2012 company performed first step twostep annual impairment test goodwill tradename inprocess research development goodwill company’s acquisition copley controls april 2008 company compared fair value oem reporting unit medical imaging segment carrying value company’s approach considered market approach income approach equal weight given approach market approach fair value reporting unit based trading multiples market approach company assumed control premium 15 reporting unit determined based analysis control premiums relevant recent acquisitions income approach fair value reporting unit based present value estimated future cash flows income approach dependent number significant management assumptions including estimates future sales future gross margin percentage discount rates applied discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales reporting unit company determined fair value reporting unit carrying value net assets reporting unit thus necessary company perform step two impairment test goodwill tradename company compared fair value copley tradename using relief royalty approach carrying value second quarter fiscal year 2012 relief royalty approach utilized aftertax royalty rate discount rate aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated analogic corporation notes consolidated financial statements continued achieving forecasted sales copley tradename company determined fair value copley tradename carrying value inprocess research development company compared fair value inprocess research development using income approach carrying value second quarter fiscal year 2012 income approach utilized discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales inprocess research development company determined fair value inprocess research development carrying value company expects begin amortizing inprocess research development product life cycle production product begins expected within next nine twentyone months given current economic environment uncertainties regarding impact company’s business company’s estimates assumptions regarding duration ongoing economic downturn period strength recovery made purposes goodwill tradename inprocess research development impairment testing second quarter fiscal year 2012 may accurate predictions future company’s assumptions regarding forecasted revenue margin growth rates reporting unit tradename inprocess research development achieved company may required record impairment charge goodwill tradename inprocess research development future periods whether connection company’s next annual impairment testing second quarter fiscal year ending july 31 2013 prior change constitutes triggering event outside quarter annual goodwill tradename inprocess research development impairment test performed possible time determine future impairment charge would result whether charge would material 12 commitments guarantees contingencies guarantees indemnification obligations company’s standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2012 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 26 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable analogic corporation notes consolidated financial statements continued following table presents company’s product general warranty liability years ended july 31 2012 2011 company deferred revenue product extended warranty contracts 7207 6528 respectively legal claims company subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable company believes valid defenses respect matters currently pending intends defend vigorously outcome matters individually aggregate expected material impact company’s cash flows results operations financial position revolving credit agreements october 11 2011 company entered 100 million fiveyear revolving credit agreement “credit agreement” financial institutions identified therein lenders included sovereign bank td bank na hsbc bank usa national association credit agreement guaranteed company’s material domestic subsidiaries designated company time required credit agreement supported pledge 65 capital stock equity equivalents company’s principal international subsidiary credit facility require amortization principal may reduced maturity whole part company’s option without penalty credit agreement replaces 20000 credit facility sovereign bank renewed annually since 2001 terminated connection new facility borrowings credit agreement may used general corporate purposes including permitted acquisitions amount facility increased specified circumstances 150000 aggregate company sole borrower credit agreement interest rates borrowings outstanding credit facility would range 125 200 libor rate company elect libor rate 000 100 defined base rate highest 1 prime rate 2 federal funds rate plus 050 3 onemonth libor plus 1 case based upon company’s leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon company’s leverage ratio credit agreement limits company subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make analogic corporation notes consolidated financial statements continued investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires company maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters ebitda greater 275100 time • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2012 company’s leverage ratio 0006 company’s interest coverage ratio infinite attributable interest expense july 31 2012 company full compliance financial operating covenants failure comply financial operating covenants credit facility would prevent company able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control company defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility company incurred approximately 500 transactions costs expensed fiveyear life credit facility company also approximately 4000 revolving credit facilities banks available direct borrowings company borrowing outstanding credit facilities july 31 2012 july 31 2011 investigation regarding company’s danish subsidiary previously disclosed company’s annual report form 10k fiscal year ended july 31 2011 company identified transactions involving danish subsidiary bk medical certain foreign distributors respect company raised questions concerning compliance law including danish law united states foreign corrupt practices act business policies company voluntarily disclosed matter danish government united states department justice “doj” securities exchange commission “sec” cooperating inquiry doj sec company unable estimate potential penalties andor sanctions might assessed connection matter company concluded identified transactions properly accounted reported financial statements material respects company terminated employment bk medical employees involved transactions company wound process winding relationship bk medical distributors involved transactions replacing employees distributors could adverse impact bk medical’s distributor sales replacements place productive revenue sales bk medical distributors company decided wind bk medical’s relationship represented less 1 company’s total revenue fiscal year 2011 less 13 company’s total revenue fiscal year 2012 fiscal year 2012 company incurred employee termination costs approximately 400 inquiryrelated costs approximately 1288 connection matter analogic corporation notes consolidated financial statements continued 13 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 2154 2623 2560 fiscal years 2012 2011 2010 respectively following schedule year future minimum lease payments july 31 2012 july 31 2012 company outstanding noncancelable purchase orders aggregating 62517 purchase orders manufacturing nonmanufacturing related goods services 14 income expense income expense consists primarily interest income cash equivalents gains sale investments foreign exchange gains losses company foreign exchange gains losses totaling 668 678 612 fiscal years 2012 2011 2010 respectively 15 retirement plans 401k plan company qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service fiscal years 2012 2011 2010 company matched employee contributions 4 eligible compensation company’s contributions plan totaled 2900 2729 2632 fiscal years 2012 2011 2010 respectively analogic corporation notes consolidated financial statements continued defined benefit retirement plan company’s canadian subsidiary analogic canada corporation formerly known anrad corporation sponsors defined benefit retirement plan called anrad retirement plan “anrad plan” anrad plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 company recognizes periodic pension expense consolidated statement operations associated assets liabilities consolidated balance sheet estimated net prior service cost net transition asset net actuarial loss anrad plan expected amortized stockholders’ equity pension cost fiscal year 2013 10 27 359 respectively comparable amortized amounts net prior service cost net transition asset net actuarial loss fiscal year 2012 10 26 210 respectively amounts recognized accumulated comprehensive loss net periodic benefit cost actuarial assumptions actuarial assumptions anrad plan described discount rates july 31 used measure yearend benefit obligations earnings effects subsequent year discount rate based high quality corporate bond spot rates cash flows match timing amount expected benefit payments analogic corporation notes consolidated financial statements continued determine expected longterm rate return anrad plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company amortizes experienced gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy anrad plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts company may determine appropriate fiscal years 2012 2011 2010 company made contributions anrad plan 1068 1168 1256 respectively made payments benefits administrative expenses 107 209 169 respectively fiscal year 2013 company expects make contributions payments benefits administrative expenses 1265 408 respectively projected benefit obligation accumulated benefit obligation abo balances anrad plan 7743 5952 july 31 2012 2011 respectively fair value plan assets analogic corporation notes consolidated financial statements continued plan assets anrad plan assets held trust follows pension committee anrad plan sets investment policies strategies anrad plan longterm strategic investment objectives include preserving funded status anrad plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range fair value anrad pension assets asset category july 31 2012 2011 follows analogic corporation notes consolidated financial statements continued comprises units segregated pooled funds insurance company funds underlying values primarily derived mutual funds debt equity securities traded active market based closing price trading day estimated future benefit payments estimated future benefit payments anrad plan follows funded status amounted recognized company’s balance sheet anrad plan follows 16 income taxes reconciliation income taxes united states statutory rate effective tax rate follows analogic corporation notes consolidated financial statements continued components provision benefit income taxes continuing operations follows income continuing operations income taxes domestic foreign operations follows net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws company received refund 12007 second quarter fiscal year 2012 result completion us internal revenue service “irs” audit us federal income tax returns fiscal years ended july 31 2003 2005 2008 refund largely result federal research analogic corporation notes consolidated financial statements continued experimentation credits carryover fiscal years 1991 2000 audited returns company recorded tax benefit refund including related interest consolidated statement operations 10025 fiscal year ended july 31 2012 related refund interest contingent professional fees 2714 recorded general administrative expenses consolidated statement operations fiscal year ended july 31 2012 connection conclusion irs audit company recorded benefit reversal remeasurement related tax reserves 2308 consolidated statement operations fiscal year ended july 31 2012 additional benefit 358 recorded current fiscal year reversal tax reserves certain state nonus taxes company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs circumstances would affect calculations would source location amount distribution underlying tax rate already paid earning foreign withholding taxes opportunity use foreign tax credits july 31 2012 company net operating loss carryforwards belgium approximately 3659 expiration date losses 378 italy expire 2017 losses 781 china begin expire 2015 july 31 2012 company also state tax credit carryforwards 8519 expire 2025 management determined likely company recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2012 july 31 2011 change valuation allowance fiscal year 2012 primarily result addition state credits use cannot assured reversal 148 valuation allowance operation china management performs twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns following table summarizes changes company’s unrecognized income tax benefits fiscal years 2012 2011 analogic corporation notes consolidated financial statements continued unrecognized tax benefits decreased 6756 july 31 2012 recognized future period timing estimable net unrecognized tax benefit approximately 6756 would reduce company’s effective tax rate company subject us federal income tax well income tax multiple state foreign jurisdictions company concluded us federal income tax matters year ended july 31 2008 next four quarters statute limitations company’s fiscal years ended july 31 2009 july 31 2007 may expire us federal state income taxes foreign subsidiaries respectively reasonably expected net unrecognized benefits including interest approximately 900 may recognized fiscal year 2012 company reduced uncertain tax benefits accrued interest 11389 result completion audits fiscal years 2003 2005 2008 closing statutes limitation fiscal year 2006 foreign subsidiaries 2008 domestic entities remeasurement uncertain tax benefits open years company accrues interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2012 july 31 2011 company approximately 640 1485 respectively accrued interest penalties unrecognized tax benefits refundable deferred income taxes july 31 2012 consisted deferred tax assets 8810 refundable income tax assets 976 refundable deferred income taxes july 31 2011 consisted deferred tax assets 8389 refundable income tax assets 1288 refundable income tax assets include expected federal state foreign refunds expected received within next twelve months analogic corporation notes consolidated financial statements continued 17 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2012 2011 discussed note 17 company received tax refund 12007 second quarter fiscal year 2012 recorded tax benefit refund including related interest 10025 related refund company recorded contingent consulting fees 2714 general administrative expenses discussed note 21 company recorded gain 2500 second quarter fiscal year 2012 related sale 25 interest chinabased affiliate 2500 discussed note 5 first fourth quarters fiscal year 2011 company recorded restructuring charge 3562 3587 discussed note 4 company recorded bargain purchase gain 1042 general administrative expenses second quarter fiscal year 2011 related acquisition certain assets oem transducer probe business analogic corporation notes consolidated financial statements continued 18 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows supplemental disclosure noncash investing activities company accrued milestone payments towards construction manufacturing facilities shanghai china state college pa 1755 1785 0 july 31 2012 2011 2010 respectively 19 segment geographic information table presents information company’s reportable segments analogic corporation notes consolidated financial statements continued includes 2198 contingent consulting fees related tax refund related interest received fiscal year 2012 includes restructuring charges 2829 fiscal year 2011 includes restructuring charges 527 fiscal year 2010 includes depreciation amortization 11484 11315 10261 fiscal years 2012 2011 2010 respectively includes sharebased compensation expense 7836 6162 4090 fiscal years 2012 2011 2010 respectively b includes restructuring charges 3668 fiscal year 2011 includes depreciation amortization 5099 5303 4644 fiscal years 2012 2011 2010 respectively includes sharebased compensation expense 3575 2078 560 fiscal years 2012 2011 2010 respectively c includes 516 contingent consulting fees related tax refund related interest received fiscal year 2012 includes restructuring 569 fiscal year 2011 includes restructuring 163 fiscal year 2010 includes depreciation amortization 1192 1180 1909 fiscal years 2012 2011 2010 respectively includes sharebased compensation expense 1985 1398 1141 fiscal years 2012 2011 2010 respectively includes gain 2500 sale company’s remaining interest china based affiliate received fiscal year 2012 includes net interest income 532 711 633 fiscal years 2012 2011 2010 respectively e includes goodwill net intangible assets acquisitions 1849 32447 respectively july 31 2012 1849 35503 respectively july 31 2011 f includes cash equivalents marketable securities 153122 135069 134219 july 31 2012 2011 2010 respectively information regarding geographic areas fiscal years 2012 2011 2010 follows analogic corporation notes consolidated financial statements continued revenues attributed countries based location company’s customers oem sales customer location may differ location ultimate completed systems sold oem market longlived assets primarily canada 20 common stock repurchases december 9 2010 company announced board directors authorized repurchase 30000 company’s common stock fiscal year 2012 company repurchased 286390 shares common stock repurchase program 14813 average purchase price 5173 per share 2010 repurchase program completed second quarter fiscal year 2012 cumulative shares repurchased retired program 586679 shares common stock 30000 average price 5114 per share december 8 2011 company announced board directors authorized repurchase additional 30000 company’s common stock repurchase program funded using company’s available cash fiscal year 2012 company repurchased retired 137591shares common stock repurchase program 8447 average purchase price 6139 per share 21 related party transactions july 25 2011 company entered agreement sell 25 interest chinabased affiliate 2500 book value interest chinabased affiliate written 0 fiscal year 2006 company upon final approval transaction chinese government receipt proceeds recorded gain sale investments 2500 fiscal year 2012 july 31 2011 company net advance payments deferred revenue balance 474 chinabased affiliate sales chinabased affiliate fiscal years 2012 2011 2010 approximately 0 2808 1289 respectively april 2010 company invested 1900 startup company proprietary technology expected utilized company’s ultrasound segment company received 1547 2438 438 engineering services startup company fiscal years 2012 2011 2010 respectively 22 subsequent events september 13 2012 company announced board september 11 2012 declared dividend 010 per common share payable october 9 2012 stockholders record september 27 2012 analogic corporation schedule ii valuation qualifying accounts thousands changes valuation allowance represents changes federal state foreign tax attributes company believes likely able utilize index exhibits management contract compensatory plan arrangement submitted electronically herewith attached exhibit 101 report following formatted xbrl extensible business reporting language condensed consolidated balance sheets july 31 2012 july 31 2011 ii condensed consolidated statements operations years ended july 31 2012 2011 2010 iii condensed consolidated statements changes stockholders’ equity years ended july 31 2012 2011 2010 iv condensed consolidated statements cash flows years ended july 31 2012 2011 2010 v notes unaudited condensed consolidated financial statements accordance rule 406t regulation st xbrl related information exhibit 101 annual report form 10k deemed filed part registration statement prospectus purposes sections 11 12 securities act deemed filed purposes section 18 exchange act otherwise subject liability sectionsitem 15 exhibits financial statement schedules b index exhibits immediately following financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position analogic corporation subsidiaries july 31 2013 july 31 2012 results operations cash flows three years period ended july 31 2013 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2013 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s annual report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described management’s annual report internal control financial reporting management excluded ultrasonix medical corporation assessment internal control financial reporting july 31 2013 acquired company purchase business combination 2013 also excluded ultrasonix medical corporation audit internal control financial reporting ultrasonix medical corporation whollyowned subsidiary whose total assets total revenues represent 13 2 respectively related consolidated financial statement amounts year ended july 31 2013 pricewaterhousecoopers llp boston massachusetts september 30 2013 analogic corporation consolidated balance sheets thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements comprehensive income thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2013 2012 2011 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows years ended july 31 2013 2012 2011 thousands except share data supplemental disclosure noncash investing activities accrued milestone payments towards construction manufacturing facilities shanghai china state college pa 620 1755 1785 july 31 2013 2012 2011 respectively also approximately 1000 property plant equipment included accounts payable july 31 2013 property plant equipment received accounts payable july 31 2012 july 31 2011 accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements 1 summary business operations significant accounting policies business operations analogic corporation high technology company designs manufactures advanced medical imaging security systems subsystems sold original equipment manufacturers oems end users primarily healthcare airport security markets incorporated commonwealth massachusetts november 1967 recognized worldwide advancing stateoftheart technology areas medical computed tomography ct ultrasound magnetic resonance imaging mri digital mammography ctbased automated explosive detection systems airport security oem customers incorporate technology systems turn sell various medical security applications also sell ultrasound products directly clinical enduser markets direct worldwide sales force brand names bk medical ultrasonix report financial condition results operations fiscal year basis ending july 31st year dollar amounts presented thousands except per share data significant accounting policies consolidation consolidated financial statements include accounts us subsidiaries wholly owned investments companies ownership interests range 10 50 percent exercise significant influence investee’s operating financial policies accounted using equity method intercompany accounts transactions eliminated consolidation determining whether primary beneficiary entity therefore required consolidate apply qualitative approach determines whether 1 power direct economically significant activities entity 2 obligation absorb losses right receive benefits entity could potentially significant entity required consolidate activity entity due considerations b inventories value inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory writedowns recorded subsequently reversed unless inventory used disposed inventory includes demo equipment utilized sales force field c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected consolidated statement operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued review property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following total depreciation property plant equipment 12973 13439 12770 fiscal years 2013 2012 2011 respectively capitalize interest fiscal years 2013 2012 2011 revenue recognition accounts receivable recognize revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated upon shipment revenue recognized upon customer acceptance provided revenue recognition criteria met sales contracts generally provide customer accept title risk loss product leaves facilities shipping terms local laws allow passage title risk loss shipping point defer recognizing revenue title risk loss transfer customer classify shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority include service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification transactions sometimes involve multiple elements ie products services recognize revenue product sales industry specific software accounting guidance since products contain analogic corporation notes consolidated financial statements continued software nonsoftware components function together deliver tangible product’s essential functionality inception agreement allocate arrangement consideration deliverable qualifying separate unit accounting arrangement based relative selling price determine selling price using vendor specific objective evidence “vsoe” exists otherwise third party evidence “tpe” neither vsoe tpe selling price exists unit accounting use estimated selling price “esp” generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available esp vsoe generally limited price charged similar product service sold separately applicable stated substantive renewal rate agreement product service seldom sold separately unlikely determine vsoe product service define vsoe median price recent standalone transactions priced within narrow range defined us stated renewal rates contracts tpe determined based prices charged competitors us similar deliverable sold separately noted typically able use tpe usually able obtain sufficient information competitor pricing substantiate tpe unable establish selling price using vsoe tpe use esp allocation arrangement consideration objective esp determine price would transact product service sold us standalone basis determination esp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies determine esp deliverables future agreements based specific facts circumstances arrangement analyze selling prices used allocation arrangement consideration least annually selling prices analyzed frequent basis significant change business necessitates timely analysis experience significant variances selling prices maintenance service revenues recognized ratably term contract provide engineering services customers contractual basis recognize revenue using percentage completion method completed contract method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate shortterm unbilled receivables included accounts receivable longterm unbilled receivables included noncurrent assets consolidated balance sheet total unbilled receivables july 31 2013 2012 4949 7653 respectively july 31 2013 2012 longterm portion unbilled receivables 1806 2678 respectively included noncurrent assets total cost estimates exceed revenues accrue estimated losses immediately deferred revenue primarily comprised maintenance service revenues payment received services yet performed revenue also deferred situations collection receivable time shipment reasonably assured situations collection receivable reasonably assured inventory expensed upon shipment revenue deferred analogic corporation notes consolidated financial statements continued recognized cash received total deferred revenue july 31 2013 2012 10584 12267 respectively july 31 2013 2012 longterm portion deferred revenue 1366 716 respectively included noncurrent liabilities grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified e warranty costs provide estimated cost product warranties time products shipped although engage extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect operating results generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 36 months date delivery f derivative instruments hedging activities recognize derivative instruments either assets liabilities fair value consolidated balance sheets changes fair value derivatives recorded period current earnings accumulated comprehensive income loss depending whether derivative designated part hedge transaction classify cash flows instruments category cash flows hedged items enter derivative transactions trading speculative purposes assess inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows fair values hedged items also assess hedge ineffectiveness quarterly basis record gain loss related ineffective portion current earnings determine forecasted transaction longer probable occurring discontinue hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings g research product development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries incentive compensation including sharebased compensation overhead materials used connection research product development activities research product development costs related nonrecurring engineering projects funded customers included within engineering cost sales project accounted percentage completion method completed contract method software development costs incurred subsequent establishing technological feasibility capitalized general release products contain embedded software elements technological feasibility demonstrated completion detailed program design capitalized costs amortized straightline basis economic lives related products generally three years amortization expense software development expense 187 1273 1940 fiscal years 2013 2012 2011 respectively included product cost sales analogic corporation notes consolidated financial statements continued h income taxes account income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock j cash equivalents consider highly liquid investments maturity three months less acquisition date cash equivalents k concentration credit risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents derivative instruments accounts receivable cash equivalents required working capital purposes placed primarily shortterm bank deposits money market funds demand notes financial institutions banks meet stringent credit rating requirements collateralized securities issued us government agencies grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition require collateral security furnished counterparties derivative instruments l use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions may affect reported amounts assets liabilities equity revenue expenses related disclosures contingent assets liabilities ongoing basis evaluate estimates judgments methodologies base estimates historical experience various assumptions believed reasonable results forms basis making judgments carrying value assets liabilities estimates include estimates percentage completion contracts allocation consideration multipleelement arrangements allowances doubtful accounts receivable inventory writedowns reflect net realizable value estimates used calculation recognition sharebased compensation accruals product warranty estimates fair value acquired assets liabilities estimates goodwill indefinite lived intangible asset impairment testing valuation allowances deferred tax assets liabilities actual results may differ estimates different assumptions conditions analogic corporation notes consolidated financial statements continued advertising costs expensed incurred included selling general administrative expenses n sharebased compensation account sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards recognize associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target evaluate probability meeting performance criteria balance sheet date probable related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change earnings per share related target performance achieved compensation cost recognized previously recognized compensation cost reversed marketbased awards compensation cost amortized performance period straightline basis awards vest end measurement period probability actual shares expected earned considered grant date valuation therefore expense adjusted reflect actual units earned fair value financial instruments carrying amounts cash equivalents receivables approximate fair value due shortterm nature fair values marketable securities estimated based quoted market price securities marketable securities july 31 2013 2012 p impairment longlived assets evaluate recoverability longlived assets recognizing impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis market value review longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset group compared recorded value asset group q segment information three reportable segments medical imaging ultrasound security technology medical imaging consists primarily electronic systems subsystems ct mri medical imaging equipment analogic corporation notes consolidated financial statements continued direct conversion digital xray detectors mammography sold primarily oem customers ultrasound consists ultrasound systems transducers urology ultrasoundguided surgery pointofcare markets sold primarily direct sales force security technology consists advanced weapon threat detection aviation security systems subsystems sold primarily oem customers r translation foreign currencies assets liabilities foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet foreign currency translation adjustments 4582 7605 7568 respectively included within consolidated statement comprehensive income fiscal years 2013 2012 2011 respectively exchange gains losses resulting foreign currency transactions denominated currency entity’s primary functional currency excluding longterm intercompany receivables payables investments included operations period occur reflected results operations caption “other net” foreign exchange losses gains included within consolidated statement operations totaling 1546 668 678 fiscal years 2013 2012 2011 respectively business combinations accordance acquisition method accounting fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business expensed incurred excess purchase price estimated fair value net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain general administrative expenses intangible assets goodwill intangible assets consist intellectual property licenses capitalized software certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact results operations perform annual reviews second quarter fiscal year impairment goodwill indefinite lived intangible assets related acquisitions frequently whenever events changes circumstances indicate carrying values may recoverable goodwill may considered impaired determine carrying value reporting unit including goodwill exceeds reporting unit’s fair value assessing impairment goodwill requires us make assumptions judgments regarding analogic corporation notes consolidated financial statements continued fair value net assets reporting units estimate fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compare values estimated overall market capitalization indefinite lived intangible asset may considered impaired determine carrying value exceeds assets’ fair value assessing impairment indefinite lived intangible asset requires us make assumptions judgments regarding fair value asset using relief royalty approach valuation technique u new accounting pronouncements recently adopted presentation comprehensive income june 2011 financial accounting standards board “fasb” issued update accounting comprehensive income increase prominence items reported comprehensive income facilitate convergence us gaap international financial reporting standards “ifrs” update requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements update change items must reported comprehensive income item comprehensive income must reclassified net income furthermore update affect earnings per share calculated presented update effective annual periods beginning december 15 2011 periods thereafter applied retrospectively adoption update impact financial condition results operations comprehensive income january 2013 fasb issued update seeks improve reporting reclassifications accumulated comprehensive income requiring entity report effect significant reclassifications accumulated comprehensive income respective line items net income amount reclassified required us gaap reclassified entirety net income amounts required us gaap reclassified entirety net income reporting period entity required crossreference disclosures required us gaap provide additional detail amounts update effective annual interim reporting periods beginning december 15 2012 adopted standard third quarter fiscal year 2013 presented information note 21 adoption standard impact financial condition results operations yet effective testing indefinitelived intangible assets impairment july 2012 fasb issued update regarding testing indefinitelived intangible assets impairment update gives entity option first assess qualitative factors determine whether existence events circumstances indicates likely indefinitelived intangible asset impaired assessing totality events circumstances entity concludes likely indefinitelived intangible asset impaired entity required take action however entity concludes otherwise required determine fair value indefinitelived analogic corporation notes consolidated financial statements continued intangible asset perform quantitative impairment test comparing fair value carrying amount entity also option bypass qualitative assessment indefinitelived intangible asset period proceed directly performing quantitative impairment test entity able resume performing qualitative assessment subsequent period guidance effective interim period ended october 31 2013 expected impact financial condition results operations early adoption permitted foreign currency matters march 2013 fasb issued update amends guidance foreign currency matters consolidations address diversity practice related release cumulative translation adjustments “cta” earnings upon occurrence certain derecognition events update reflects compromise cta release guidance included within foreign currency matters loss control concepts included within consolidation guidance precludes release cta derecognition events occur within foreign entity unless events represent complete substantially complete liquidation foreign entity derecognition events related investments foreign entity result release cta related derecognized foreign entity even noncontrolling financial interest retained update also amends guidance business combinations transactions result company obtaining control business step acquisition increasing investment foreign entity one accounted equity method one accounted consolidated investment update effective fiscal years beginning december 15 2013 update applied prospectively prior periods adjusted update expected impact financial condition results operations early adoption permitted beginning entity’s fiscal year presentation unrecognized tax benefits july 2013 fasb issued update intended eliminate diversity practice regard financial statement presentation unrecognized tax benefits net operating loss carryforward similar tax loss tax credit carryforward exists guidance effective interim period ending january 31 2014 adoption update expected material impact consolidated financial statements v reclassifications revisions prior period financial statements certain financial statement items reclassified conform current period presentation fourth quarter fiscal year 2013 identified errors annual 2012 2011 supplemental disclosures cash flow information income taxes paid net refunds determined errors impact balance sheet statement operations cash flows operating investing financing activities material consolidated financial statements fiscal years 2012 2011 revised consolidated statement cash flows appropriate disclosures form 10k resulted following fiscal year ended 2012 income taxes paid net refunds 935 previously disclosed amount 11224 ii fiscal year ended 2011 income taxes paid net refunds 8643 previously disclosed amount 8643 analogic corporation notes consolidated financial statements continued 2 discontinued operations first quarter fiscal year 2011 sold hotel business realized net proceeds 10467 transaction costs recorded gain sale hotel business 924 net tax provision 505 007 per diluted share fiscal year 2011 former member board directors also served board directors entity acquired hotel business revenue net income hotel business fiscal year 2011 2906 289 respectively 3 sharebased compensation expense following table presents sharebased compensation expenses continuing operations included consolidated statements operations fiscal years 2013 2012 2011 recognized compensation expense performancebased awards earnings per share “eps”related total shareholder return “tsr”related conditions along timebased stock option restricted stock award conditions follows stock incentive plans january 29 2010 stockholders approved new sharebased compensation plan named “2009 stock incentive plan” 2009 stock incentive plan 1600000 shares common stock 005 par value per share may awarded employees awards may form stock options stock appreciation rights “sars” shares restricted stock restricted stock units stockbased awards stock options granted 2009 stock incentive plan may granted exercise price less 100 fair market value common stock date grant options may granted term excess analogic corporation notes consolidated financial statements continued ten years except certain circumstances options vest based continued service option recipient may vest earlier one year date grant sars granted 2009 stock incentive plan must measurement price less 100 fair market value date grant sars may granted term excess ten years restricted stock may granted subject right repurchase part shares issue price stated formula price require forfeiture shares issued cost recipient event conditions grant satisfied prior end restriction period conditions may include achievement performance goals continued service us except certain circumstances restricted stock vests solely based passage time vest prior first anniversary date grant onethird vested prior second anniversary date grant twothirds vested prior third anniversary date grant plan amended january 23 2012 among things increase number shares available issuance plan 2200000 allow nonemployee members board directors “board participate plan january 28 2008 stockholders approved new sharebased director compensation plan nonemployee members board named “analogic corporation nonemployee director stock plan” “director plan” director plan 100000 shares common stock 005 par value per share may awarded directors fiscal years 2013 2012 2011 granted shares 8720 37107 3492 respectively plan director plan provides annual share retainer granted participant february 1 annual share retainer calendar years 2013 2012 2011 value 70 55 respectively participant may elect receive annual share retainer given calendar year ii annual cash retainer consists annual base cash compensation receives service board committees board applicable compensation received service chairman board committee chairman form “deferred stock units” elected participant later december 15 preceding calendar year plan amended january 23 2012 among things payment outstanding deferred stock units future deferred stock units made common stock instead cash future dividends earned deferred stock units paid cash instead additional deferred stock units total number deferred stock units outstanding july 31 2013 2012 34974 28981 respectively fiscal year 2007 stockholders approved two sharebased compensation plans named “2007 stock option plan” “2007 restricted stock plan” 2007 stock option plan options may either nonqualified options incentive stock options may granted exercise price less 100 fair market value common stock date grant less 110 fair market value case incentive stock options granted optionees holding 10 voting power us 2007 stock option plan 250000 shares common stock 005 par value per share may awarded employees options may granted term excess ten years five years case incentive stock options granted optionees holding 10 voting power us except certain circumstances options vest based continued service optionee may vest earlier one year date grant unless otherwise provided compensation committee board “committee” specific option agreement option vest 25 number shares common stock underlying option second third fourth fifth anniversaries date grant 2007 restricted stock plan recipients awarded shares common stock subject right repurchase part shares recipient event conditions specified applicable award satisfied prior end applicable restriction period established award analogic corporation notes consolidated financial statements continued 2007 restricted stock plan 500000 shares common stock 005 par value per share may awarded employees conditions may include achievement performance goals continued service us except certain circumstances awards vest based continued service may vest earlier three equal installments first three anniversaries date grant committee may condition award recipient competing us oneyear period following termination recipient’s employment us prior fiscal year 2007 two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant estimate fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected volatility stock option’s expected term riskfree interest rate option’s expected term expected annual dividend yield believe valuation technique approach utilized develop underlying assumptions appropriate calculating fair values outstanding stock options granted fiscal years 2013 2012 2011 estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions fiscal years 2013 2012 2011 follows 1 option life determined estimating expected option life using historical data 2 stock volatility grant determined based review experience weighted average historical daily price changes common stock expected option term 3 riskfree interest rate periods equal expected term stock option based us treasury yield curve effect time grant 4 expected annual dividend yield calculated dividing expected annual dividends stock price date grant analogic corporation notes consolidated financial statements continued july 31 2013 july 31 2012 target performance contingent restricted stock awards outstanding 311616 451450 respectively awards form restricted stock shares units vest specific preestablished levels performance achieved end threeyear performance cycle three year performance cycles awards outstanding july 31 2013 end july 31 2014 2015 three year performance cycles awards outstanding july 31 2012 ended end july 31 2013 2014 2015 actual number sharesunits issued determined end threeyear performance cycle range zero 200 target award grant performance awards either eps related performance condition tsr determined specified peer group condition july 31 2013 311616 restricted sharesunits outstanding 182776 eps related performance condition 128390 tsr related performance condition estimate fair value restricted stock restricted stock units based quoted market price common stock estimate fair value performance based restricted stock restricted stock units market conditions based use montecarlo simulation model estimates fair value intended predict actual future events value ultimately realized persons receive equity awards stock compensation expense amortized award’s vesting period straightline basis awards service conditions graded vesting method applies awards service performance conditions awards epsrelated condition recognize compensation expense performance period based number shares deemed probable vesting end threeyear performance cycle net forfeitures probability assessment done quarter changes estimates result significant expense fluctuations due cumulative catchup adjustment fair value awards epsrelated condition determined closing price common stock date grant awards tsrrelated condition recognize compensation expense net estimated forfeitures average derived service period 28 years awards granted fiscal years 2013 2012 2011 weighted average grant date fair values awards granted tsrrelated condition 10654 9731 5427 per share fiscal years 2013 2012 2011 respectively fair value awards tsrrelated condition date grant estimated using montecarlo simulation model following assumptions 1 stock price closing price common stock date grant 2 stock volatility grant determined based historical volatility peer group companies common stock period equal remaining term performance period date grant awards 3 riskfree interest rate periods equal performance period based us treasury yield curve effect date grant 4 dividends considered reinvested calculating tsr purpose fair value model dividend yield therefore considered 0 analogic corporation notes consolidated financial statements continued employee stock purchase plan eligible participants granted options purchase common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions july 31 2013 approximately 1060760 shares reserved grant stock option bonus purchase plans following table sets forth stock option restricted stock transactions fiscal year 2013 1 performancebased unvested restricted stock shown table target except number shares vested reflect shares earned july 31 2013 maximum number performancebased unvested restricted stock available earned 658132 2 addition vested options expect portion unvested options vest point future options expected vest calculated applying estimated forfeiture rate unvested options analogic corporation notes consolidated financial statements continued weighted average fair value stock options granted fiscal years 2013 2012 2011 2525 1671 1542 per share respectively fiscal years 2013 2012 2011 total intrinsic value options exercised ie difference market price paid employee exercise options 1535 489 195 respectively total amount cash received exercise options 3390 1891 1122 respectively total fair value restricted stock vested fiscal years 2013 2012 2011 15967 1867 4138 respectively july 31 2013 12620 total unrecognized compensation cost assumes target performance based epsrelated condition awards related nonvested sharebased compensation arrangements granted stock option restricted stock plans cost expected recognized weightedaverage period 21 years actual tax benefit realized tax deductions option exercises totaled 19 26 49 fiscal years 2013 2012 2011 respectively 4 business combination ultrasonix medical corporation march 1 2013 completed acquisition outstanding equity securities ultrasonix medical corporation nevada corporation whose principal assets included customer lists intangibles related solely sales destined us march 2 2013 completed acquisition outstanding equity securities ultrasonix medical corporation canadian corporation pursuant “plan arrangement” canadian law ultrasonix supplier advanced ultrasound systems pointofcare general imaging applications undertook acquisition accelerate expansion pointofcare ultrasound market purchase price net cash acquired 79932 finalized july 2013 acquisition funded existing cash hand accounted acquisition business analogic corporation notes consolidated financial statements continued purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date fair value measurements inventory intangibles property plant equipment deferred revenue based upon significant inputs observable market therefore represent fair value measurements based level 3 inputs date filing annual report form 10k purchase accounting finalized mainly due fact evaluation utilization certain foreign tax losses credits completed following table summarizes preliminary purchase price allocation includes estimated fair values separately identifiable assets acquired liabilities assumed march 2 2013 gross amount due 8720 2209 expected uncollectible acquire class receivables trade receivables result acquisition ultrasonix b inventory fair value deferred revenue adjustments associated acquisition 3667 807 respectively amortized 6 months 45 years respectively inventory fair value deferred revenue adjustments recognized product cost sales product revenue statement operations respectively determining purchase price allocation considered among factors market participants’ intentions use acquired assets historical estimated future demand ultrasonix products services fair value developed technology trade name intangible assets based upon relief royalty approach customer relationships intangible asset based upon excess earnings income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital calculation discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired ultrasonix analogic corporation notes consolidated financial statements continued total weighted average amortization period intangible assets approximately 10 years intangible assets amortized economic consumption basis consistent pattern economic benefits intangible assets expected utilized based upon estimated cash flows generated assets goodwill associated acquisition primarily attributable opportunities addition ultrasonix’s product portfolio complements direct ultrasound business suite products goodwill attributable us deductible tax purposes statutory 15 year period goodwill attributable nonus jurisdictions deductible tax purposes fiscal year 2013 incurred approximately 5600 acquisition related costs comprised 3033 inventory step amortization 1357 intangible deferred revenue amortization 1210 legal due diligence related expenses costs included product revenue product costs sales selling marketing expenses general administrative expenses consolidated statement operations consolidated financial statements include results ultrasonix included ultrasound segment results date acquisition period march 2 2013 july 31 2013 ultrasonix contributed revenues approximately 10095 net loss 5777 following unaudited pro forma information fiscal years 2013 2012 presents consolidated information business combination occurred august 1 2011 first day fiscal year 2012 pro forma results calculated adjusting results ultrasonix reflect additional amortization would charged assuming fair value adjustments intangible assets applied august 1 2011 consequential tax effects pro forma results fiscal years 2013 2012 includes 4791 7842 respectively expenses related amortization trade name developed technology customer relationships inventory fair value deferred revenue adjustments purchase accounting respectively fiscal year 2013 adjusted exclude acquisition related expenses 1210 tetrad corporation november 19 2010 acquired certain assets tetrad corporation oem ultrasound transducer probe business acquisition undertaken us order increase market share transducer probe business expand relationships major customer expand product portfolio acquisition resulted bargain purchase seller motivated sell assets transducer probe business since core part seller’s business purchase price acquisition allocated net tangible intangible assets acquired excess fair value assets acquired purchase price recorded bargain purchase gain fiscal year 2011 results operations estimated fair value assets acquired liabilities assumed included audited consolidated financial statements beginning november 19 2010 analogic corporation notes consolidated financial statements continued total purchase consideration expected 686 cash approximately 346 paid closing purchase consideration also included contingent consideration 340 represented fair value future cash payments expected made us based sale certain acquired products two year period commencing november 1 2010 estimated contingent consideration based probability weighted expected future cash flows included audited consolidated balance sheet july 31 2012 accrued liabilities rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital calculation contingent consideration marked market end fiscal quarter fiscal year 2013 paid 435 contingent consideration seller contingent consideration obligation related transaction acquisitionrelated costs insignificant final fair value allocated major classes tangible identifiable intangible assets acquired november 19 2010 bargain purchase gain recorded general administrative expenses audited consolidated statements operations computed follows deferred tax liability associated estimated fair value adjustments tangible intangible assets acquired recorded estimated weighted average statutory tax rate jurisdictions fair value adjustments may occur following table sets forth components identifiable intangible assets acquired amortized estimated useful lives maximum amortization period five years straightline basis determining purchase price allocation considered among factors intention use acquired assets historical estimated future demand acquired products services fair value developed technology based upon relief royalty approach customer relationship backlog intangible assets based income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired analogic corporation notes consolidated financial statements continued results would materially different reported results acquisition occurred beginning fiscal years 2011 2010 5 restructuring charges fiscal year 2013 restructuring plan third fourth quarter fiscal year 2013 incurred restructuring expense amount 496 3023 respectively fiscal year 2013 incurred pretax charges 3519 primarily relating severance personnel related costs 137 involuntarily terminated employees well facility exit costs associated restructuring activities including consolidation manufacturing certain support activities currently conducted ultrasonix facility vancouver operations existing facilities closure ultrasonix sales subsidiary paris france transition costs associated planned closure englewood colorado facility consolidate manufacturing development activities state college pennsylvania facility optimization operations montreal canada peabody massachusetts recognized consolidated statement operation restructuring pretax charges included operating results medical imaging segment ultrasound segment security technology segment expect record additional pretax restructuring charges approximately 1500 complete transitions associated restructuring activities fourth quarter fiscal year ending july 31 2014 total pretax charges approximately 1500 expect approximately 1300 130 0 included operating results ultrasound medical imaging security technology segments respectively fiscal year 2011 restructuring plan first quarter fiscal year 2011 recorded restructuring charge 3562 severance personnel related costs plan initiated reduce workforce 104 employees worldwide purpose workforce reduction streamline operations consolidate denmark canton massachusetts manufacturing operations existing facilities second quarter 2011 recorded adjustment 134 change estimate severance related benefit expenses related plan fourth quarter fiscal year 2011 recorded restructuring charge 3587 severance personnel related costs plan streamline operations reducing workforce 51 employees worldwide analogic corporation notes consolidated financial statements continued following table summarizes accrued restructuring costs activity july 31 2010 july 31 2013 activity fiscal year 2013 pertains ultrasonix acquisition b activity prior july 31 2012 relates fiscal year 2011 restructuring plan fiscal year 2013 restructuring charge 3519 cash payments 702 foreign exchange loss 31 relate fiscal year 2013 restructuring plan cash payments 284 foreign exchange loss 7 relate fiscal year 2011 restructuring plan cash expenditures remaining paid july 31 2013 paid within next twelve months restructuring related charges including actions associated acquisitions segment follows net restructuring related charges comprised following analogic corporation notes consolidated financial statements 6 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method options purchase common shares exercise prices exceeded market value underlying common stock excluded computation diluted earnings per share following table sets forth computation basic diluted net income per share fiscal years 2013 2012 2011 shares related outstanding stock options unvested restricted stock included calculations diluted earnings per share effect including would antidilutive analogic corporation notes consolidated financial statements 7 risks uncertainties subject risks common companies medical security technology industries risks could material negative impact business financial condition results operations include limited loss significant customer dependence key suppliers us foreign regulatory clearances approvals customers three customers set forth table accounted 10 net revenue fiscal years 2013 2012 2011 note total net revenue less 10 fiscal year philips’ toshiba’s revenue medical imaging segment l3’s revenue security technology segment ten largest customers group accounted 68 64 net product engineering revenue fiscal years 2013 2012 2011 respectively loss one customers could material adverse effect business philips accounted 18 13 net accounts receivable july 31 2013 2012 respectively ge accounted 7 10 net accounts receivable july 31 2013 2012 respectively l3 accounted 16 18 net accounts receivable july 31 2013 2012 respectively although seeking broaden customer base continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition generate significant accounts receivable connection products sell services provide major customers although major customers large well established corporations one customers become insolvent otherwise unable pay products services operating results financial condition could adversely affected 8 derivative instruments certain foreign operations revenues andor expenses transacted currencies us dollar order mitigate foreign currency exchange risk use forward contracts lock exchange rates associated portion forecasted international expenses july 31 2013 forward contracts outstanding notional amounts totaling 6720 canadian dollar contracts designated cash flow hedges unrealized loss 104 net tax contracts reported accumulated comprehensive income loss liability asset analogic corporation notes consolidated financial statements derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheets realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal year 2013 2012 recorded approximately 80 70 realized losses included cost revenues operating expenses consolidated statements operations expect contracts currently outstanding settle january 31 2014 amounts accumulated comprehensive income loss reported adjustment operating expenses 9 fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs use fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities cash equivalents july 31 2013 july 31 2012 comprised primarily demand deposits money market funds highly rated financial institutions following table provides assets liabilities carried fair value measured recurring basis july 31 2013 july 31 2012 analogic corporation notes consolidated financial statements assets held deferred compensation plan used pay benefits nonqualified deferred compensation plan investments consist primarily mutual funds b amount contingent consideration related acquisition acquire certain assets oem ultrasound transducer probe business november 2010 quarter ended january 31 2013 paid 435 contingent consideration obligation level 2 instruments classified cash equivalents consist highly liquid demand deposits fair value deposits deviate face value fair value level 2 instruments classified foreign currency forward contracts determined using valuation models based market observable inputs including forward spot prices currencies intangible assets acquired ultrasonix acquisition accounted described note 4 report estimated fair value nonfinancial assets based level 3 inputs contingent consideration fair values contingent consideration based significant unobservable inputs including management estimates assumptions measured based probabilityweighted present value payments expected made accordingly fair values contingent consideration classified level 3 within fair value hierarchy liabilities remeasured reporting period changes fair values included consolidated statements operations following reconciliations changes fair value contingent consideration fiscal years 2013 2012 analogic corporation notes consolidated financial statements 10 inventory components inventory summarized follows fiscal years 2013 2012 11 goodwill intangible assets carrying amount goodwill july 31 2013 july 31 2012 50073 1849 respectively increase goodwill 48224 due acquisition ultrasonix march 2013 information relating acquisition please refer note 4 intangible assets include value assigned intellectual property technology patents customer contracts relationships trade name inprocess research development estimated useful lives intangible assets excluding trade name inprocess research development considered indefinite life 1 14 years carrying values indefinite lived intangible assets 9507 july 31 2013 july 31 2012 respectively intangible assets july 31 2013 2012 consisted following amortization expense related acquired intangible assets 4115 3063 3088 fiscal years 2013 2012 2011 respectively estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows perform annual impairment test goodwill indefinite lived intangible assets second quarter fiscal year second quarter fiscal year 2013 performed annual impairment test analogic corporation notes consolidated financial statements goodwill 1849 december 31 2012 relates 2008 acquisition copley controls oem reporting unit medical imaging segment elected bypass qualitative assessment proceeded step 1 impairment test comparing fair value oem reporting unit medical imaging segment carrying value approach considered market approach income approach equal weight assigned market approach fair value reporting unit based trading multiples control premium determined based analysis control premiums relevant recent acquisitions income approach fair value reporting unit based present value estimated future cash flows income approach dependent number significant management assumptions including estimates future sales future gross margin percentage discount rates determined fair value reporting unit excess carrying value net assets reporting unit greater 70 thus necessary us perform step two impairment test goodwill trade name compared fair value copley trade name using relief royalty approach carrying value second quarter fiscal year 2013 relief royalty approach utilized aftertax royalty rate discount rate aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales copley trade name determined fair value copley trade name carrying value greater 40 goodwill acquired result acquisition ultrasonix assigned ultrasound reporting unit total amount goodwill expected deductible tax purposes 3709 0 fiscal years 2013 2012 respectively inprocess research development represents investment 1900 pocketsonics inc pocketsonics startup company proprietary ultrasound technology compared fair value inprocess research development using income approach carrying value second quarter fiscal year 2013 refer note 22 discussion pocketsonics income approach utilized discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales inprocess research development determined fair value inprocess research development carrying value greater 100 current economic environment uncertainties regarding impact business estimates forecasted revenue spending levels made purposes goodwill trade name inprocess research development impairment testing second quarter fiscal year 2013 may accurate predictions future assumptions regarding forecasted revenue margin growth rates reporting unit trade name inprocess research development achieved may required record impairment charge goodwill trade name inprocess research development future periods whether connection next annual impairment testing second quarter fiscal year ending july 31 2014 prior change constitutes triggering event outside quarter annual goodwill trade name inprocess research development impairment test performed possible time determine future impairment charge would result whether charge would material analogic corporation notes consolidated financial statements 12 commitments guarantees contingencies guarantees indemnification obligations standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant indemnify hold harmless agree reimburse indemnified party losses suffered incurred indemnified party connection us patent copyright intellectual property infringement claim third party respect products provisions generally survive termination expiration agreements potential amount future payments could required make indemnification provisions instances unlimited never incurred costs defend lawsuits settle claims related indemnification agreements result believe estimated exposure agreements currently minimal accordingly liabilities recorded agreements july 31 2013 generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 36 months date delivery provide estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents product general warranty liability fiscal years 2013 2012 july 31 2013 2012 deferred revenue product extended warranty contracts 8018 7207 respectively legal claims subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable believe valid defenses respect matters currently pending us intend defend vigorously outcome matters individually aggregate expected material impact cash flows results operations financial position revolving credit agreements october 11 2011 entered 100 million fiveyear revolving credit agreement “credit agreement” financial institutions identified therein lenders included sovereign bank td bank na hsbc bank usa national association credit agreement guaranteed material domestic subsidiaries designated us time required credit agreement supported pledge 65 capital stock equity equivalents principal international subsidiary analogic corporation notes consolidated financial statements credit facility require amortization principal may reduced maturity whole part option without penalty borrowings credit agreement may used general corporate purposes including permitted acquisitions amount facility increased specified circumstances 150000 aggregate sole borrower credit agreement interest rates borrowings outstanding credit facility would range 125 200 libor rate elect libor rate 000 100 defined base rate highest 1 prime rate 2 federal funds rate plus 050 3 onemonth libor plus 1 case based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits us subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters ebitda greater 275100 time • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2013 leverage ratio 0005 interest coverage ratio applicable attributable interest expense july 31 2013 full compliance financial operating covenants failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control us defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility incurred approximately 500 transactions costs expensed fiveyear life credit facility currently also approximately 12025 revolving credit facilities banks available direct borrowings connection acquisition ultrasonix assumed 784 debt certain credit facility paid july 31 2013 addition debt assumed borrowed 2230 credit facility fiscal year 2013 paid july 31 2013 borrowings outstanding credit facilities july 31 2013 july 31 2012 investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt analogic corporation notes consolidated financial statements practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice refer doj sec cooperating inquiries danish government doj sec unable estimate potential penalties andor sanctions might assessed connection matters concluded transactions identified date properly accounted reported financial statements material respects fiscal year 2013 incurred inquiryrelated costs approximately 1211 connection matter compared 1288 fiscal year 2012 terminated employment certain bk medical employees wound relationships bk medical distributors involved transactions incurred employee termination costs 0 400 respectively connection matter fiscal years 2013 2012 revenue sales bk medical distributors wound bk medical’s relationship represented less 02 total revenue fiscal year 2013 compared less 13 total revenue fiscal year 2012 13 leases commitments certain subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options lease certain real property equipment operating leases aggregate significant rent expense associated operating leases approximately 1812 2154 2623 fiscal years 2013 2012 2011 respectively following schedule year future minimum lease payments july 31 2013 july 31 2013 outstanding noncancelable purchase orders aggregating 61371 purchase orders manufacturing nonmanufacturing related goods services 14 income expense income expense consists primarily interest income cash equivalents gains sale investments foreign exchange gains losses foreign exchange losses gains totaling 1546 668 678 fiscal years 2013 2012 2011 respectively analogic corporation notes consolidated financial statements 15 retirement plans 401k plan qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions us employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined irs fiscal years 2013 2012 2011 matched employee contributions 4 eligible compensation contributions plan totaled 3344 2900 2729 fiscal years 2013 2012 2011 respectively defined benefit retirement plan canadian subsidiary analogic canada corporation formerly known anrad corporation sponsors defined benefit retirement plan called analogic canada corporation retirement plan “analogic canada plan” analogic canada plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 recognize periodic pension expense consolidated statement operations associated assets liabilities consolidated balance sheet estimated net prior service cost net transition asset net actuarial loss analogic canada plan expected amortized stockholders’ equity pension cost fiscal year 2014 9 26 136 respectively comparable amortized amounts net prior service cost net transition asset net actuarial loss fiscal year 2013 10 26 357 respectively amounts recognized accumulated comprehensive loss net periodic benefit cost analogic corporation notes consolidated financial statements actuarial assumptions actuarial assumptions analogic canada plan described discount rates july 31 used measure fiscal year end benefit obligations earnings effects subsequent year discount rate based high quality corporate bond spot rates cash flows match timing amount expected benefit payments determine expected longterm rate return analogic canada plan assets considered current expected asset allocations well historical expected returns various categories plan assets amortize realized gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy analogic canada plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate fiscal years 2013 2012 2011 made contributions analogic canada plan 1657 1068 1168 respectively made payments benefits administrative expenses 647 107 209 respectively fiscal year 2014 expect make contributions payments benefits administrative expenses 1457 358 respectively projected benefit obligation accumulated benefit obligation abo balances analogic canada plan 10189 7743 july 31 2013 2012 respectively analogic corporation notes consolidated financial statements fair value plan assets plan assets analogic canada plan assets held trust follows pension committee analogic canada plan sets investment policies strategies analogic canada plan longterm strategic investment objectives include preserving funded status analogic canada plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range analogic corporation notes consolidated financial statements fair value analogic canada plan pension assets asset category july 31 2013 2012 follows comprises units segregated pooled funds insurance company funds underlying values primarily derived mutual funds debt equity securities traded active market based closing price trading day estimated future benefit payments estimated future benefit payments analogic canada plan follows funded status amounts recognized consolidated balance sheets analogic canada plan follows analogic corporation notes consolidated financial statements 16 income taxes reconciliation income taxes us statutory rate effective tax rate follows components provision benefit income taxes continuing operations follows income continuing operations income taxes domestic foreign operations follows analogic corporation notes consolidated financial statements net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws received refund 12007 second quarter fiscal year 2012 result completion us internal revenue service “irs” audit us federal income tax returns fiscal years ended july 31 2003 2005 2008 refund largely result federal research experimentation credits carryover fiscal years 1991 2000 audited returns recorded tax benefit refund including related interest consolidated statement operations 10025 fiscal year ended july 31 2012 related refund interest contingent professional fees 2714 recorded general administrative expenses consolidated statement operations fiscal year ended july 31 2012 connection conclusion irs audit recorded benefit reversal remeasurement related tax reserves 2308 consolidated statement operations fiscal year ended july 31 2012 additional benefit 358 recorded fiscal year ended july 31 2012 reversal tax reserves certain state nonus taxes provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs circumstances would affect calculations would source location amount distribution underlying tax rate already paid earnings foreign withholding taxes opportunity use foreign tax credits july 31 2013 net operating loss carryforwards belgium approximately 3797 expiration date losses 287 italy expire 2017 losses approximately 2450 united kingdom expiration date losses approximately 142 denmark expiration analogic corporation notes consolidated financial statements date losses 1001 france expiration date july 31 2013 also state tax credit carryforwards 9051 expire 2028 determined likely recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2013 july 31 2012 change valuation allowance fiscal year 2013 primarily result addition state credits foreign losses use cannot assured perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide us comprehensive model recognize measure present disclose financial statements certain tax positions taken expect take income tax returns following table summarizes changes unrecognized income tax benefits fiscal years 2013 2012 unrecognized tax benefits increased 7256 july 31 2013 recognized future period timing estimable net unrecognized tax benefit approximately 6223 would reduce effective tax rate subject us federal income tax well income tax multiple state foreign jurisdictions concluded us federal income tax matters year ended july 31 2008 currently review federal income tax return year ended july 31 2009 next four quarters statute limitations fiscal year ended july 31 2010 may expire us federal state income taxes foreign subsidiaries reasonably expected net unrecognized benefits including interest approximately 1190 may recognized fiscal year 2012 reduced uncertain tax benefits accrued interest 11389 result completion audits fiscal years 2003 2005 2008 closing statutes limitation fiscal year 2006 foreign subsidiaries 2008 domestic entities remeasurement uncertain tax benefits open years analogic corporation notes consolidated financial statements accrue interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2013 july 31 2012 approximately 682 640 respectively accrued interest penalties unrecognized tax benefits refundable deferred income taxes july 31 2013 consisted deferred tax assets 6815 refundable income tax assets 988 refundable deferred income taxes july 31 2012 consisted deferred tax assets 8810 refundable income tax assets 976 refundable income tax assets include expected federal state foreign refunds expected received within next twelve months 17 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2013 2012 discussed note 16 received tax refund 12007 second quarter fiscal year 2012 recorded tax benefit refund including related interest 10025 related refund recorded contingent consulting fees 2714 general administrative expenses discussed note 20 recorded gain 2500 second quarter fiscal year 2012 related sale 25 interest chinabased affiliate discussed note 5 third fourth quarters fiscal year 2013 recorded restructuring charges 496 3023 respectively discussed note 4 second third fourth quarters fiscal year 2013 recorded acquisition related expense 663 1880 3057 respectively association ultrasonix acquisition analogic corporation notes consolidated financial statements 18 segment geographic information business strategically aligned three segments medical imaging ultrasound security technology business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily urology surgery including robotic assisted surgery anesthesia pointofcare markets • security technology includes advanced threat detecting ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide table presents information reportable segments analogic corporation notes consolidated financial statements includes restructuring charges 1099 fiscal year 2013 includes 2198 contingent consulting fees related tax refund related interest received fiscal year 2012 includes restructuring charges 2829 fiscal year 2011 b includes restructuring charges 2209 fiscal year 2013 includes restructuring charges 3668 fiscal year 2011 c includes restructuring charges 202 fiscal year 2013 includes 516 contingent consulting fees related tax refund related interest received fiscal year 2012 includes restructuring 569 fiscal year 2011 includes realized loss 1546 foreign currency transactions fiscal year 2013 includes realized gain 2500 sale remaining interest china based affiliate received fiscal year 2012 includes net interest income 371 532 711 fiscal years 2013 2012 2011 respectively e includes goodwill net intangible assets acquisitions 1849 29391 respectively july 31 2013 1849 32447 respectively july 31 2012 1849 35503 respectively july 31 2011 f includes goodwill net intangible assets acquisitions 48224 24248 respectively july 31 2013 relating acquisition ultrasonix third quarter fiscal year 2013 g includes cash equivalents marketable securities 57424 153122 135069 july 31 2013 2012 2011 respectively information regarding sharebased compensation depreciation amortization segment fiscal years 2013 2012 2011 follows analogic corporation notes consolidated financial statements information regarding geographic areas fiscal years 2013 2012 2011 follows long lived assets primarily canada revenues attributed countries based location customers oem sales customer location may differ location ultimate completed systems sold oem market 19 common stock repurchases december 9 2010 announced board directors authorized repurchase 30000 common stock fiscal year 2012 repurchased 286390 shares common stock repurchase program 14813 average purchase price 5173 per share 2010 repurchase program completed second quarter fiscal year 2012 cumulative shares repurchased retired program 586679 shares common stock 30000 average price 5114 per share december 8 2011 announced board directors authorized repurchase additional 30000 common stock repurchase program funded using available cash fiscal year 2013 repurchased retired 111816 shares common stock repurchase program 7945 average purchase price 7106 per share fiscal year 2012 repurchased retired 137591 shares common stock repurchase program 8447 average purchase price 6139 per share july 31 2013 repurchased retired total 249407 shares common stock repurchase program 16393 average purchase price 6573 per share 20 related party transactions july 25 2011 entered agreement sell 25 interest chinabased affiliate 2500 book value interest chinabased affiliate written 0 fiscal year 2006 analogic corporation notes consolidated financial statements upon final approval transaction chinese government receipt proceeds recorded gain sale investments 2500 fiscal year 2012 july 31 2011 net advance payment deferred revenue balance 474 former chinabased affiliate sales chinabased affiliate fiscal years 2012 2011 approximately 0 2808 respectively april 2010 invested 1900 pocketsonics startup company proprietary ultrasound technology expensed 898 1547 2438 engineering services startup company fiscal years 2013 2012 2011 respectively 21 accumulated comprehensive income loss components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income consists reported foreign currency translation gains losses net taxes actuarial gains losses pension plan assets net taxes changes unrealized value foreign currency forward contracts net taxes deferred taxes provided cumulative translation adjustments expect earnings foreign subsidiary indefinitely reinvested income tax effect currency translation adjustments related foreign subsidiaries considered indefinitely reinvested recorded component deferred taxes offset comprehensive income following table summarizes components accumulated comprehensive income loss follows effective portion unrealized gains losses foreign currency forward contracts unrealized gains losses currency translation included income expense consolidated statement operations analogic corporation notes consolidated financial statements 22 subsequent events april 2010 entered transaction pocketsonics inc pocketsonics pursuant received exclusive license certain ultrasound technology owned controlled pocketsonics acquired ten percent 10 equity interest pocketsonics equity investment recorded inprocess research development 1900 september 20 2013 acquired remaining equity pocketsonics purchase price includes base merger consideration 11083 paid cash closing additional contingent consideration 3000 payable upon achievement certain milestones due timing transaction supplemental disclosures respect acquisition readily available order properly disclose time intend update disclosure surrounding transaction fiscal year 2014 quarterly filings september 12 2013 announced board directors september 10 2013 declared dividend 010 per common share payable october 10 2013 stockholders record september 26 2013 analogic corporation schedule ii valuation qualifying accounts thousands changes valuation allowance represents changes federal state foreign tax attributes believe likely able utilized index exhibits management contract compensatory plan arrangement submitted electronically herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated balance sheets july 31 2013 july 31 2012 ii consolidated statements operations years ended july 31 2013 2012 2011 iii consolidated statements comprehensive income years ended july 31 2013 2012 2011 iv consolidated statements changes stockholders’ equity years ended july 31 2013 2012 2011 v consolidated statements cash flows years ended july 31 2013 2012 2011 vi notes consolidated financial statements accordance rule 406t regulation st xbrl related information exhibit 101 annual report form 10k deemed filed part registration statement prospectus purposes sections 11 12 securities act deemed filed purposes section 18 exchange act otherwise subject liability sectionsitem 15 exhibits financial statement schedules b index exhibits immediately following financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a 1 present fairly material respects financial position analogic corporation subsidiaries july 31 2014 july 31 2013 results operations cash flows three years period ended july 31 2014 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2014 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s annual report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts september 26 2014 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements comprehensive income thousands accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2014 2013 2012 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements millions except share per share data 1 summary business operations significant accounting policies throughout annual report form 10k unless context states otherwise words “we” “us” “our” “analogic” refer analogic corporation subsidiaries taken whole “our board directors” refers board directors analogic corporation description business analogic corporation nasdaqalog designs manufactures commercializes innovative realtime guidance diagnostic imaging threat detection technologies advance practice medicine save lives operate report along three business segments ultrasound medical imaging security technology ultrasound segment provides ultrasound guidance systems urology surgery markets expanding point care areas anesthesia emergency medicine sell ultrasound products direct sales force north america europe well network distributors clinical practitioners throughout world medical imaging segment provides critical enabling medical imaging systems subsystems computed tomography ct magnetic resonance imaging mri highresolution digital mammography systems sell medical imaging products primarily longstanding relationships wellknown multinational medical oems new entrants emerging markets security technology segment designs manufactures automated threat detection systems aviation baggage inspection applications utilizing advanced ct technology sell security products primarily multinational oem partners incorporated commonwealth massachusetts november 1967 headquarters based peabody massachusetts march 1 2013 completed acquisition ultrasonix medical corporation ultrasonix september 20 2013 acquired pocketsonics inc pocketsonics acquisitions fully discussed note 3 financial position results operations cash flows ultrasonix pocketsonics included consolidated financial statements date acquisition significant accounting policies consolidation consolidated financial statements include accounts us subsidiaries wholly owned investments companies ownership interests range 10 50 percent exercise significant influence investee’s operating financial policies accounted using equity method intercompany accounts transactions eliminated consolidation determining whether primary beneficiary entity therefore required consolidate apply qualitative approach determines whether 1 power direct economically significant activities entity 2 obligation absorb losses right receive benefits entity could potentially significant entity required consolidate activity entity due considerations b cash equivalents consider highly liquid investments original maturity three months less acquisition date cash equivalents analogic corporation notes consolidated financial statements continued millions except share per share data c revenue recognition accounts receivable recognize revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated upon shipment revenue recognized upon customer acceptance provided revenue recognition criteria met sales contracts generally provide customer accept title risk loss product leaves facilities shipping terms local laws allow passage title risk loss shipping point defer recognizing revenue title risk loss transfer customer classify shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority include service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification transactions sometimes involve multiple elements ie products services recognize revenue product sales industry specific software accounting guidance since products contain software nonsoftware components function together deliver tangible product’s essential functionality inception agreement allocate arrangement consideration deliverable qualifying separate unit accounting arrangement based relative selling price determine selling price using vendor specific objective evidence vsoe exists otherwise third party evidence tpe neither vsoe tpe selling price exists unit accounting use best estimated selling price besp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available besp vsoe generally limited price charged similar product service sold separately applicable stated substantive renewal rate agreement product service seldom sold separately unlikely determine vsoe product service define vsoe median price recent standalone transactions priced within narrow range defined us stated renewal rates contracts tpe determined based prices charged competitors us similar deliverable sold separately noted typically able use tpe usually able obtain sufficient information competitor pricing substantiate tpe unable establish selling price using vsoe tpe use besp allocation arrangement consideration objective besp determine price would transact product service sold us standalone basis determination besp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies determine besp deliverables future agreements based specific facts circumstances arrangement analyze selling prices used allocation arrangement consideration least analogic corporation notes consolidated financial statements continued millions except share per share data annually selling prices analyzed frequent basis significant change business necessitates timely analysis experience significant variances selling prices maintenance service revenues recognized ratably term contract provide engineering services customers contractual basis recognize revenue using percentage completion method completed contract method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate shortterm unbilled receivables included accounts receivable longterm unbilled receivables included noncurrent assets consolidated balance sheet total unbilled receivables july 31 2014 2013 58 million 49 million respectively july 31 2014 2013 longterm portion unbilled receivables 00 million 18 million respectively included noncurrent assets total cost estimates exceed revenues accrue estimated losses immediately deferred revenue primarily comprised maintenance service revenues payment received services yet performed revenue also deferred situations collection receivable time shipment reasonably assured situations collection receivable reasonably assured inventory expensed upon shipment revenue deferred recognized cash received total deferred revenue july 31 2014 2013 118 million 106 million respectively july 31 2014 2013 longterm portion deferred revenue 11 million 14 million respectively included noncurrent liabilities grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions may affect reported amounts assets liabilities equity revenue expenses related disclosures contingent assets liabilities ongoing basis evaluate estimates judgments methodologies base estimates historical experience various assumptions believed reasonable results forms basis making judgments carrying value assets liabilities actual results may differ estimates different assumptions conditions e inventories value inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory writedowns recorded subsequently reversed unless inventory used disposed inventory includes demo equipment utilized sales force field analogic corporation notes consolidated financial statements continued millions except share per share data f income taxes account income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs g concentration credit risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents derivative instruments accounts receivable cash equivalents required working capital purposes placed primarily shortterm bank deposits money market funds demand notes financial institutions banks meet stringent credit rating requirements collateralized securities issued us government agencies grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition require collateral security furnished counterparties derivative instruments h property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected consolidated statement operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized property plant equipment consisted following analogic corporation notes consolidated financial statements continued millions except share per share data total depreciation amortization property plant equipment 143 million 130 million 134 million fiscal years 2014 2013 2012 respectively capitalize interest fiscal years 2014 2013 2012 intangible assets goodwill intangible assets consist intellectual property licenses certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology intangible assets finite lives amortized using either straightline method reliably determinable based pattern economic benefit asset expected utilized definitelived intangible assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact results operations indefinite lived intangible asset inprocess research development iprd asset tested impairment annually frequently indicators impairment present perform annual review second quarter fiscal year indefinite lived intangible asset may considered impaired determine carrying value exceeds assets’ fair value may first perform qualitative assessment determine whether necessary perform quantitative impairment test bypass qualitative assessment proceed directly performing quantitative impairment test quantitative impairment test based discounted estimated future cash flows assessing impairment indefinite lived intangible asset requires us make assumptions judgments regarding fair value asset using relief royalty valuation technique include management’s estimates future growth rates discount rates goodwill amortized reviewed impairment annually frequently whenever events changes circumstances indicate carrying value reporting unit may exceed fair value reporting unit purpose impairment test operating segment level constitutes business discrete financial information available regularly reviewed segment management perform annual reviews second quarter fiscal year may first assess qualitative factors determine whether likely fair value reporting unit less it’s carrying value basis determining whether necessary perform twostep goodwill impairment test may also elect proceed directly twostep impairment test initial qualitative assessment indicates likely carrying value reporting unit exceeds estimated fair value additional quantitative evaluation performed twostep impairment test based quantitative evaluation fair value reporting unit less carrying amount perform analysis fair value assets liabilities reporting unit implied fair value reporting unit’s goodwill determined less carrying amount impairment recognized difference assessing impairment goodwill requires us make assumptions judgments regarding fair value reporting units estimate fair value reporting units using combination valuation analogic corporation notes consolidated financial statements continued millions except share per share data techniques including discounted cash flows cash earnings multiples compare values estimated overall market capitalization j fair value financial instruments financial instruments consist primarily cash equivalents accounts receivable accounts payable accrued liabilities derivative instruments carrying amounts financial instruments approximate fair value due shortterm nature fair values marketable securities estimated based quoted market price securities marketable securities july 31 2014 2013 k asset retirement obligations establish asset retirement obligations “aros” present value estimated future costs return certain facilities original condition recorded liabilities accreted future value estimated restoration costs accretion liability depreciation capitalized cost recognized estimated useful lives facilities l impairment longlived assets evaluate recoverability longlived assets recognizing impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis market value review longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset group compared recorded value asset group warranty costs provide estimated cost standard product warranties time products shipped although engage extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect operating results generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery n research product development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries incentive compensation including sharebased compensation overhead materials used connection research product development activities research product development costs related nonrecurring engineering projects funded customers included within engineering cost sales project accounted percentage completion method completed contract method software development costs incurred subsequent establishing technological feasibility capitalized technological feasibility established general release products contain analogic corporation notes consolidated financial statements continued millions except share per share data embedded software elements technological feasibility demonstrated completion detailed program design capitalized costs amortized higher straightline basis economic life software ranging 3 5 years b ratio product’s current gross revenues total current expected gross revenues amortization expense capitalized software development costs 00 million 02 million 13 million fiscal years 2014 2013 2012 respectively included product cost sales derivative instruments hedging activities recognize derivative instruments either assets liabilities fair value consolidated balance sheets changes fair value derivatives recorded period current earnings accumulated comprehensive income loss depending whether derivative designated part hedge transaction classify cash flows instruments category cash flows hedged items enter derivative transactions trading speculative purposes assess inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows fair values hedged items also assess hedge ineffectiveness quarterly basis record gain loss related ineffective portion current earnings determine forecasted transaction longer probable occurring discontinue hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings p translation foreign currencies assets liabilities foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected component accumulated comprehensive income consolidated balance sheet foreign currency translation adjustments 01 million 46 million 76 million respectively included within consolidated statement comprehensive income fiscal years 2014 2013 2012 respectively exchange gains losses resulting foreign currency transactions denominated currency entity’s functional currency excluding intercompany transactions considered longterm investment nature included results operations period occur reflected caption “other net” foreign exchange gains losses included within consolidated statement operations totaling 02 million 15 million 07 million fiscal years 2014 2013 2012 respectively q advertising costs expensed incurred included selling marketing expenses r sharebased compensation recognize sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant net estimated forfeitures analogic corporation notes consolidated financial statements continued millions except share per share data estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards recognize associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target evaluate probability meeting performance criteria balance sheet date probable related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change earnings per share related target performance achieved compensation cost recognized previously recognized compensation cost reversed marketbased awards compensation cost amortized performance period straightline basis awards vest end measurement period probability actual shares expected earned considered grant date valuation therefore expense adjusted reflect actual units earned business combinations accordance acquisition method accounting fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business expensed incurred excess purchase price estimated fair value net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common dilutive common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock u segment information identify business operating segment engages business activities may earn revenues incur expenses ii operating results regularly reviewed chief operating decision maker chief executive officer iii available discrete financial information aggregate operating segments reportable segment operating segments determined similar economic characteristics similar nature products services nature production processes type class customer products services product service distribution method applicable nature regulatory environment three reportable segments medical imaging ultrasound security technology v new accounting pronouncements recently adopted testing indefinitelived intangible assets impairment july 2012 financial accounting standards board fasb issued update regarding testing indefinitelived intangible assets impairment update gives entity option first assess qualitative analogic corporation notes consolidated financial statements continued millions except share per share data factors determine whether existence events circumstances indicates likely indefinitelived intangible asset impaired assessing totality events circumstances entity concludes likely indefinitelived intangible asset impaired entity required take action however entity concludes otherwise required determine fair value indefinitelived intangible asset perform quantitative impairment test comparing fair value carrying amount entity also option bypass qualitative assessment indefinitelived intangible asset period proceed directly performing quantitative impairment test entity able resume performing qualitative assessment subsequent period guidance effective interim period ended october 31 2013 adopted standard first quarter fiscal year ended july 31 2014 adoption standard material impact financial condition results operations presentation unrecognized tax benefits july 2013 fasb issued update intended eliminate diversity practice regard financial statement presentation unrecognized tax benefits net operating loss carryforward similar tax loss tax credit carryforward exists guidance effective interim period ending january 31 2014 adopted standard first quarter fiscal year 2014 presented information note 15 income taxes adoption standard material impact financial condition results operations yet effective revenue contracts customers may 2014 fasb issued update provides guidance revenue recognition update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition requirement industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates today’s guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update effective us first quarter fiscal year 2018 early adoption permitted currently evaluating impact adoption update consolidated financial statements foreign currency matters march 2013 fasb issued update amends guidance foreign currency matters consolidations address diversity practice related release cumulative translation adjustments “cta” earnings upon occurrence certain derecognition events update reflects compromise cta release guidance included within foreign currency matters loss control concepts included within consolidation guidance precludes release cta derecognition events occur within foreign entity unless events represent complete substantially complete liquidation foreign entity derecognition events related investments foreign entity result release cta related derecognized foreign entity even noncontrolling financial interest retained update analogic corporation notes consolidated financial statements continued millions except share per share data also amends guidance business combinations transactions result company obtaining control business step acquisition increasing investment foreign entity one accounted equity method one accounted consolidated investment update effective fiscal years beginning december 15 2013 update applied prospectively prior periods adjusted update expected impact financial condition results operations early adoption permitted beginning entity’s fiscal year w reclassifications revisions prior period financial statements certain financial statement items reclassified conform current period presentation 2 sharebased compensation expense january 29 2010 stockholders approved “2009 stock incentive plan” 2009 plan provided issuance 1600000 shares common stock stockholders approved amendments 2009 plan january 23 2012 january 21 2014 increased number shares available issuance 2009 plan 2200000 4453518 respectively sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period net forfeitures following table sets forth stock option restricted stock transactions fiscal year 2014 1 performancebased unvested restricted stock shown table target except number shares vested reflect shares earned july 31 2014 maximum number performancebased unvested restricted stock available earned 375860 2 addition vested options expect portion unvested options vest point future stock options expected vest calculated applying estimated forfeiture rate unvested options analogic corporation notes consolidated financial statements continued millions except share per share data following table presents sharebased compensation expense included consolidated statements operations july 31 2014 unrecognized compensation cost net estimated forfeitures related unvested stock options restricted stock 104 million cost recognized estimated weighted average amortization period 13 years assumes target performance nongaap eps performance based rsu’s stock options estimate fair value stock options using blackscholes valuation model key input assumptions used estimate grant date fair values stock options include exercise price award expected option term expected volatility stock option’s expected term riskfree interest rate option’s expected term expected annual dividend yield estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair values option grants estimated grant date using following assumptions fiscal years 2014 2013 2012 1 expected option term estimated using historical data 2 expected volatility grant determined based review average historical daily price changes common stock expected option term 3 riskfree interest rate determined based yield zerocoupon us treasury securities period commensurate expected term assumption 4 expected annual dividend yield calculated dividing expected annual dividends stock price date grant weighted average grant date fair value stock options granted fiscal years 2014 2013 2012 2755 2525 1671 per share respectively analogic corporation notes consolidated financial statements continued millions except share per share data total intrinsic value options exercised fiscal years 2014 2013 2012 19 million 15 million 05 million respectively intrinsic value defined difference market price date exercise grant date exercise price total amount cash received exercise options 49 million 34 million 19 million respectively actual tax benefit realized tax deductions option exercises less 01 million fiscal years 2014 2013 2012 restricted stock restricted stock units estimate fair value restricted stock restricted stock units rsu’s vest based service conditions using quoted closing price common stock date grant sharebased compensation expense amortized award’s vesting period straightline basis awards service performance conditions vest end performance cycle graded vesting method applies awards service performance conditions nongaap earnings per share eps performancebased awards compensation cost amortized performance period straightline basis net forfeitures awards vest end performance period compensation cost based number shares deemed probable vesting end threeyear performance cycle probability assessment done quarter changes estimates result significant expense fluctuations due cumulative catchup adjustment estimate fair value nongaap eps performancebased awards using quoted closing price common stock date grant relative total shareholder return tsr performancebased awards based market performance compensation cost amortized performance period straightline basis net forfeitures awards vest end measurement period probability actual shares expected earned considered grant date valuation result expense adjusted reflect actual shares earned estimate fair value tsr performancebased awards using montecarlo simulation model granted 27450 24470 38042 tsr 35686 31806 38042 nongaap eps performancebased awards fiscal years 2014 2013 2012 respectively fair value tsr performancebased awards date grant estimated using montecarlo simulation model following assumptions 1 stock price closing price common stock date grant 2 expected volatility grant determined based historical volatility peer group companies common stock period equal remaining term performance period date grant awards 3 riskfree interest rate determined based yield zerocoupon us treasury securities period commensurate performance period analogic corporation notes consolidated financial statements continued millions except share per share data 4 dividends considered reinvested calculating tsr dividend yield therefore considered 0 weighted average grant date fair values timebased restricted stock awards granted fiscal years 2014 2013 2012 8246 7178 5045 respectively weighted average grant date fair value performancebased restricted stock awards granted fiscal years 2014 2013 2012 9385 8594 7759 respectively total fair value restricted stock vested fiscal years 2014 2013 2012 249 million 160 million 19 million respectively employee stock purchase plan november 4 1985 stockholders approved employee stock purchase plan espp authorizing issuances 700000 shares common stock espp allows qualified participants purchase common stock 85 market price first business day purchase period last business day sixmonth purchase period stockholders approved amendments espp january 22 1986 january 23 1998 january 17 2003 january 21 2014 stockholders approved amendments espp removed income limitation participation plan increased maximum value stock employee purchase two payment periods per year estimate fair value espp shares using blackscholes valuation model fiscal years 2014 2013 2012 financial impact espp shares immaterial 3 business combination pocketsonics inc april 2010 entered agreement pocketsonics inc pocketsonics privately held ultrasound technology company based charlottesville virginia granted us exclusive license certain ultrasound technology owned controlled pocketsonics ten percent 10 equity interest pocketsonics equity investment recorded inprocess research development iprd 19 million since time collaborated pocketsonics develop patented ultrasound technology enable acceleration high acuity guided procedures lower cost pointofcare settings technical applications september 20 2013 acquired remaining stock pocketsonics purchase price includes base consideration 111 million paid cash closing fair value contingent consideration 19 million revaluation initial equity investment undertook acquisition strengthen competitive position procedure guidance pointofcare advanced guidance applications acquisition funded existing cash hand accounted acquisition business analogic corporation notes consolidated financial statements continued millions except share per share data finalized purchase accounting pocketsonics acquisition fiscal year 2014 following table summarizes fair values separately identifiable assets acquired liabilities assumed september 20 2013 determining fair value considered among factors market participants’ intentions use acquired assets historical estimated future demand pocketsonics products services recognized iprd asset 115 million fair value asset determined probability adjusted cash flow analysis may 2014 determined iprd completed performed qualitative assessment determined impairment accordingly carrying amount iprd asset reclassified developed technology amortized estimated useful life 10 years connection acquisition recorded fair value contingent consideration obligation 19 million related potential additional consideration 30 million payable upon achievement certain milestones relating pocketsonics technology contingent earnout payments payable sellers pocketsonics would met upon commercial launch volume sales target 19 million fair value estimated valuation model incorporates probability adjusted assumptions relating achievement milestones likelihood us making payments fair value measurement based upon significant inputs observable market therefore represents level 3 input measurement subsequent changes fair value obligation recognized adjustments contingent consideration liability reflected within income expense net consolidated statement operations fiscal year 2014 estimated fair value contingent consideration obligation increased 02 million total fair value contingent consideration obligation 21 million july 31 2014 additional information related fair value obligation please refer note 8 fair value measurements recorded goodwill 69 million related pocketsonics acquisition representing value opportunity strengthening competitive position procedure guidance pointofcare advanced guidance applications goodwill deductible tax purposes upon acquisition pocketsonics recognized loss 05 million related 10 preacquisition equity interest reflected component expense net within consolidated statement operations fiscal year 2014 analogic corporation notes consolidated financial statements continued millions except share per share data fiscal year 2014 incurred acquisition costs 01 million consisting primarily legal due diligence expenses included general administrative expenses consolidated statement operations expensed 09 million 15 million engineering services related pocketsonics fiscal years 2013 2012 respectively prior acquisition remaining stock ultrasonix medical corporation march 1 2013 completed acquisition outstanding equity securities ultrasonix medical corporation ultrasonix nevada corporation whose principal assets included customer lists intangibles related solely sales destined us march 2 2013 completed acquisition outstanding equity securities ultrasonix medical corporation canadian corporation pursuant “plan arrangement” canadian law ultrasonix supplier advanced ultrasound systems pointofcare general imaging applications undertook acquisition accelerate expansion pointofcare ultrasound market purchase price net cash acquired 799 million funded existing cash hand acquisition accounted acquisition business finalized purchase accounting ultrasonix acquisition fiscal year 2014 following table summarizes purchase price allocation includes fair values separately identifiable assets acquired liabilities assumed march 2 2013 gross amount due 87 million 22 million expected uncollectible acquire class receivables trade receivables result acquisition ultrasonix b inventory fair value adjustment 37 million associated acquisition fully amortized october 31 2013 deferred revenue adjustment 08 million associated acquisition analogic corporation notes consolidated financial statements continued millions except share per share data amortized 45 years inventory fair value deferred revenue adjustments recognized product cost sales net product revenue consolidated statement operations respectively determining purchase price allocation considered among factors market participants’ intentions use acquired assets historical estimated future demand ultrasonix products services fair value developed technology trade name intangible assets based relief royalty approach customer relationships intangible asset based excess earnings income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital calculation discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired ultrasonix total weighted average amortization period intangible assets approximately 10 years intangible assets amortized economic consumption basis consistent pattern economic benefits intangible assets expected utilized based upon estimated cash flows generated assets goodwill associated acquisition primarily attributable opportunities addition ultrasonix’s product portfolio complements direct ultrasound business suite products goodwill attributable us deductible tax purposes statutory 15 year period goodwill attributable nonus jurisdictions deductible tax purposes fiscal year 2014 incurred acquisitionrelated costs approximately 87 million primarily related intangible amortization 78 million well inventory fair value step charge 06 million intangible amortization 54 million 24 million included selling marketing expense product cost sales respectively consolidated statement operations inventory fair value step charge recorded product cost sales consolidated statement operations fiscal year 2013 incurred approximately 56 million acquisitionrelated costs comprised 30 million inventory step amortization 14 million intangible deferred revenue amortization 12 million legal due diligence related expenses costs included net product revenue product costs sales selling marketing expenses general administrative expenses consolidated statement operations pro forma financial information following unaudited pro forma information fiscal years ended july 31 2014 july 31 2013 respectively presents consolidated information pocketsonics ultrasonix acquisitions occurred august 1 2012 first day fiscal year 2013 analogic corporation notes consolidated financial statements continued millions except share per share data 4 restructuring charges fiscal year 2014 restructuring plan fourth quarter fiscal year 2014 incurred pretax charges 29 million primarily relating severance personnel related costs 48 involuntarily terminated employees associated restructuring activities including improving operational effectiveness peabody massachusetts better leverage core competencies across business recognized consolidated statement operations restructuring pretax charges included operating results medical imaging segment ultrasound segment security technology segment 29 million charge recorded operating results medical imaging ultrasound security technology segments charges 19 million 05 million 05 million respectively expect restructuring plan completed fiscal year 2015 fiscal year 2013 restructuring plan may 2013 announced restructuring plan incurred pretax charges 35 million primarily relating severance personnel related costs 115 terminated employees well facility exit costs closure ultrasonix sales subsidiary paris france well closure ultrasound transducer operation englewood colorado consolidate transducer operations state college pennsylvania plan also include activities consolidate manufacturing certain support functions currently conducted ultrasonix facility vancouver canada facilities well optimization operations montreal canada peabody massachusetts pretax charges included operating results medical imaging segment ultrasound segment security technology segment fiscal year 2014 incurred additional 06 million restructuring related charges respect fiscal year 2013 restructuring plan related primarily facility exit costs respect closure englewood colorado facility following table summarizes accrued restructuring costs activity july 31 2012 july 31 2014 restructuring charges fiscal year 2014 include 29 million respect fiscal year 2014 restructuring plan activity pertains fiscal year 2013 restructuring plan b activity fiscal year 2013 pertains fiscal year 2013 restructuring plan respect ultrasonix acquisition c restructuring charges fiscal year 2014 pertains fiscal year 2013 restructuring plan respect closure englewood colorado facility cash payments fiscal year 2014 pertain closure englewood colorado facility ultrasonix sales subsidiary paris france analogic corporation notes consolidated financial statements continued millions except share per share data activity prior july 31 2012 relates fiscal year 2011 restructuring plan fiscal year 2013 restructuring charge 35 million cash payments 07 million relate fiscal year 2013 restructuring plan cash payments 03 million relate fiscal year 2011 restructuring plan e activity fiscal year 2014 pertains fiscal year 2014 restructuring plan 2013 restructuring plan fiscal year 2014 restructuring charges 29 million relate fiscal year 2014 restructuring plan restructuring charges 06 million cash payments 25 million relate fiscal year 2013 restructuring plan restructuring charges comprised balance sheet following location cash expenditures remaining paid july 31 2014 paid within next twelve months restructuring costs including actions associated acquisitions segment fiscal years 2014 2013 follows restructuring costs incurred fiscal year 2012 net restructuring related charges comprised following 5 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method options purchase common shares exercise prices exceeded market value underlying common stock excluded computation diluted earnings per share analogic corporation notes consolidated financial statements continued millions except share per share data following table sets forth computation basic diluted net income per share fiscal years 2014 2013 2012 shares related outstanding stock options unvested restricted stock included calculations diluted earnings per share effect including would antidilutive 6 risks uncertainties subject risks common companies medical security technology industries risks could material negative impact business financial condition results operations include limited loss significant customer dependence key suppliers us foreign regulatory clearances approvals customers accounts receivable arise primarily products sold services provided us europe asia balance accounts receivable represents amount due domestic foreign oem customers distributors end users majority accounts receivable standard payment terms require payment within 30 days perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified amounts determined uncollectible charged written reserve date historical writeoffs accounts receivable minimal ten largest customers group accounted 66 68 net product engineering revenue fiscal years 2014 2013 2012 respectively set forth table customers individually accounted 10 net revenue note total net revenue less 10 fiscal year analogic corporation notes consolidated financial statements continued millions except share per share data philips’ toshiba’s siemens’ revenues primarily medical imaging segment l3’s revenue security technology segment following table summarizes net accounts receivable due customers net accounts receivable balances greater equal 10 total net accounts receivable balance note total net accounts receivable less 10 fiscal year 7 derivative instruments certain foreign operations revenues expenses transacted currencies functional currency order mitigate foreign currency exchange risk use forward contracts lock exchange rates associated portion forecasted international expenses july 31 2014 outstanding forward contracts july 31 2013 forward contracts outstanding notional amounts totaling 67 million canadian dollar contracts designated cash flow hedges unrealized loss 01 million net tax contracts reported accumulated comprehensive income july 31 2013 liability asset derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheets realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal year 2014 2013 recorded approximately 02 million realized gain 01 million realized loss respectively included consolidated statements operations 8 fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs use fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities analogic corporation notes consolidated financial statements continued millions except share per share data following table provides assets liabilities carried fair value measured recurring basis july 31 2014 2013 assets held deferred compensation plans used pay benefits nonqualified deferred compensation plans investments primarily consist mutual funds publicly traded stock exchanges accordingly fair value assets categorized level 1 within fair value hierarchy cash equivalents consist highly liquid demand deposits money market funds highly rated financial institutions fair value demand deposits determined projecting future cash flows using estimated economic life deviate face value accordingly fair value assets categorized level 2 within fair value hierarchy fair value liabilities arising foreign currency forward contracts determined valuation models based market observable inputs including forward spot prices currencies accordingly fair value liabilities categorized level 2 within fair value hierarchy fair value contingent consideration obligation based significant unobservable inputs including management estimates assumptions measured based probabilityweighted present value payments expected made accordingly fair value liability categorized level 3 within fair value hierarchy analogic corporation notes consolidated financial statements continued millions except share per share data fair value contingent payments associated acquisition pocketsonics calculated utilizing 100 earnout associated 510k clearance obtained food drug administration fda april 9 2014 anticipation commercial launch first quarter fiscal year 2015 july 31 2014 fair value contingent consideration payments associated sales volume target earnout calculated utilizing discount rate 270 quarter revalue contingent consideration obligations associated acquisition pocketsonics current fair value record changes fair value consolidated statement operations changes contingent consideration result changes assumptions regarding probabilities estimated timing launch volume sales target payments discount rate used estimate fair value liability assumptions used estimating fair value require significant judgment use different assumptions judgments could result materially different estimate fair value following reconciliations changes fair value contingent consideration fiscal years 2014 2013 9 inventory components inventory net allowance obsolete unmarketable slowmoving inventories summarized follows 10 goodwill intangible assets goodwill carrying value goodwill july 31 2014 2013 570 million 501 million respectively difference two periods relates goodwill associated acquisition pocketsonics 69 million upon acquisition pocketsonics recorded goodwill 28 million representing value opportunity strengthening competitive position goodwill associated acquisition increased additional 41 million deferred tax liability iprd recorded pocketsonics please refer note 3 business combinations information acquisition pocketsonics total amount goodwill expected deductible tax purposes 37 million fiscal years 2014 2013 analogic corporation notes consolidated financial statements continued millions except share per share data intangible assets intangible assets include value assigned intellectual property technology patents customer contracts relationships trade names inprocess research development estimated useful lives intangible assets excluding trade names inprocess research development considered indefinite life 1 14 years carrying values indefinite lived intangible assets 76 million 95 million july 31 2014 2013 respectively intangible assets july 31 2014 2013 consisted following 76 million trade names nonamortizable amortization expense related intangible assets 78 million 41 million 31 million fiscal years 2014 2013 2012 respectively estimated future amortization expenses related intangible assets succeeding fiscal years expected follows performed annual impairment test goodwill intangible assets indefinite lives december 31 2013 goodwill december 31 2013 relates acquisitions copley controls april 2008 ultrasonix march 2013 pocketsonics september 2013 accordance us gaap elected bypass qualitative assessment proceeded step one impairment test comparing fair value reporting units carrying values goodwill acquisition copley controls 19 million included oem reporting unit medical imaging segment purposes assessing annual impairment goodwill acquisitions ultrasonix pocketsonics 551 million included ultrasound reporting unit impairment assessment considered market approach income approach different probabilities assigned market approach fair value reporting unit based trading multiples control premium determined based analysis control premiums recent relevant acquisitions income approach fair analogic corporation notes consolidated financial statements continued millions except share per share data value reporting unit based present value estimated future cash flows income approach dependent number significant management assumptions including estimates future sales future gross margin percentage discount rates determined fair values oem ultrasound reporting units excess carrying values therefore necessary us perform step two impairment test compared fair value copley tradename using relief royalty approach carrying value december 31 2013 relief royalty approach utilized aftertax royalty rate discount rate aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales copley tradename determined fair value copley tradename excess carrying value iprd asset arises acquisition pocketsonics determined fair value iprd using probabilityadjusted cash flow model compared fair value iprd using income approach carrying value december 31 2013 determined impairment may 2014 iprd completed performed qualitative assessment determined impairment accordingly carrying amount iprd asset 115 million reclassified developed technology amortized estimated useful life 10 years expect utilize iprd asset ultrasound segment current economic environment uncertainties regarding impact business estimates forecasted revenue spending levels made purposes goodwill trade name impairment testing second quarter fiscal year 2014 may accurate predictions future assumptions regarding forecasted revenue margin growth rates reporting unit trade name achieved may required record impairment charge goodwill trade name future periods whether connection next annual impairment testing second quarter fiscal year ending july 31 2015 prior change constitutes triggering event outside quarter annual goodwill trade name impairment test performed possible time determine future impairment charge would result whether charge would material 11 commitments guarantees contingencies guarantees indemnification obligations standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant indemnify hold harmless agree reimburse indemnified party losses suffered incurred indemnified party connection us patent copyright intellectual property infringement claim third party respect products provisions generally survive termination expiration agreements potential amount future payments could required make indemnification provisions instances unlimited costs defend lawsuits settle claims related indemnification agreements insignificant date result believe estimated exposure agreements currently minimal accordingly liabilities recorded agreements july 31 2014 generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery provide estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable analogic corporation notes consolidated financial statements continued millions except share per share data following table presents accrued warranty liability fiscal years 2014 2013 july 31 2014 2013 deferred revenue extended product warranty contracts 74 million 80 million respectively revolving credit agreements october 11 2011 entered fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included santander bank td bank na hsbc bank usa national association credit agreement provides 1000 million available credit expires october 10 2016 outstanding borrowings payable full credit facility require amortization principal may reduced maturity whole part option without penalty borrowings credit agreement may used general corporate purposes including permitted acquisitions amount available credit increased specified circumstances 1500 million aggregate sole borrower credit agreement obligations credit facility guaranteed material domestic subsidiaries supported pledge 65 capital stock equity equivalents principal international subsidiaries interest rates borrowings outstanding credit facility would range 125 200 libor rate option would range 000 100 defined base rate case based leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based leverage ratio credit agreement limits ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters earnings interest taxes depreciation amortization ebitda greater 275100 time • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2014 leverage ratio 0003 interest coverage ratio applicable attributable interest expense july 31 2014 full compliance financial operating covenants analogic corporation notes consolidated financial statements continued millions except share per share data failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control us defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility incurred approximately 05 million transactions costs expensed fiveyear life credit facility july 31 2014 approximately 44 million revolving credit facilities banks available direct borrowings outstanding credit facilities july 31 2014 2013 asset retirement obligations aro july 31 2014 2013 aro estimated future costs associated estimated cost restoring leased facilities 11 million 10 million respectively included liabilities consolidated balance sheet fiscal years 2014 2013 recorded insignificant amount accretion foreign currency translation related aro legal claims subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable believe valid defenses respect matters currently pending us intend defend vigorously outcome matters individually aggregate expected material impact cash flows results operations financial position addition litigation claims investigations audits arising normal course business also subject investigation regarding danish subsidiary please refer following disclosure details regarding investigation danish subsidiary record losses estimable probable accordance us gaap investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving danish subsidiary bk medical aps bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors terminated employment certain bk medical employees wound relationships bk medical distributors involved transactions concluded transactions identified date properly accounted reported financial statements material respects however unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice doj sec cooperating inquiries danish government doj sec believe sec doj substantially completed investigation transactions issue reasonably likely one entities may seek impose sanctions andor penalties us connection resolution inquiries unable estimate potential penalties andor sanctions may ultimately assessed fiscal year 2014 incurred inquiryrelated costs approximately 14 million connection matter compared 12 million fiscal year 2013 analogic corporation notes consolidated financial statements continued millions except share per share data 12 leases commitments certain subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options lease certain real property equipment operating leases aggregate significant rent expense associated operating leases approximately 21 million 18 million 22 million fiscal years 2014 2013 2012 respectively following schedule year future minimum lease payments july 31 2014 july 31 2014 outstanding noncancelable purchase orders aggregating 601 million purchase orders manufacturing nonmanufacturing related goods services 13 income expense income expense consists primarily interest income cash equivalents gains sale investments foreign exchange gains losses related acquisition pocketsonics recognized loss 05 million first quarter fiscal year 2014 please refer note 3 business combinations information acquisition pocketsonics foreign exchange losses gains totaling 02 million 15 million 07 million fiscal years 2014 2013 2012 respectively 14 retirement plans 401k plan qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions us employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salary wage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined irs matched employee contributions 4 eligible compensation analogic corporation notes consolidated financial statements continued millions except share per share data addition 401k plan provided us employees also provide benefits defined contribution plans employees denmark china contributions defined contribution plans totaled 52 million 49 million 45 million fiscal years 2014 2013 2012 respectively defined benefit retirement plan canadian subsidiary analogic canada corporation formerly known anrad corporation sponsors defined benefit retirement plan called analogic canada corporation retirement plan “analogic canada plan” analogic canada plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 recognize periodic pension expense consolidated statements operations associated assets liabilities consolidated balance sheet following tables provide information benefit obligations plan assets funded status july 31 2014 2013 change benefit obligation change plan assets analogic corporation notes consolidated financial statements continued millions except share per share data accumulated benefit obligation abo balances analogic canada plan 128 million 102 million july 31 2014 2013 respectively net periodic benefit cost components net periodic benefit cost follows amounts recognized accumulated comprehensive income pretax estimated net actuarial loss analogic canada plan expected amortized stockholders’ equity net pension cost fiscal year 2015 02 million actuarial assumptions actuarial assumptions analogic canada plan described discount rates july 31 used measure fiscal year end benefit obligations earnings effects subsequent year discount rate based high quality corporate bond spot rates cash flows match timing amount expected benefit payments determine expected longterm rate return analogic canada plan assets considered current expected asset allocations well historical expected returns various categories plan assets amortize realized gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees analogic corporation notes consolidated financial statements continued millions except share per share data funding policy funding policy analogic canada plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate fiscal years 2014 2013 2012 made contributions analogic canada plan 16 million 17 million 11 million respectively made payments benefits administrative expenses 10 million 06 million 01 million respectively fiscal year 2015 expect make contributions payments benefits administrative expenses 09 million 04 million respectively plan assets analogic canada plan assets held trust follows pension committee analogic canada plan sets investment policies strategies analogic canada plan longterm strategic investment objectives include preserving funded status analogic canada plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range fair value analogic canada plan pension assets asset category july 31 2014 2013 follows analogic corporation notes consolidated financial statements continued millions except share per share data comprises units segregated pooled funds insurance company funds underlying values primarily derived mutual funds debt equity securities traded active market based closing price trading day estimated future benefit payments estimated future benefit payments analogic canada plan follows millions 202024 03 04 31 15 income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2014 2013 effective income tax rate based actual income year composition income different countries adjustments applicable quarterly periods potential tax consequences benefits resolution tax audits tax contingencies discrete items reconciliation income taxes us statutory rate effective tax rate follows analogic corporation notes consolidated financial statements continued millions except share per share data effective tax rate discrete items fiscal year 2014 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2014 includes certain discrete tax benefits totaling 129 million discrete tax benefit fiscal year 2014 consists primarily reduction net deferred tax liability 88 million associated change classification canadian operations 27 million benefit associated us deduction historical currency losses incurred result operating offshore nonfunctional currency 1 million reduction uncertain tax positions primarily associated federal tax credits research development rd credits following conclusion internal revenue service irs review fiscal year 2009 along 04 million items effective tax rate fiscal year 2013 lower statutory rate 35 due primarily reversal tax reserves us federal state tax returns result expiration applicable statutes limitations 06 million including interest impact retroactive extension us rd credit 05 million ongoing benefits us rd credits us deductions manufacturing activity lower foreign tax rates compared us statutory rate 35 components benefit provision income taxes follows income taxes domestic foreign operations follows analogic corporation notes consolidated financial statements continued millions except share per share data net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws july 31 2014 net operating loss carryforwards belgium approximately 37 million expiration date losses 01 million italy expire 2017 losses approximately 32 million united kingdom expiration date losses approximately 01 million denmark expiration date losses 13 million canada expire 2024 losses us 02 million expire 2034 losses 10 million france expiration date july 31 2014 also state tax credit carryforwards 96 million expire 2029 provide us federal income taxes undistributed earnings consolidated foreign subsidiaries approximately 66 million earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs circumstances would affect calculations would source location amount distribution underlying tax rate already paid earnings foreign withholding taxes opportunity use foreign tax credits determined likely recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2014 2013 change valuation allowance fiscal year 2014 primarily result addition state credits foreign losses use likely perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide us comprehensive model recognize measure present disclose financial statements certain tax positions taken expect take income tax returns analogic corporation notes consolidated financial statements continued millions except share per share data following table summarizes changes unrecognized income tax benefits fiscal years 2014 2013 unrecognized tax benefits decreased 69 million july 31 2014 recognized future period timing estimablewe expect approximately 52 million would reduce effective tax rate net potential valuation allowances subject us federal income tax well income tax multiple state foreign jurisdictions concluded us federal income tax matters year ended july 31 2010 next four quarters statute limitations fiscal year ended july 31 2011 may expire us federal state income taxes foreign subsidiaries reasonably expected net unrecognized benefits including interest approximately 28 million may recognized fiscal year 2014 reduced uncertain tax benefits accrued interest 19 million result completion audit fiscal year 2009 closing statutes limitation fiscal year 2007 foreign subsidiaries 2010 domestic entities remeasurement uncertain tax benefits open years accrue interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2014 2013 approximately 06 million 07 million respectively accrued interest penalties unrecognized tax benefits refundable deferred income taxes july 31 2014 consisted deferred tax assets 93 million refundable income tax assets 93 million refundable deferred income taxes july 31 2013 consisted deferred tax assets 68 million refundable income tax assets 10 million refundable income tax assets include expected federal state foreign refunds expected received within next twelve months 16 segment geographic information business strategically aligned three reportable segments medical imaging ultrasound security technology business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily urology surgery including robotic assisted surgery anesthesia pointofcare markets analogic corporation notes consolidated financial statements continued millions except share per share data • security technology includes advanced threat detecting ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide table presents information reportable segments analogic corporation notes consolidated financial statements continued millions except share per share data includes restructuring charges 17 million 11 million fiscal years 2014 2013 respectively includes 22 million contingent consulting fees related tax refund related interest received fiscal year 2012 b includes restructuring charges 14 million 22 million fiscal year 2014 2013 respectively c includes restructuring charges 04 million 02 million fiscal year 2014 2013 respectively includes 05 million contingent consulting fees related tax refund related interest received fiscal year 2012 includes net intangible assets acquisitions 260 million 294 million respectively july 31 2014 2013 e includes net intangible assets acquisitions 199 million 242 million respectively july 31 2014 2013 relating acquisition ultrasonix third quarter fiscal year 2013 f includes cash equivalents marketable securities 609 million 574 million july 31 2014 2013 respectively information regarding sharebased compensation depreciation amortization segment fiscal years 2014 2013 2012 follows information regarding geographic areas fiscal years 2014 2013 2012 follows analogic corporation notes consolidated financial statements continued millions except share per share data property plant equipment primarily canada revenues attributed countries based location customers oem sales customer location may differ location ultimate completed systems sold oem market 17 common stock repurchases december 9 2010 announced board directors authorized repurchase 300 million common stock fiscal year 2012 repurchased 286390 shares common stock repurchase program 148 million average purchase price 5173 per share 2010 repurchase program completed second quarter fiscal year 2012 cumulative shares repurchased retired program 586679 shares common stock 300 million average price 5114 per share december 8 2011 announced board directors authorized repurchase additional 300 million common stock fiscal year 2014 repurchased 166361 shares common stock repurchase program 135 million average purchase price 8133 per share fiscal year 2013 repurchased retired 111816 shares common stock repurchase program 79 million average purchase price 7106 per share 2011 repurchase program completed fourth quarter fiscal year 2014 cumulative shares repurchased retired program 415768 shares common stock 300 million average price 7198 per share june 2 2014 board directors authorized repurchase 300 million common stock repurchase program funded available cash repurchase program fixed expiration date july 31 2014 repurchased retired total 18683 shares common stock repurchase program 14 million average purchase price 7622 per share 18 related party transactions july 25 2011 entered agreement sell 25 interest chinabased affiliate 25 million book value interest chinabased affiliate written 0 fiscal year 2006 upon final approval transaction chinese government receipt proceeds recorded gain sale investments 25 million fiscal year 2012 fiscal year 2012 sales chinabased affiliate 19 accumulated comprehensive income loss components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income analogic corporation notes consolidated financial statements continued millions except share per share data consists reported foreign currency translation gains losses net taxes actuarial gains losses pension plan assets net taxes changes unrealized value foreign currency forward contracts net taxes deferred taxes provided cumulative translation adjustments expect earnings foreign subsidiary indefinitely reinvested income tax effect currency translation adjustments related foreign subsidiaries considered indefinitely reinvested recorded component deferred taxes offset comprehensive income following table summarizes components accumulated comprehensive income loss ineffective portion unrealized gains losses foreign currency forward contracts unrealized gains losses currency translation included income expense consolidated statement operations 20 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2014 2013 analogic corporation notes consolidated financial statements continued millions except share per share data discussed note 4 restructuring charges recorded restructuring costs 29 million fourth quarter fiscal year 2014 respect 2014 restructuring plan second quarter fiscal year 2014 also recorded restructuring costs 06 million respect 2013 restructuring plan discussed note 3 business combination first quarter fiscal year 2014 recorded loss 05 million related 10 preacquisition equity interest pocketsonics discussed note 15 income taxes second quarter fiscal year 2014 recognized discrete tax benefit 88 million associated change classification canadian operations discussed note 4 restructuring charges third fourth quarters fiscal year 2013 recorded restructuring charges 05 million 30 million respectively discussed note 3 business combination second third fourth quarters fiscal year 2013 recorded acquisition related expense 07 million 19 million 31 million respectively association ultrasonix acquisition 21 subsequent events september 4 2014 entered asset purchase agreement pathfinder therapeutics inc pathfinder pursuant agreed purchase certain assets assume certain liabilities relating pathfinder’s surgical planning guidance business aggregate consideration 15 million subject satisfaction certain closing conditions enumerated asset purchase agreement expect transaction close first quarter fiscal year 2015 september 9 2014 board directors declared dividend 010 per common share payable october 10 2014 stockholders record september 25 2014 analogic corporation schedule ii valuation qualifying accounts millions changes valuation allowance represents changes federal state foreign tax attributes believe likely able utilized index exhibits management contract compensatory plan arrangement submitted electronically herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated balance sheets july 31 2014 july 31 2013 ii consolidated statements operations years ended july 31 2014 2013 2012 iii consolidated statements comprehensive income years ended july 31 2014 2013 2012 iv consolidated statements changes stockholders’ equity years ended july 31 2014 2013 2012 v consolidated statements cash flows years ended july 31 2014 2013 2012 vi notes consolidated financial statementsitem 15 exhibits financial statement schedules b index exhibits immediately following financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders analogic corporation audited accompanying consolidated balance sheet analogic corporation july 31 2015 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows year ended july 31 2015 audit also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects consolidated financial position analogic corporation july 31 2015 consolidated results operations cash flows year ended july 31 2015 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states analogic corporation’s internal control financial reporting july 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated september 25 2015 expressed unqualified opinion thereon ernst young llp boston massachusetts september 25 2015 report independent registered public accounting firm board directors shareholders analogic corporation audited analogic corporation’s internal control financial reporting july 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria analogic corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion analogic corporation maintained material respects effective internal control financial reporting july 31 2015 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheet analogic corporation july 31 2015 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows year ended july 31 2015 analogic corporation report dated september 25 2015 expressed unqualified opinion thereon ernst young llp boston massachusetts september 25 2015 report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated balance sheet july 31 2014 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows two years period ended july 31 2014 present fairly material respects financial position analogic corporation subsidiaries july 31 2014 results operations cash flows two years period ended july 31 2014 conformity accounting principles generally accepted united states america addition opinion financial statement schedule two years period ended july 31 2014 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp boston massachusetts september 26 2014 analogic corporation consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements comprehensive income thousands accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2015 2014 2013 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements millions except share per share data 1 summary business operations significant accounting policies throughout annual report form 10k unless context states otherwise words “we” “us” “our” “analogic” refer analogic corporation subsidiaries taken whole “our board directors” refers board directors analogic corporation description business analogic corporation nasdaqalog designs manufactures commercializes innovative realtime guidance diagnostic imaging threat detection technologies advance practice medicine save lives operate report along three business segments ultrasound medical imaging security detection ultrasound segment provides ultrasound guidance systems urology surgery markets expanding point care areas anesthesia emergency medicine sell ultrasound products direct sales force north america europe well network distributors clinical practitioners throughout world medical imaging segment provides critical enabling medical imaging systems subsystems computed tomography ct magnetic resonance imaging mri highresolution digital mammography systems sell medical imaging products primarily longstanding relationships wellknown multinational medical oems new entrants emerging markets security detection segment designs manufactures automated threat detection systems aviation baggage inspection applications utilizing advanced ct technology sell security products primarily multinational oem partners incorporated commonwealth massachusetts november 1967 headquarters based peabody massachusetts march 1 2013 completed acquisition ultrasonix medical corporation ultrasonix september 20 2013 acquired pocketsonics inc pocketsonics october 28 2014 acquired certain assets assumed certain liabilities related surgical planning guidance business pathfinder acquisitions fully discussed note 3 financial position results operations cash flows ultrasonix pocketsonics pathfinder included consolidated financial statements date acquisition significant accounting policies consolidation consolidated financial statements include accounts us subsidiaries wholly owned investments companies ownership interests range 10 50 percent exercise significant influence investee’s operating financial policies accounted using equity method intercompany accounts transactions eliminated consolidation determining whether primary beneficiary entity therefore required consolidate apply qualitative approach determines whether 1 power direct economically significant activities entity 2 obligation absorb losses right receive benefits entity could potentially significant entity required consolidate activity entity due considerations b cash equivalents consider highly liquid investments original maturity three months less acquisition date cash equivalents analogic corporation notes consolidated financial statements continued millions except share per share data c revenue recognition accounts receivable recognize revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated upon shipment revenue recognized upon customer acceptance provided revenue recognition criteria met sales contracts generally provide customer accept title risk loss product leaves facilities shipping terms local laws allow passage title risk loss shipping point defer recognizing revenue title risk loss transfer customer classify shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority include service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification transactions sometimes involve multiple elements ie products services recognize revenue product sales industry specific software accounting guidance since products contain software nonsoftware components function together deliver tangible product’s essential functionality inception agreement allocate arrangement consideration deliverable qualifying separate unit accounting arrangement based relative selling price determine selling price using vendor specific objective evidence vsoe exists otherwise third party evidence tpe neither vsoe tpe selling price exists unit accounting use best estimated selling price besp generally expect able establish tpe due nature markets compete typically determine selling price using vsoe available besp vsoe generally limited price charged similar product service sold separately applicable stated substantive renewal rate agreement product service seldom sold separately unlikely determine vsoe product service define vsoe median price recent standalone transactions priced within narrow range defined us stated renewal rates contracts tpe determined based prices charged competitors us similar deliverable sold separately noted typically able use tpe usually able obtain sufficient information competitor pricing substantiate tpe unable establish selling price using vsoe tpe use besp allocation arrangement consideration objective besp determine price would transact product service sold us standalone basis determination besp involves weighting several factors based specific facts circumstances arrangement specifically consider cost produce deliverable anticipated margin deliverable selling price profit margin similar parts ongoing pricing strategy policies determine besp deliverables future agreements based specific facts circumstances arrangement analyze selling prices used allocation arrangement consideration least analogic corporation notes consolidated financial statements continued millions except share per share data annually selling prices analyzed frequent basis significant change business necessitates timely analysis experience significant variances selling prices maintenance service revenues recognized ratably term contract provide engineering services customers contractual basis recognize revenue using percentage completion method completed contract method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate shortterm unbilled receivables included accounts receivable longterm unbilled receivables included noncurrent assets consolidated balance sheet total unbilled receivables july 31 2015 2014 52 million 58 million respectively longterm unbilled receivables either july 31 2015 2014 total cost estimates exceed revenues accrue estimated losses immediately deferred revenue primarily comprised maintenance service revenues payment received services yet performed situations collection receivable reasonably assured inventory expensed upon shipment revenue recognized cash received total deferred revenue july 31 2015 2014 61 million 118 million respectively july 31 2015 2014 longterm portion deferred revenue 09 million 11 million respectively included noncurrent liabilities grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions may affect reported amounts assets liabilities equity revenue expenses related disclosures contingent assets liabilities ongoing basis evaluate estimates judgments methodologies base estimates historical experience various assumptions believed reasonable results forms basis making judgments carrying value assets liabilities actual results may differ estimates different assumptions conditions significant estimates changes near term considered reasonably possible may material impact financial statements disclosed notes consolidated financial statements e inventories value inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory writedowns recorded subsequently reversed unless inventory used disposed analogic corporation notes consolidated financial statements continued millions except share per share data inventory includes demo equipment utilized sales force field company intends sell demo equipment demo equipment amortized straightline basis four year period included cost sales f income taxes account income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs g concentration credit risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents derivative instruments accounts receivable cash equivalents required working capital purposes placed primarily shortterm bank deposits money market funds demand notes financial institutions banks meet stringent credit rating requirements collateralized securities issued us government agencies grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition require collateral security furnished counterparties derivative instruments h property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected consolidated statement operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued millions except share per share data property plant equipment consisted following land depreciated total depreciation amortization property plant equipment 141 million 143 million 130 million fiscal years 2015 2014 2013 respectively capitalize interest fiscal years 2015 2014 2013 intangible assets goodwill intangible assets consist intellectual property licenses certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology intangible assets finite lives amortized using either straightline method reliably determinable based pattern economic benefit asset expected utilized finitelived intangible assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact results operations indefinitelived intangible asset inprocess research development iprd trade names acquired business combinations tested impairment annually frequently indicators impairment present perform annual review second quarter fiscal year indefinitelived intangible asset may considered impaired determine carrying value exceeds assets’ fair value may first perform qualitative assessment determine whether necessary perform quantitative impairment test bypass qualitative assessment proceed directly performing quantitative impairment test quantitative impairment test based discounted estimated future cash flows assessing impairment indefinitelived intangible asset requires us make assumptions judgments regarding fair value asset using relief royalty valuation technique include management’s estimates future growth rates discount rates analogic corporation notes consolidated financial statements continued millions except share per share data goodwill amortized reviewed impairment annually frequently whenever events changes circumstances indicate carrying value reporting unit may exceed fair value reporting unit purpose impairment test operating segment level constitutes business discrete financial information available regularly reviewed segment management perform annual reviews second quarter fiscal year may first assess qualitative factors determine whether likely fair value reporting unit less carrying value basis determining whether necessary perform twostep goodwill impairment test may also elect proceed directly twostep impairment test initial qualitative assessment indicates likely carrying value reporting unit exceeds estimated fair value additional quantitative evaluation performed twostep impairment test based quantitative evaluation fair value reporting unit less carrying amount perform analysis fair value assets liabilities reporting unit implied fair value reporting unit’s goodwill determined less carrying amount impairment recognized difference assessing impairment goodwill requires us make assumptions judgments regarding fair value reporting units estimate fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compare values estimated overall market capitalization j fair value financial instruments financial instruments consist primarily cash equivalents accounts receivable accounts payable accrued liabilities derivative instruments carrying amounts financial instruments approximate fair value due shortterm nature fair values marketable securities investments pension deferred compensation plans estimated based quoted market price securities marketable securities july 31 2015 2014 k asset retirement obligations establish asset retirement obligations “aros” present value estimated future costs return certain facilities original condition recorded liabilities accreted future value estimated restoration costs accretion liability depreciation capitalized cost recognized estimated useful lives facilities l impairment longlived assets evaluate longlived assets whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate indicators impairment present respect longlived assets undiscounted cash flows attributable assets expected sufficient recover assets’ carrying amount additional analysis performed appropriate carrying value longlived assets written estimated fair value based discounted cash flow analysis market value warranty costs provide estimated cost standard product warranties time products shipped although engage extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates analogic corporation notes consolidated financial statements continued millions except share per share data service delivery costs differ estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect operating results generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery n research product development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries incentive compensation including sharebased compensation overhead materials used connection research product development activities research product development costs related nonrecurring engineering projects funded customers included within engineering cost sales project accounted percentage completion method completed contract method software development costs incurred subsequent establishing technological feasibility capitalized technological feasibility established general release products contain embedded software elements technological feasibility demonstrated completion detailed program design capitalized costs amortized higher straightline basis economic life software ranging 3 5 years b ratio product’s current gross revenues total current expected gross revenues unamortized capitalized software costs 07 million 11 million july 31 2015 2014 respectively amortization expense capitalized software development costs 02 million 00 million 02 million fiscal years 2015 2014 2013 respectively included product cost sales derivative instruments hedging activities recognize derivative instruments either assets liabilities fair value consolidated balance sheets changes fair value derivatives recorded period current earnings accumulated comprehensive income loss depending whether derivative designated part hedge transaction classify cash flows instruments category cash flows hedged items enter derivative transactions trading speculative purposes assess inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows fair values hedged items also assess hedge ineffectiveness quarterly basis record gain loss related ineffective portion current earnings determine forecasted transaction longer probable occurring discontinue hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings p translation foreign currencies assets liabilities foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected component accumulated comprehensive income consolidated balance sheet foreign currency translation adjustments 126 million 01 million 46 million respectively included within consolidated statement comprehensive income fiscal years 2015 2014 2013 respectively analogic corporation notes consolidated financial statements continued millions except share per share data exchange gains losses resulting foreign currency transactions denominated currency entity’s functional currency excluding intercompany transactions considered longterm investment nature included results operations period occur reflected caption “other net” foreign exchange gains losses included within consolidated statement operations totaling 04 million 02 million 15 million fiscal years 2015 2014 2013 respectively q advertising costs expensed incurred included selling marketing expenses totaled 04 million 02 million 02 million fiscal years 2015 2014 2013 respectively r sharebased compensation recognize sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant net estimated forfeitures estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards recognize associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target evaluate probability meeting performance criteria balance sheet date probable related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change earnings per share related target performance achieved compensation cost recognized previously recognized compensation cost reversed marketbased awards compensation cost amortized performance period straightline basis awards vest end measurement period probability actual shares expected earned considered grant date valuation therefore expense adjusted reflect actual units earned business combinations accordance acquisition method accounting fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business expensed incurred excess purchase price estimated fair value net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common analogic corporation notes consolidated financial statements continued millions except share per share data dilutive common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock u segment information identify business operating segment engages business activities may earn revenues incur expenses ii operating results regularly reviewed chief operating decision maker chief executive officer iii available discrete financial information aggregate operating segments reportable segment operating segments determined similar economic characteristics similar nature products services nature production processes type class customer products services product service distribution method applicable nature regulatory environment three reportable segments medical imaging ultrasound security detection v new accounting pronouncements recently adopted none yet effective cloud computing arrangements april 2015 fasb issued accounting standards update 201505 “customer’s accounting fees paid cloud computing arrangement” amends accounting standards codification asc 350 “intangibles goodwill other” amendments provide guidance whether cloud computing arrangement eg software service platform service infrastructure service similar hosting arrangements includes software license based determination account arrangements amendments effective fiscal years interim periods within years beginning december 15 2015 may applied either prospective retrospective basis provisions effective us first quarter fiscal year ending july 31 2017 early adoption permitted update effective us first quarter fiscal year ending july 31 2017 expect adoption provisions material impact consolidated financial statements consolidation february 2015 fasb issued asc update 201502 “consolidation topic 810 amendments consolidation analysis” update 201502 amended process reporting entity must perform determine whether consolidate certain types legal entities update 201502 effective annual reporting periods ending december 15 2015 annual periods interim periods thereafter early adoption permitted adoption update expected material impact financial position results operations revenue contracts customers may 2014 fasb issued update provides guidance revenue recognition update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition analogic corporation notes consolidated financial statements continued millions except share per share data requirement industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates today’s guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update applied either retrospective modified retrospective basis update effective us first quarter fiscal year ending july 31 2018 early adoption permitted april 2015 fasb issued proposal defer effective date new revenue standard public entities one year therefore update would effective us first quarter fiscal year ending july 31 2019 proposal would also permit entities early adopt original effective date ie one year earlier currently evaluating impact adoption update consolidated financial statements w reclassifications revisions prior period financial statements certain financial statement items reclassified conform current period presentation 2 sharebased compensation expense january 29 2010 stockholders approved “2009 stock incentive plan” 2009 plan provided issuance 1600000 shares common stock stockholders approved amendments 2009 plan january 23 2012 january 21 2014 increased number shares available issuance 2009 plan 2200000 4453518 respectively sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period net forfeitures following table sets forth stock option restricted stock transactions fiscal year 2015 analogic corporation notes consolidated financial statements continued millions except share per share data 1 performancebased unvested restricted stock shown table target except number shares vested reflect shares earned july 31 2015 maximum number performancebased unvested restricted stock available earned 317894 2 addition vested options expect portion unvested options vest point future stock options expected vest calculated applying estimated forfeiture rate unvested options following table presents sharebased compensation expense included consolidated statements operations july 31 2015 unrecognized compensation cost net estimated forfeitures related unvested stock options restricted stock 103 million cost recognized estimated weighted average amortization period 13 years assumes target performance nongaap eps performance based rsu’s stock options estimate fair value stock options using blackscholes valuation model key input assumptions used estimate grant date fair values stock options include exercise price award expected option term expected volatility stock option’s expected term riskfree interest rate option’s expected term expected annual dividend yield estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair values option grants estimated grant date using following assumptions fiscal years 2015 2014 2013 1 expected option term estimated using historical data analogic corporation notes consolidated financial statements continued millions except share per share data 2 expected volatility grant determined based review average historical daily price changes common stock expected option term 3 riskfree interest rate determined based yield zerocoupon us treasury securities period commensurate expected term assumption 4 expected annual dividend yield calculated dividing expected annual dividends stock price date grant total intrinsic value options exercised fiscal years 2015 2014 2013 43 million 19 million 15 million respectively intrinsic value defined difference market price date exercise grant date exercise price total amount cash received exercise options 73 million 49 million 34 million respectively actual tax benefit realized tax deductions option exercises less 01 million fiscal years 2015 2014 2013 restricted stock restricted stock units estimate fair value restricted stock restricted stock units rsu’s vest based service conditions using quoted closing price common stock date grant sharebased compensation expense amortized award’s vesting period straightline basis awards service performance conditions vest end performance cycle accelerated method applies awards service performance conditions nongaap earnings per share eps performancebased awards compensation cost amortized performance period straightline basis net forfeitures awards vest end performance period compensation cost based number shares deemed probable vesting end threeyear performance cycle probability assessment done quarter changes estimates result significant expense fluctuations due cumulative catchup adjustment estimate fair value nongaap eps performancebased awards using quoted closing price common stock date grant relative total shareholder return tsr performancebased awards based market performance compensation cost amortized performance period straightline basis net forfeitures awards vest end measurement period probability actual shares expected earned considered grant date valuation result expense adjusted reflect actual shares earned estimate fair value tsr performancebased awards using montecarlo simulation model analogic corporation notes consolidated financial statements continued millions except share per share data granted 28455 27450 24470 tsr 36641 35686 31806 nongaap eps performancebased awards fiscal years 2015 2014 2013 respectively fair value tsr performancebased awards date grant estimated using montecarlo simulation model following assumptions 1 stock price closing price common stock date grant 2 expected volatility grant determined based historical volatility peer group companies common stock period equal remaining term performance period date grant awards 3 riskfree interest rate determined based yield zerocoupon us treasury securities period commensurate performance period 4 dividends considered reinvested calculating tsr dividend yield therefore considered 0 total fair value restricted stock vested fiscal years 2015 2014 2013 98 million 249 million 160 million respectively employee stock purchase plan november 4 1985 stockholders approved employee stock purchase plan espp authorizing issuances 700000 shares common stock espp allows qualified participants purchase common stock 85 market price first business day purchase period last business day sixmonth purchase period stockholders approved amendments espp january 22 1986 january 23 1998 january 17 2003 january 21 2014 stockholders approved amendments espp removed income limitation participation plan increased maximum value stock employee purchase two payment periods per year estimate fair value espp shares using blackscholes valuation model fiscal years 2015 2014 2013 financial impact espp shares immaterial 3 business combination pathfinder therapeutics inc pathfinder october 28 2014 acquired certain assets assumed certain liabilities related surgical planning guidance business pathfinder 16 million paid cash acquisition date acquisition accounted acquisition business analogic corporation notes consolidated financial statements continued millions except share per share data following table summarizes purchase price allocation based fair values separately identifiable assets acquired liabilities assumed acquisition date estimated fair value identifiable acquisitionrelated intangible assets primarily based discounted cash flows projections arise assets use significant judgment regard assumptions used determination fair value discount rates determination estimated useful lives intangible assets total weighted average amortization period intangible assets approximately 76 years goodwill associated acquisition primarily attributable opportunities addition pathfinder’s product portfolio technology complement suite products goodwill acquisition deductible tax purposes statutory 15 year period fiscal year 2015 incurred acquisition costs approximately 01 million consisted primarily legal due diligence expenses included general administrative expenses consolidated statements operations pro forma financial information year ended july 31 2015 including revenue net income immaterial separately presented pocketsonics inc april 2010 entered agreement pocketsonics inc pocketsonics privately held ultrasound technology company based charlottesville virginia granted us exclusive license certain ultrasound technology owned controlled pocketsonics ten percent 10 equity interest pocketsonics equity investment recorded inprocess research development iprd 19 million since time collaborated pocketsonics develop patented ultrasound technology enable acceleration high acuity guided procedures lower cost pointofcare settings technical applications september 20 2013 acquired remaining stock pocketsonics purchase price includes base consideration 111 million paid cash closing fair value contingent consideration 19 million revaluation initial equity investment undertook acquisition strengthen competitive position procedure guidance pointofcare advanced guidance applications acquisition funded existing cash hand accounted acquisition business analogic corporation notes consolidated financial statements continued millions except share per share data finalized purchase accounting pocketsonics acquisition fiscal year 2014 following table summarizes fair values separately identifiable assets acquired liabilities assumed september 20 2013 determining fair value considered among factors market participants’ intentions use acquired assets historical estimated future demand pocketsonics products services recognized iprd asset 115 million fair value asset determined probability adjusted cash flow analysis may 2014 determined iprd completed performed qualitative assessment determined impairment accordingly carrying amount iprd asset reclassified developed technology amortized estimated useful life 10 years connection acquisition recorded fair value contingent consideration obligation 19 million potential exposure 30 million payable upon achievement certain milestones relating pocketsonics technology contingent earnout payments sellers pocketsonics would payable upon commercial launch achievement volume sales target defined asset purchase agreement 20 million fair value estimated valuation model incorporates probability adjusted assumptions relating achievement milestones likelihood us making payments fair value measurement based upon significant inputs observable market therefore represents level 3 input measurement subsequent changes fair value obligation recognized adjustments contingent consideration liability reflected within consolidated statements operations within selling marketing expenses fiscal year 2015 estimated fair value contingent consideration obligation decreased 01 million total fair value contingent consideration obligation 20 million july 31 2015 additional information related fair value obligation please refer note 8 fair value measurements recorded goodwill 69 million related pocketsonics acquisition representing value opportunity strengthening competitive position procedure guidance pointofcare advanced guidance applications goodwill deductible tax purposes upon acquisition pocketsonics recognized loss 05 million related 10 preacquisition equity interest reflected component expense net within consolidated statement operations fiscal year 2014 fiscal year 2014 incurred acquisition costs 01 million consisting primarily legal due diligence expenses included general administrative expenses consolidated statement operations analogic corporation notes consolidated financial statements continued millions except share per share data expensed 09 million 15 million engineering services related pocketsonics fiscal years 2013 2012 respectively prior acquisition remaining stock 4 restructuring charges fiscal year 2014 restructuring plan fourth quarter fiscal year 2014 implemented fiscal year 2014 restructuring plan improve operational effectiveness peabody massachusetts leverage core competencies better across business incurred pretax charges 29 million primarily relating severance personnel related costs 48 involuntarily terminated employees associated restructuring activities including improving operational effectiveness peabody massachusetts better leverage core competencies across business recognized consolidated statement operations restructuring 29 million charge recorded operating results medical imaging ultrasound security detection segments charges 19 million 05 million 05 million respectively expect restructuring plan completed fiscal year 2016 fiscal year 2013 restructuring plan may 2013 announced restructuring plan incurred pretax charges 41 million primarily relating severance personnel related costs 115 terminated employees well facility exit costs closure ultrasonix sales subsidiary paris france well closure ultrasound transducer operation englewood colorado consolidate transducer operations state college pennsylvania plan also include activities consolidate manufacturing certain support functions currently conducted ultrasonix facility vancouver canada facilities well optimization operations montreal canada peabody massachusetts pretax charges included operating results medical imaging segment ultrasound segment security detection segment expect restructuring plan completed fiscal year 2017 lease englewood colorado facility ends following table summarizes accrued restructuring costs activity july 31 2013 july 31 2015 restructuring charges fiscal year 2014 include 29 million respect fiscal year 2014 restructuring plan activity pertains fiscal year 2013 restructuring plan analogic corporation notes consolidated financial statements continued millions except share per share data b restructuring charges fiscal year 2014 pertains fiscal year 2013 restructuring plan respect closure englewood colorado facility cash payments fiscal year 2014 pertain closure englewood colorado facility ultrasonix sales subsidiary paris france cash payments fiscal year 2015 pertain closure englewood colorado facility c activity fiscal year 2014 pertains fiscal year 2014 restructuring plan 2013 restructuring plan fiscal year 2014 restructuring charges 29 million relate fiscal year 2014 restructuring plan restructuring charges 06 million cash payments 25 million relate fiscal year 2013 restructuring plan activity fiscal year 2015 pertains fiscal year 2014 restructuring plan 2013 restructuring plan fiscal year 2015 restructuring adjustments 03 million cash payments 24 million relate fiscal year 2014 restructuring plan restructuring adjustments 01 million cash payments 05 million relate fiscal year 2013 restructuring plan restructuring charges comprised balance sheet following location cash expenditures remaining paid july 31 2015 paid within next twelve months restructuring costs including actions associated acquisitions segment fiscal years 2015 2014 2013 follows net restructuring related charges comprised following 5 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number analogic corporation notes consolidated financial statements continued millions except share per share data common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method options purchase common shares exercise prices exceeded market value underlying common stock excluded computation diluted earnings per share following table sets forth computation basic diluted net income per share fiscal years 2015 2014 2013 shares related outstanding stock options unvested restricted stock included calculations diluted earnings per share effect including would antidilutive 6 accounts receivable net customers accounts receivable arise primarily products sold services provided us europe asia balance accounts receivable represents amount due domestic foreign oem customers distributors end users majority accounts receivable standard payment terms require payment within 30 days perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified amounts determined uncollectible charged written reserve date historical writeoffs accounts receivable minimal ten largest customers group accounted 64 66 68 net product engineering revenue fiscal years 2015 2014 2013 respectively set forth table customers individually accounted 10 net revenue note total net revenue less 10 fiscal year analogic corporation notes consolidated financial statements continued millions except share per share data philips’ toshiba’s siemens’ revenues primarily medical imaging segment l3’s revenue security detection segment following table summarizes net accounts receivable due customers net accounts receivable balances greater equal 10 total net accounts receivable balance note total net accounts receivable less 10 fiscal year 7 derivative instruments certain foreign operations revenues expenses transacted currencies functional currency order mitigate foreign currency exchange risk use forward contracts lock exchange rates associated portion forecasted international expenses july 31 2015 forward contracts outstanding notional amounts totaling 101 million contracts designated cash flow hedges unrealized loss 04 million net tax contracts reported accumulated comprehensive income july 31 2015 liability asset derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheets july 31 2015 derivative liability 05 million included liabilities consolidated balance sheet july 31 2014 outstanding forward contracts realized gains losses cash flow hedges recognized income period payment expenses recognized july 31 2014 outstanding forward contracts fiscal year 2015 2014 recorded approximately 05 million realized loss 02 million realized gain respectively included consolidated statements operations 8 fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs use fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities analogic corporation notes consolidated financial statements continued millions except share per share data following table provides assets liabilities carried fair value measured recurring basis july 31 2015 2014 assets held deferred compensation plans used pay benefits nonqualified deferred compensation plans investments primarily consist mutual funds publicly traded stock exchanges accordingly fair value assets categorized level 1 within fair value hierarchy fair value liabilities arising foreign currency forward contracts determined valuation models based market observable inputs including forward spot prices currencies accordingly fair value liabilities categorized level 2 within fair value hierarchy fair value contingent consideration obligation based significant unobservable inputs including management estimates assumptions measured based probabilityweighted present value payments expected made accordingly fair value liability categorized level 3 within fair value hierarchy fair value contingent payments associated acquisition pocketsonics calculated utilizing 100 probability earn associated section 510k clearance obtained food analogic corporation notes consolidated financial statements continued millions except share per share data drug administration fda april 9 2014 anticipation commercial sales defined purchase agreement fiscal year ending july 31 2016 fiscal year 2016 quarter revalue contingent consideration obligations associated acquisition pocketsonics current fair value record changes fair value consolidated statements operations changes contingent consideration result changes assumptions regarding probabilities estimated timing launch volume sales target payments discount rate used estimate fair value liability assumptions used estimating fair value require significant judgment use different assumptions judgments could result materially different estimate fair value 01 million decrease fair value contingent consideration obligation year ended july 31 2015 july 31 2015 2014 fair value contingent consideration obligation reported longterm liabilities current liabilities respectively consolidated balance sheets following reconciliations changes fair value contingent consideration fiscal years 2015 2014 9 inventory components inventory net allowance obsolete unmarketable slowmoving inventories summarized follows 10 goodwill intangible assets goodwill gross carrying value goodwill july 31 2015 2014 575 million 570 million respectively difference two periods relates goodwill associated acquisition pathfinder 05 million please refer note 3 business combinations information acquisition pathfinder determined goodwill impaired 2015 2014 2013 total amount goodwill expected deductible tax purposes 4 million fiscal year 2015 37 million fiscal year 2014 analogic corporation notes consolidated financial statements continued millions except share per share data intangible assets intangible assets include value assigned intellectual property technology patents customer contracts relationships trade names inprocess research development estimated useful lives finiteelived intangible assets 1 14 years indefinitelived intangibles consist trade names acquired business combinations carrying values indefinitelived intangible assets 76 million july 31 2015 2014 intangible assets july 31 2015 2014 consisted following 76 million trade names indefinitelived 01 million 04 million finitelived trade names 2015 2014 respectively amortization expense related intangible assets 89 million 78 million 41 million fiscal years 2015 2014 2013 respectively amortization expense related customer relationships trade names recognized operating expenses amortization expense related developed technologies recognized cost sales consolidated statement operations estimated future amortization expenses related intangible assets succeeding fiscal years expected follows performed annual impairment test goodwill intangible assets indefinite lives december 31 2014 goodwill december 31 2014 relates acquisitions copley controls april 2008 ultrasonix march 2013 pocketsonics september 2013 pathfinder october 2014 valuation pathfinder performed recently significant changes business would impact valuation since october 28 2014 conclude goodwill pathfinder acquisition 04 million impaired december 31 2014 conclude goodwill pathfinder acquisition impaired december 31 2014 line approach goodwill accordance us gaap elected bypass qualitative assessment proceeded step one analogic corporation notes consolidated financial statements continued millions except share per share data impairment test comparing fair value reporting units carrying values goodwill acquisition copley controls 19 million included medical imaging reporting unit goodwill acquisitions ultrasonix pocketsonics 551 million included ultrasound reporting unit impairment assessment considered market approach income approach different probabilities assigned market approach fair value reporting unit based trading multiples determined based analysis selected guideline public companies’ business enterprise value “bev” control premium determined based analysis control premiums recent relevant acquisitions income approach fair value reporting unit based present value estimated future cash flows income approach dependent number significant management assumptions including estimates future sales future gross margin percentage applicable risk adjusted discount rates determined fair values medical imaging ultrasound reporting units excess carrying values therefore necessary us perform step two impairment test compared fair value copley tradename using relief royalty approach carrying value december 31 2014 relief royalty approach utilized aftertax royalty rate discount rate aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales copley tradename determined fair value copley tradename excess carrying value iprd asset arises acquisition pocketsonics determined fair value iprd using probabilityadjusted cash flow model compared fair value iprd using income approach carrying value december 31 2013 determined impairment may 2014 iprd completed performed qualitative assessment determined impairment accordingly carrying amount iprd asset 115 million reclassified developed technology amortized estimated useful life 10 years expect utilize iprd asset ultrasound segment current economic environment uncertainties regarding impact business estimates forecasted revenue spending levels made purposes goodwill trade name impairment testing second quarter fiscal year 2015 may accurate predictions future assumptions regarding forecasted revenue margin growth rates reporting unit trade name achieved may required record impairment charge goodwill trade name future periods whether connection next annual impairment testing second quarter fiscal year ending july 31 2016 prior change constitutes triggering event outside quarter annual goodwill trade name impairment test performed possible time determine future impairment charge would result whether charge would material 11 commitments guarantees contingencies guarantees indemnification obligations standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant indemnify hold harmless agree reimburse indemnified party losses suffered incurred indemnified party connection us patent copyright intellectual property infringement claim third party respect products provisions generally survive termination expiration agreements potential amount future analogic corporation notes consolidated financial statements continued millions except share per share data payments could required make indemnification provisions instances unlimited costs defend lawsuits settle claims related indemnification agreements insignificant date result believe estimated exposure agreements currently minimal accordingly liabilities recorded agreements july 31 2015 generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery provide estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents accrued warranty liability fiscal years 2015 2014 july 31 2015 2014 deferred revenue extended product warranty contracts 53 million 74 million respectively revolving credit agreements october 11 2011 entered fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included santander bank td bank na hsbc bank usa national association credit agreement provides 1000 million available credit expires october 10 2016 outstanding borrowings payable full credit facility require amortization principal may reduced maturity whole part option without penalty borrowings credit agreement may used general corporate purposes including permitted acquisitions amount available credit increased specified circumstances 1500 million aggregate sole borrower credit agreement obligations credit facility guaranteed material domestic subsidiaries supported pledge 65 capital stock equity equivalents principal international subsidiaries interest rates borrowings outstanding credit facility would range 125 200 libor rate option would range 000 100 defined base rate case based leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based leverage ratio credit agreement limits ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters earnings interest taxes depreciation amortization ebitda greater 275100 time analogic corporation notes consolidated financial statements continued millions except share per share data • interest coverage ratio defined ratio consolidated trailing four quarters ebitda consolidated interest charges less 300100 time july 31 2015 leverage ratio 0004100 interest coverage ratio applicable attributable interest expense july 31 2015 full compliance financial operating covenants failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control us defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering facility incurred approximately 05 million transactions costs expensed fiveyear life credit facility july 31 2015 approximately 12 million revolving credit facilities banks available direct borrowings outstanding credit facilities july 31 2015 2014 asset retirement obligations aro july 31 2015 2014 aro estimated future costs associated restoring leased facilities carrying value 12 million 11 million respectively included liabilities consolidated balance sheet fiscal years 2015 2014 recorded insignificant amount accretion foreign currency translation related aro legal claims subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable believe valid defenses respect matters currently pending us intend defend vigorously outcome matters individually aggregate expected material impact cash flows results operations financial position addition litigation claims investigations audits arising normal course business also subject investigation regarding danish subsidiary please refer following disclosure details regarding investigation danish subsidiary record losses estimable probable accordance us gaap investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving danish subsidiary bk medical aps bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors terminated employment certain bk medical employees also terminated relationships bk medical distributors involved transactions concluded transactions analogic corporation notes consolidated financial statements continued millions except share per share data identified date properly accounted reported financial statements material respects however unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice doj sec cooperating inquiries danish government doj sec believe sec doj substantially completed investigation transactions issue commenced discussions sec concerning resolution sec inquiry proposed payment 16 million settlement inquiry three months ended july 31 2015 accrued 16 million charge connection settlement proposal uncertain whether doj danish government seek impose sanctions penalties us engaged settlement discussions either entities assurance enter settlement sec doj danish government cost settlements resolutions matters could materially exceed accruals incurred inquiryrelated costs approximately 14 million fiscal years ended july 31 2014 july 31 2015 connection matter 12 leases commitments certain subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options lease certain real property equipment operating leases aggregate significant rent expense associated operating leases approximately 23 million 21 million 18 million fiscal years 2015 2014 2013 respectively following schedule year future minimum lease payments july 31 2015 july 31 2015 outstanding noncancelable purchase orders aggregating 382 million purchase orders manufacturing nonmanufacturing related goods services 13 income expense income expense consists primarily interest income cash equivalents gains sale investments foreign exchange gains losses fiscal year 2015 recorded 06 million interest charge settlement proposal sec related danish subsidiary bk medical related acquisition pocketsonics recognized loss 05 million first quarter fiscal year 2014 please refer note 3 business combinations information acquisition pocketsonics analogic corporation notes consolidated financial statements continued millions except share per share data foreign exchange losses totaling 04 million 02 million 15 million fiscal years 2015 2014 2013 respectively 14 retirement plans 401k plan qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions us employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salary wage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined irs matched employee contributions 4 eligible compensation addition 401k plan provided us employees also provide benefits defined contribution plans employees denmark china contributions defined contribution plans totaled 51 million 52 million 49 million fiscal years 2015 2014 2013 respectively defined benefit retirement plan canadian subsidiary analogic canada corporation formerly known anrad corporation sponsors defined benefit retirement plan called analogic canada corporation retirement plan “analogic canada plan” analogic canada plan frozen new accruals fiscal year 2015 analogic canada plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 recognize periodic pension expense consolidated statements operations associated assets liabilities consolidated balance sheet following tables provide information benefit obligations plan assets funded status july 31 2015 2014 change benefit obligation analogic corporation notes consolidated financial statements continued millions except share per share data change plan assets accumulated benefit obligation abo balances analogic canada plan 123 million 128 million july 31 2015 2014 respectively net periodic benefit cost components net periodic benefit cost follows amounts recognized accumulated comprehensive income pretax estimated net actuarial loss analogic canada plan expected amortized stockholders’ equity net pension cost fiscal year 2016 02 million analogic corporation notes consolidated financial statements continued millions except share per share data actuarial assumptions actuarial assumptions analogic canada plan described discount rates july 31 used measure fiscal year end benefit obligations earnings effects subsequent year discount rate based high quality corporate bond spot rates cash flows match timing amount expected benefit payments determine expected longterm rate return analogic canada plan assets considered current expected asset allocations well historical expected returns various categories plan assets amortize realized gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy analogic canada plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate fiscal years 2015 2014 2013 made contributions analogic canada plan 08 million 16 million 17 million respectively made payments benefits administrative expenses 05 million 10 million 06 million respectively fiscal year 2016 expect make contributions payments benefits administrative expenses 07 million 04 million respectively plan assets analogic canada plan assets held trust follows pension committee analogic canada plan sets investment policies strategies analogic canada plan longterm strategic investment objectives include preserving funded status analogic canada plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range analogic corporation notes consolidated financial statements continued millions except share per share data fair value analogic canada plan pension assets asset category july 31 2015 2014 follows comprises units segregated pooled funds insurance company funds underlying values primarily derived mutual funds debt equity securities traded active market based closing price trading day estimated future benefit payments estimated future benefit payments analogic canada plan follows analogic corporation notes consolidated financial statements continued millions except share per share data 15 income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2015 2014 2013 effective income tax rate based actual income year composition income different countries adjustments applicable quarterly periods potential tax consequences benefits resolution tax audits tax contingencies discrete items reconciliation income taxes us statutory rate effective tax rate follows effective tax rate discrete items fiscal year 2015 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2015 includes certain discrete tax benefits totaling 29 million discrete tax benefit fiscal year 2015 consists primarily 34 million reduction uncertain tax positions primarily associated expiration statute limitations 08 million benefit associated extension federal rd tax credit offset 03 million provision reduction domestic production deduction due filing nol carryback claim along 10 million provision items effective tax rate discrete items fiscal year 2014 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2014 includes certain discrete tax benefits totaling 129 million discrete tax benefit fiscal year 2014 consists primarily reduction net deferred tax liability 88 million associated change classification canadian operations 27 million benefit associated us deduction historical currency losses incurred result operating offshore nonfunctional currency 1 million reduction uncertain tax positions primarily associated federal tax credits research development rd credits following conclusion internal revenue service irs review fiscal year 2009 along 04 million items analogic corporation notes consolidated financial statements continued millions except share per share data components provision benefit income taxes follows income taxes domestic foreign operations follows net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws analogic corporation notes consolidated financial statements continued millions except share per share data july 31 2015 net operating loss carryforwards belgium approximately 30 million expiration date losses approximately 30 million united kingdom expiration date losses approximately 01 million denmark expiration date losses 13 million canada expire 2024 losses us 04 million expire 2025 july 31 2015 also state tax credit carryforwards 135 million begin expire 2021 credit carryforwards 75 million canada begin expire 2025 also operating loss carryforwards luxembourg approximately 136 million believe possibility utilizing luxembourg loss carryforwards foreseeable future remote therefore provided full valuation allowance provide us federal income taxes undistributed earnings consolidated foreign subsidiaries approximately 791 million earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs circumstances would affect calculations would source location amount distribution underlying tax rate already paid earnings foreign withholding taxes opportunity use foreign tax credits determined likely recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2015 2014 change valuation allowance fiscal year 2015 primarily result addition operating loss carryforwards luxembourg use likely perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide us comprehensive model recognize measure present disclose financial statements certain tax positions taken expect take income tax returns following table summarizes changes unrecognized income tax benefits fiscal years 2015 2014 unrecognized tax benefits decreased 47 million july 31 2015 recognized future period timing estimable expect approximately 25 million would reduce effective tax rate net potential valuation allowances analogic corporation notes consolidated financial statements continued millions except share per share data subject us federal income tax well income tax multiple state foreign jurisdictions concluded us federal income tax matters year ended july 31 2011 next four quarters statute limitations fiscal year ended july 31 2012 may expire us federal state income taxes foreign subsidiaries reasonably expected net unrecognized benefits including interest approximately 03 million may recognized fiscal year 2015 reduced uncertain tax benefits accrued interest 34 million result closing statutes limitation fiscal year 2011 domestic entities remeasurement uncertain tax benefits open years accrue interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2015 2014 approximately 03 million 06 million respectively accrued interest penalties unrecognized tax benefits refundable deferred income taxes july 31 2015 consisted deferred tax assets 80 million refundable income tax assets 104 million refundable deferred income taxes july 31 2014 consisted deferred tax assets 93 million refundable income tax assets 93 million refundable income tax assets include expected federal state foreign refunds expected received within next twelve months 16 segment geographic information business strategically aligned three reportable segments medical imaging ultrasound security detection business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily urology surgery including robotic assisted surgery anesthesia pointofcare markets • security detection includes advanced threat detecting ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide well dna scanning systems analogic corporation notes consolidated financial statements continued millions except share per share data table presents information reportable segments analogic corporation notes consolidated financial statements continued millions except share per share data includes restructuring charges 02 million 17 million 11 million fiscal years 2015 2014 2013 respectively b includes restructuring charges 01 million 14 million 22 million fiscal year 2015 2014 2013 respectively includes 10 million charge settlement proposal sec related danish subsidiary bk medical c includes restructuring charges 01 million 04 million 02 million fiscal year 2015 2014 2013 respectively includes net intangible assets acquisitions 232 million 260 million july 31 2015 2014 respectively e includes net intangible assets acquisitions 152 million 199 million july 31 2015 2014 respectively f includes net intangible assets acquisitions 01 million july 31 2015 relating acquisition pathfinder first quarter fiscal year 2015 g includes cash equivalents marketable securities 862 million 609 million july 31 2015 2014 respectively revenues attributed countries based location customers oem sales customer location may differ location ultimate completed systems sold oem market information regarding sharebased compensation depreciation amortization segment fiscal years 2015 2014 2013 follows information regarding geographic areas fiscal years 2015 2014 2013 follows analogic corporation notes consolidated financial statements continued millions except share per share data property plant equipment primarily canada 17 common stock repurchases december 8 2011 announced board directors authorized repurchase additional 300 million common stock fiscal year 2014 repurchased retired 166361 shares common stock repurchase program 135 million average purchase price 8133 per share fiscal year 2013 repurchased retired 111816 shares common stock repurchase program 79 million average purchase price 7106 per share 2011 repurchase program completed fourth quarter fiscal year 2014 cumulative shares repurchased retired program 415768 shares common stock 300 million average price 7198 per share june 2 2014 board directors authorized repurchase 300 million common stock repurchase program funded available cash fiscal year 2015 repurchased retired 176611 shares common stock repurchase program 139 million average purchase price 7851 per share fiscal year 2014 repurchased 18683 shares common stock repurchase program 14 million average purchase price 7622 per share cumulative shares repurchased retired program 195294 shares common stock 153 million average price 7829 per share 18 accumulated comprehensive income loss components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income consists reported foreign currency translation gains losses net taxes actuarial gains losses pension plan assets net taxes changes unrealized value foreign currency forward contracts net taxes deferred taxes provided cumulative translation adjustments expect earnings foreign subsidiary indefinitely reinvested income tax effect currency translation adjustments related foreign subsidiaries considered indefinitely reinvested recorded component deferred taxes offset comprehensive income analogic corporation notes consolidated financial statements continued millions except share per share data following table summarizes components accumulated comprehensive income loss ineffective portion unrealized gains losses foreign currency forward contracts realized gains losses currency translation included income expense consolidated statement operations realized gains losses pension plan included general administrative expenses consolidated statement operations 19 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2015 2014 analogic corporation notes consolidated financial statements continued millions except share per share data discussed note 3 business combination first quarter fiscal year 2015 recorded acquisition related expense 01 million association pathfinder acquisition discussed note 15 income taxes third quarter fiscal year 2015 recognized discrete tax benefit 34 million reduction uncertain tax positions primarily associated expiration statute limitations discussed note 4 restructuring charges recorded restructuring costs 29 million fourth quarter fiscal year 2014 respect 2014 restructuring plan second quarter fiscal year 2014 also recorded restructuring costs 06 million respect 2013 restructuring plan discussed note 3 business combination first quarter fiscal year 2014 recorded loss 05 million related 10 preacquisition equity interest pocketsonics discussed note 15 income taxes second quarter fiscal year 2014 recognized discrete tax benefit 88 million associated change classification canadian operations 20 subsequent events september 9 2015 board directors declared dividend 010 per common share payable october 10 2015 stockholders record september 25 2015 september 16 2015 announced restructuring business includes transition certain manufacturing activities peabody location existing facility shanghai china reduction force order align research development investment expected customer funding security detection business expect incur restructuring charge approximately 6 million fiscal 2016 approximately 3 million taken q1 fy16 balance taken throughout remainder fiscal year analogic corporation schedule ii valuation qualifying accounts millions changes valuation allowance represents changes federal state foreign tax attributes believe likely able utilized index exhibits management contract compensatory plan arrangement submitted electronically herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated balance sheets july 31 2015 july 31 2014 ii consolidated statements operations years ended july 31 2015 2014 2013 iii consolidated statements comprehensive income years ended july 31 2015 2014 2013 iv consolidated statements changes stockholders’ equity years ended july 31 2015 2014 2013 v consolidated statements cash flows years ended july 31 2015 2014 2013 vi notes consolidated financial statementsitem 15 exhibits financial statement schedules b index exhibits immediately following financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders analogic corporation audited accompanying consolidated balance sheets analogic corporation july 31 2016 2015 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows two years period ended july 31 2016 audit also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position analogic corporation july 31 2016 2015 consolidated results operations cash flows two years period ended july 31 2016 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states analogic corporation’s internal control financial reporting july 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated september 27 2016 expressed unqualified opinion thereon ernst young llp boston massachusetts september 27 2016 report independent registered public accounting firm board directors shareholders analogic corporation audited analogic corporation’s internal control financial reporting july 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria analogic corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion analogic corporation’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s annual report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls oncura partners diagnostics llc included 2016 consolidated financial statements analogic corporation constituted 4 1 total net assets respectively july 31 2016 1 revenues net income respectively year ended audit internal control financial reporting analogic corporation also include evaluation internal control financial reporting oncura partners diagnostics llc opinion analogic corporation maintained material respects effective internal control financial reporting july 31 2016 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets analogic corporation july 31 2016 2015 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows two years period ended july 31 2016 analogic corporation report dated september 27 2016 expressed unqualified opinion thereon ernst young llp boston massachusetts september 27 2016 report independent registered public accounting firm board directors stockholders analogic corporation opinion accompanying consolidated statements operations comprehensive income changes stockholders’ equity cash flows year ended july 31 2014 present fairly material respects results operations cash flows analogic corporation subsidiaries year ended july 31 2014 conformity accounting principles generally accepted united states america addition opinion financial statement schedule year ended july 31 2014 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion pricewaterhousecoopers llp boston massachusetts september 26 2014 analogic corporation consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements comprehensive income thousands accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2016 2015 2014 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements millions except share per share data 1 summary business operations significant accounting policies throughout annual report form 10k unless context states otherwise words “we” “us” “our” “analogic” refer analogic corporation subsidiaries taken whole “our board directors” refers board directors analogic corporation description business analogic corporation nasdaqalog designs manufactures commercializes innovative realtime guidance diagnostic imaging threat detection technologies advance practice medicine save lives operate report along three business segments medical imaging ultrasound security detection ultrasound segment provides ultrasound guidance systems urology surgery markets expanding point care areas anesthesia emergency medicine sell ultrasound products direct sales force north america europe well network distributors clinical practitioners throughout world medical imaging segment provides critical enabling medical imaging systems subsystems computed tomography ct magnetic resonance imaging mri highresolution digital mammography systems sell medical imaging products primarily longstanding relationships wellknown multinational medical oems new entrants emerging markets security detection segment designs manufactures automated threat detection systems aviation baggage inspection applications utilizing advanced ct technology sell security products primarily multinational oem partners incorporated commonwealth massachusetts november 1967 headquarters based peabody massachusetts september 20 2013 acquired pocketsonics inc pocketsonics october 28 2014 acquired certain assets assumed certain liabilities related surgical planning guidance business pathfinder january 8 2016 wholly acquired oncura partners diagnostics llc privately held provider remote realtime ultrasound imaging teleconsulting services currently focused veterinary medicines market acquisitions fully discussed note 3 financial position results operations cash flows pocketsonics pathfinder oncura included consolidated financial statements date acquisition significant accounting policies consolidation consolidated financial statements include accounts us subsidiaries wholly owned intercompany accounts transactions eliminated consolidation determining whether primary beneficiary entity therefore required consolidate apply qualitative approach determines whether 1 power direct economically significant activities entity 2 obligation absorb losses right receive benefits entity could potentially significant entity required consolidate activity entity due considerations b cash equivalents consider highly liquid investments original maturity three months less acquisition date cash equivalents analogic corporation notes consolidated financial statements continued millions except share per share data c revenue recognition accounts receivable recognize revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated persuasive evidence arrangement company uses contracts customer purchase orders determine existence arrangement delivery company’s sales contracts generally provide customer accept title risk loss product leaves facilities shipping terms local laws allow passage title risk loss shipping point defer recognizing revenue title risk loss transfer customer product sales acceptance criteria successfully demonstrated upon shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company assesses whether sales price fixed determinable time transaction sales prices documented executed sales contract purchase orders received prior shipment company’s standard terms allow trial evaluation periods rights return refund payments contingent upon customer obtaining financing terms could impact customer’s obligation company assesses whether collection reasonably assured based number factors including customer’s past transaction history credit worthiness grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified classify shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority include service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification limited basis company enters transactions involve multiple elements ie products services installation training typically products sold customer delivered time partial delivery occurs authorized customer company allocates revenue various products based vendorspecific objective evidence fair value vsoe exists according asc 60525 basis determining relative selling price element vsoe exist company may use third party evidence fair value tpe determine relative selling price element neither vsoe tpe exists company may use management’s best estimate sales price besp element determine relative selling price relative selling prices installations trainings extended warranties based established price lists separate standalone sales elements company establishes best estimates within range selling prices considering multiple factors including limited factors size transaction pricing strategies market conditions company believes use besp allows revenue recognition manner consistent underlying economics transaction additionally time may undelivered elements multiple element arrangement elements generally training extended warranty company defers revenue undelivered elements arrangement recognizes revenue recognition criteria met analogic corporation notes consolidated financial statements continued millions except share per share data maintenance service revenues recognized ratably term contract provide engineering services customers contractual basis recognize revenue using percentage completion method completed contract method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate shortterm unbilled receivables included accounts receivable consolidated balance sheets total unbilled receivables july 31 2016 2015 40 million 52 million respectively longterm unbilled receivables either july 31 2016 2015 total cost estimates exceed revenues accrue estimated losses immediately deferred revenue primarily comprised maintenance service revenues payment received services yet performed situations collection receivable reasonably assured inventory expensed upon shipment revenue recognized cash received total deferred revenue july 31 2016 2015 72 million 61 million respectively july 31 2016 2015 longterm portion deferred revenue 18 million 09 million respectively included longterm liabilities use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions may affect reported amounts assets liabilities equity revenue expenses related disclosures contingent assets liabilities ongoing basis evaluate estimates judgments methodologies base estimates historical experience various assumptions believed reasonable results forms basis making judgments carrying value assets liabilities actual results may differ estimates different assumptions conditions significant estimates changes near term considered reasonably possible may material impact financial statements disclosed notes consolidated financial statements e inventories value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based age inventory lower cost market along significant management judgments concerning future demands inventory technological obsolescence actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed product held sales force field sales demonstration purposes classify value product based manner used sales force prior fiscal 2016 demonstration inventory amortized straight line basis four year period approximate net realizable value beginning fiscal 2016 based ability intent sell inventory normal profit margin analogic corporation notes consolidated financial statements continued millions except share per share data company longer amortized demonstration inventory first year placed field company implemented policy prospectively fiscal 2016 based changes demonstration inventory utilized field extent demonstration inventory unsold period year reclassified fixed assets amortized estimated remaining useful life 36 months amortization demonstration inventory recorded sales marketing expense inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence f income taxes account income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs g concentration credit risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents derivative instruments accounts receivable cash equivalents required working capital purposes placed primarily shortterm bank deposits money market funds demand notes financial institutions banks meet stringent credit rating requirements collateralized securities issued us government agencies grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition require collateral security furnished counterparties derivative instruments h property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected consolidated statement operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued millions except share per share data property plant equipment consisted following land depreciated total depreciation amortization property plant equipment 150 million 141 million 143 million fiscal years 2016 2015 2014 respectively capitalize interest fiscal years 2016 2015 2014 intangible assets goodwill intangible assets consist intellectual property licenses certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology intangible assets finite lives amortized using either straightline method reliably determinable based pattern economic benefit asset expected utilized finitelived intangible assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact results operations indefinitelived intangible asset inprocess research development iprd trade names acquired business combinations tested impairment annually frequently indicators impairment present perform annual review second quarter fiscal year indefinitelived intangible asset may considered impaired determine carrying value exceeds assets’ fair value may first perform qualitative assessment determine whether necessary perform quantitative impairment test bypass qualitative assessment proceed directly performing quantitative impairment test quantitative impairment test based discounted estimated future cash flows assessing impairment indefinitelived intangible asset requires us make assumptions judgments regarding fair value asset using relief royalty valuation technique include management’s estimates future growth rates discount rates analogic corporation notes consolidated financial statements continued millions except share per share data goodwill amortized reviewed impairment annually frequently whenever events changes circumstances indicate carrying value reporting unit may exceed fair value reporting unit purpose impairment test operating segment level constitutes business discrete financial information available regularly reviewed segment management perform annual reviews second quarter fiscal year may first assess qualitative factors determine whether likely fair value reporting unit less carrying value basis determining whether necessary perform twostep goodwill impairment test may also elect proceed directly twostep impairment test initial qualitative assessment indicates likely carrying value reporting unit exceeds estimated fair value additional quantitative evaluation performed twostep impairment test based quantitative evaluation fair value reporting unit less carrying amount perform analysis fair value assets liabilities reporting unit implied fair value reporting unit’s goodwill determined less carrying amount impairment recognized difference assessing impairment goodwill requires us make assumptions judgments regarding fair value reporting units estimate fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compare values estimated overall market capitalization j fair value financial instruments financial instruments consist primarily cash equivalents accounts receivable accounts payable accrued liabilities derivative instruments carrying amounts financial instruments approximate fair value due shortterm nature fair values marketable securities investments pension deferred compensation plans estimated based quoted market price securities marketable securities july 31 2016 2015 k asset retirement obligations establish asset retirement obligations “aros” present value estimated future costs return certain facilities original condition recorded liabilities accreted future value estimated restoration costs accretion liability depreciation capitalized cost recognized estimated useful lives facilities l impairment longlived assets evaluate longlived assets whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate indicators impairment present respect longlived assets undiscounted cash flows attributable assets expected sufficient recover assets’ carrying amount additional analysis performed appropriate carrying value longlived assets written estimated fair value based discounted cash flow analysis market value warranty costs provide estimated cost standard product warranties time products shipped although engage extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ estimates based specific warranty claims historical data analogic corporation notes consolidated financial statements continued millions except share per share data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect operating results generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery n research development capitalized software development costs research development costs expensed incurred include primarily engineering salaries incentive compensation including sharebased compensation overhead materials used connection research product development activities research development costs related nonrecurring engineering projects funded customers included within engineering cost sales project accounted percentage completion method completed contract method software development costs incurred subsequent establishing technological feasibility capitalized technological feasibility demonstrated completion detailed program design capitalized costs amortized higher straightline basis economic life software ranging 3 5 years b ratio product’s current gross revenues total current expected gross revenues unamortized capitalized software costs 05 million 07 million july 31 2016 2015 respectively amortization expense capitalized software development costs 02 million 02 million 00 million fiscal years 2016 2015 2014 respectively included product cost sales derivative instruments hedging activities recognize derivative instruments either assets liabilities fair value consolidated balance sheets changes fair value derivatives recorded period current earnings accumulated comprehensive income loss depending whether derivative designated part hedge transaction classify cash flows instruments category cash flows hedged items enter derivative transactions trading speculative purposes assess inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows fair values hedged items also assess hedge ineffectiveness quarterly basis record gain loss related ineffective portion current earnings determine forecasted transaction longer probable occurring discontinue hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings p translation foreign currencies assets liabilities foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected component accumulated comprehensive income consolidated balance sheet foreign currency translation adjustments 23 million 126 million 01 million respectively included within consolidated statement comprehensive income fiscal years 2016 2015 2014 respectively exchange gains losses resulting foreign currency transactions denominated currency entity’s functional currency excluding intercompany transactions considered longterm investment nature included results operations period occur analogic corporation notes consolidated financial statements continued millions except share per share data reflected caption “other net” foreign exchange gains losses included within consolidated statement operations totaling 27 million 04 million 02 million fiscal years 2016 2015 2014 respectively q advertising costs expensed incurred included selling marketing expenses totaled 03 million 04 million 02 million fiscal years 2016 2015 2014 respectively r sharebased compensation recognize sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant net estimated forfeitures estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards recognize associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target evaluate probability meeting performance criteria balance sheet date probable related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change earnings per share related target performance achieved compensation cost recognized previously recognized compensation cost reversed marketbased awards compensation cost amortized performance period straightline basis awards vest end measurement period probability actual shares expected earned considered grant date valuation therefore expense adjusted reflect actual units earned business combinations accordance acquisition method accounting fair values assets acquired liabilities assumed determined recorded date acquisition transaction costs related acquisition expensed incurred excess purchase price estimated fair value net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets including intangible assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses furthermore fair value contingent consideration recorded part acquisition determined valuation model incorporates probability adjusted assumptions related achieving related milestones likelihood us making contingent payments unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies analogic corporation notes consolidated financial statements continued millions except share per share data net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common dilutive common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock units u segment information identify business operating segment engages business activities may earn revenues incur expenses ii operating results regularly reviewed chief operating decision maker chief executive officer iii available discrete financial information aggregate operating segments reportable segment operating segments determined similar economic characteristics similar nature products services nature production processes type class customer products services product service distribution method applicable nature regulatory environment three reportable segments medical imaging ultrasound security detection v recent accounting pronouncements recently adopted classification deferred taxes november 2015 financial accounting standards board fasb issued accounting standards update asu 201517 “income taxes topic 740 balance sheet classification deferred taxes” standard requires deferred tax assets liabilities classified noncurrent balance sheet rather separated current noncurrent asu 201517 effective fiscal years interim periods within years beginning december 15 2016 early adoption permitted standard may applied either retrospectively prospective basis deferred tax assets liabilities elected early adoption asu 201517 second quarter fiscal year 2016 retrospective basis accordingly reclassified current deferred taxes noncurrent july 31 2015 consolidated balance sheets decreased refundable deferred income taxes 80 million increased noncurrent deferred tax assets 46 million decreased noncurrent deferred tax liabilities 34 million consolidation february 2015 financial accounting standards board fasb issued accounting standards update asu 201502 “consolidation topic 810 amendments consolidation analysis” asu 201502 amended process reporting entity must perform determine whether consolidate certain types legal entities asu 201502 effective annual interim periods beginning december 15 2015 early adoption permitted update would effective us beginning august 1 2016 elected early adoption asu 201502 first quarter fiscal year ending july 31 2016 adoption update material impact consolidated financial statements yet effective improvements employee sharebased payment accounting march 2016 financial accounting standards board fasb issued accounting standards update asu 201609 “improvements employee sharebased payment accounting” amends asc 718 “stock based compensation” amendments require excess tax benefits recorded income tax analogic corporation notes consolidated financial statements continued millions except share per share data benefit expense income statement classified operating activity statement cash flows entities may also elect estimate amount forfeitures recognize occur amendments effective fiscal years interim periods within years beginning december 15 2016 standard effective us first quarter fiscal year ending july 31 2018 early adoption permitted currently evaluating impact adoption update consolidated financial statements leases february 2016 financial accounting standards board fasb issued accounting standards update asu 201602 “leases topic 842” standard requires lessees recognize assets liabilities leases balance sheet income statement purposes standard requires leases classified either operating finance standard effective annual interim periods beginning december 15 2018 early adoption permitted standard effective us first quarter fiscal year ending july 31 2020 adoption requires application new guidance periods presented currently evaluating impact adoption standard consolidated financial statements cloud computing arrangements april 2015 financial accounting standards board fasb issued accounting standards update asu 201505 “intangibles goodwill otherinternaluse software subtopic 35040” amendments provide guidance whether cloud computing arrangement eg software service platform service infrastructure service similar hosting arrangements includes software license based determination account arrangements amendments effective fiscal years interim periods within years beginning december 15 2015 may applied either prospective retrospective basis provisions effective us first quarter fiscal year ending july 31 2017 early adoption permitted expect adoption provisions material impact consolidated financial statements disclosure uncertainties entity’s ability continue going concern august 2014 fasb issued asu 201415 “presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern” standard requires management evaluate entity’s ability continue going concern within one year date issuance entity’s financial statements amendments effective annual period ending december 15 2016 annual periods interim periods thereafter applied prospective basis early adoption permitted provisions effective us first quarter fiscal year ending july 31 2017 expect adoption provisions material impact consolidated financial statements revenue contracts customers may 2014 fasb issued update provides guidance revenue recognition update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition requirements industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates today’s analogic corporation notes consolidated financial statements continued millions except share per share data guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update applied either retrospective modified retrospective basis update effective us first quarter fiscal year ending july 31 2018 early adoption permitted april 2015 fasb issued proposal defer effective date new revenue standard public entities one year therefore update would effective us first quarter fiscal year ending july 31 2019 proposal would also permit entities early adopt original effective date ie one year earlier currently evaluating impact adoption update consolidated financial statements w reclassifications revisions prior period financial statements certain financial statement items reclassified conform current period presentation reclassified current deferred taxes noncurrent due effect adopting asu 201517 separately presented current noncurrent contingent consideration liabilities july 31 2015 consolidated balance sheet conform current period presentation impact consolidated statements operations result reclassifications 2 sharebased compensation expense january 29 2010 stockholders approved “2009 stock incentive plan” 2009 plan provided issuance 1600000 shares common stock stockholders approved amendments 2009 plan january 23 2012 january 21 2014 increased number shares available issuance 2009 plan 2200000 4453518 respectively july 31 2016 remaining number shares available issuance 2009 plan 2828781 2009 plan includes number different types awards nongaap eps performancebased nongaap eps awards performance based restricted stock unit rsu awards issued executive officers high level management employees analogic nongaap eps awards align compensation performance nongaap earnings per share total shareholder return performancebased tsr awards performance based rsu awards issued executive officers high level management employees analogic tsr awards align compensation performance analogic’s stock compared stock performance peer group time based rsu awards stock awards issued analogic employees board members time based rsu’s aligned performance measures generally vest 3 year period time stock options granted executive officers employees analogic give right purchase stock set price vested analogic corporation notes consolidated financial statements continued millions except share per share data sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period net forfeitures following table sets forth stock option rsu transactions fiscal year 2016 1 performancebased unvested rsu’s shown table target except number shares vested reflect shares earned july 31 2016 maximum number performancebased unvested rsu’s available earned 334228 2 addition vested options expect portion unvested options vest point future stock options expected vest calculated applying estimated forfeiture rate unvested options following table presents sharebased compensation expense included consolidated statements operations july 31 2016 unrecognized compensation cost net estimated forfeitures related unvested stock options time based rsu’s performance based rsu’s 91 million cost recognized estimated weighted average amortization period 10 years assumes target performance nongaap eps rsu’s analogic corporation notes consolidated financial statements continued millions except share per share data stock options estimate fair value stock options using blackscholes valuation model key input assumptions used estimate grant date fair values stock options include exercise price award expected option term expected volatility stock option’s expected term riskfree interest rate option’s expected term expected annual dividend yield estimates fair value intended predict actual future events value ultimately realized persons receive equity awards stock options granted fy 2016 fair values option grants estimated grant date using following assumptions fiscal years 2015 2014 1 expected option term estimated using historical data 2 expected volatility grant determined based review average historical daily price changes common stock expected option term 3 riskfree interest rate determined based yield zerocoupon us treasury securities period commensurate expected term assumption 4 expected annual dividend yield calculated dividing expected annual dividends stock price date grant total intrinsic value stock options exercised fiscal years 2016 2015 2014 09 million 43 million 19 million respectively intrinsic value defined difference market price date exercise grant date exercise price total amount cash received exercise stock options 42 million 73 million 49 million respectively actual tax benefit realized tax deductions option exercises less 01 million fiscal years 2016 2015 2014 restricted stock restricted stock units estimate fair value rsu’s vest based service conditions using quoted closing price common stock date grant sharebased compensation expense amortized award’s vesting period straightline basis awards service performance conditions vest end performance cycle accelerated method applies awards service performance conditions nongaap eps awards compensation cost amortized performance period straightline basis net forfeitures awards vest end performance period compensation cost based number shares deemed probable vesting end threeyear performance cycle probability assessment done quarter changes estimates result significant expense fluctuations due cumulative catchup adjustment estimate fair value nongaap eps awards using quoted closing price common stock date grant analogic corporation notes consolidated financial statements continued millions except share per share data tsr awards compensation cost amortized performance period straightline basis net forfeitures awards vest end measurement period probability actual shares expected earned considered grant date valuation result expense adjusted reflect actual shares earned estimate fair value tsr awards using montecarlo simulation model granted 24821 28455 27450 tsr awards 32444 36641 35686 nongaap eps awards fiscal years 2016 2015 2014 respectively fair value tsr awards date grant estimated using montecarlo simulation model following assumptions 1 stock price closing price common stock date grant 2 expected volatility grant determined based historical volatility peer group companies common stock period equal remaining term performance period date grant awards 3 riskfree interest rate determined based yield zerocoupon us treasury securities period commensurate performance period 4 dividends considered reinvested calculating tsr dividend yield therefore considered 0 total fair value rsu’s vested fiscal years 2016 2015 2014 82 million 98 million 249 million respectively employee stock purchase plan november 4 1985 stockholders approved employee stock purchase plan espp authorizing issuances 700000 shares common stock espp allows qualified participants purchase common stock 85 market price first business day purchase period last business day sixmonth purchase period stockholders approved amendments espp january 22 1986 january 23 1998 january 17 2003 january 21 2014 stockholders approved amendments espp removed income limitation participation plan increased maximum value stock employee purchase two payment periods per year estimate fair value espp shares using blackscholes valuation model fiscal years 2016 2015 2014 compensation expense espp shares immaterial 3 business combination oncura partners diagnostics llc oncura january 8 2016 company wholly acquired oncura partners diagnostics llc privately held provider remote realtime ultrasound imaging teleconsulting services currently focused veterinary medicine market oncura included within ultrasound reportable segment see note 16 segment information analogic corporation notes consolidated financial statements continued millions except share per share data details preliminary purchase price 202 million comprised upfront cash payment 84 million postclosing adjustments 04 million relief debt owed analogic 13 million fair value contingent consideration 101 million acquisition accounted acquisition business following table summarizes purchase price allocation based preliminary estimates fair values separately identifiable assets acquired liabilities assumed acquisition date fair value measurements intangibles property plant equipment deferred revenue contingent consideration based upon significant inputs observable market therefore represent fair value measurements based level 3 inputs defined note 8 fair value measurements preliminary balances continue obtain information complete valuation accounts estimated fair value identifiable acquisitionrelated intangible assets primarily based discounted cash flow projections arise assets use significant judgment regard assumptions used determination fair value discount rates projected cash flows determination estimated useful lives intangible assets could material changes continue obtain information complete valuation accounts connection acquisition recorded acquisition date fair value contingent consideration obligation 101 million within longterm contingent consideration consolidated balance sheets obligation payable upon achievement certain revenue gross margin targets four year period starting may 1 2016 limit earnout paid 101 million fair value estimated monte carlo valuation model incorporates probability adjusted assumptions relating achievement targets likelihood us making payments could material changes continue obtain information complete valuation accounts initial postclose period changes acquisition date fair value recorded goodwill fair value measurement based upon significant inputs observable market therefore represents level 3 input measurement subsequent changes fair value obligation recognized adjustments contingent consideration liability reflected within consolidated statement operations within general administrative operating expenses additional information related fair value obligation please refer note 8 fair value measurements analogic corporation notes consolidated financial statements continued millions except share per share data goodwill associated acquisition primarily attributable opportunities expanding analogic’s service offerings launch ultrasoundbased telehealth initiative goodwill acquisition deductible tax purposes statutory 15 year period fiscal year 2016 incurred acquisition costs 04 million consisted primarily legal due diligence expenses included general administrative expenses consolidated statements operations pro forma financial information fiscal year 2016 including revenue net income immaterial separately presented pathfinder therapeutics inc pathfinder october 28 2014 acquired certain assets assumed certain liabilities related surgical planning guidance business pathfinder 16 million paid cash acquisition date acquisition accounted acquisition business following table summarizes purchase price allocation based fair values separately identifiable assets acquired liabilities assumed acquisition date estimated fair value identifiable acquisitionrelated intangible assets primarily based discounted cash flows projections arise assets use significant judgment regard assumptions used determination fair value discount rates determination estimated useful lives intangible assets total weighted average amortization period intangible assets approximately 76 years goodwill associated acquisition primarily attributable opportunities addition pathfinder’s product portfolio technology complement suite products goodwill acquisition deductible tax purposes statutory 15 year period fiscal year 2015 incurred acquisition costs approximately 01 million consisted primarily legal due diligence expenses included general administrative expenses consolidated statements operations pro forma financial information year ended july 31 2015 including revenue net income immaterial separately presented analogic corporation notes consolidated financial statements continued millions except share per share data pocketsonics inc april 2010 entered agreement pocketsonics inc pocketsonics privately held ultrasound technology company based charlottesville virginia granted us exclusive license certain ultrasound technology owned controlled pocketsonics ten percent 10 equity interest pocketsonics equity investment recorded inprocess research development iprd 19 million since time collaborated pocketsonics develop patented ultrasound technology enable acceleration high acuity guided procedures lower cost pointofcare settings technical applications september 20 2013 acquired remaining stock pocketsonics purchase price includes base consideration 111 million paid cash closing fair value contingent consideration 19 million revaluation initial equity investment undertook acquisition strengthen competitive position procedure guidance pointofcare advanced guidance applications acquisition funded existing cash hand accounted acquisition business finalized purchase accounting pocketsonics acquisition fiscal year 2014 following table summarizes fair values separately identifiable assets acquired liabilities assumed september 20 2013 determining fair value considered among factors market participants’ intentions use acquired assets historical estimated future demand pocketsonics products services recognized iprd asset 115 million fair value asset determined probability adjusted cash flow analysis may 2014 determined iprd completed performed qualitative assessment determined impairment accordingly carrying amount iprd asset reclassified developed technology amortized estimated useful life 10 years connection acquisition recorded fair value contingent consideration obligation 19 million potential exposure 30 million payable upon achievement certain milestones relating pocketsonics technology contingent earnout payments sellers pocketsonics would payable upon commercial launch achievement volume sales target defined asset purchase agreement 20 million fair value estimated valuation model incorporates probability adjusted assumptions relating achievement milestones likelihood us making payments fair value measurement based upon significant inputs observable market therefore represents level 3 input measurement subsequent changes fair value obligation recognized adjustments contingent consideration liability reflected within consolidated statements operations within selling marketing expenses fiscal year 2015 estimated fair value contingent consideration obligation decreased 01 million total fair value contingent consideration obligation 20 million july 31 2015 2016 additional information related fair value obligation please refer note 8 fair value measurements analogic corporation notes consolidated financial statements continued millions except share per share data recorded goodwill 69 million related pocketsonics acquisition representing value opportunity strengthening competitive position procedure guidance pointofcare advanced guidance applications goodwill deductible tax purposes upon acquisition pocketsonics recognized loss 05 million related 10 preacquisition equity interest reflected component expense net within consolidated statement operations fiscal year 2014 fiscal year 2014 incurred acquisition costs 01 million consisting primarily legal due diligence expenses included general administrative expenses consolidated statement operations 4 restructuring charges fiscal year 2016 restructuring plan september 16 2015 announced fiscal year 2016 restructuring plan includes transition certain manufacturing activities peabody massachusetts location existing facility shanghai china reduction force order align research development investment expected customer funding incurred pretax charges 96 million fiscal year 2016 primarily relating severance personnel related costs 117 terminated employees costs attributable relocation existing equipment project management costs recognized consolidated statement operations restructuring 96 million charge recorded operating results medical imaging ultrasound security detection segments charges 60 million 19 million 17 million respectively expect restructuring plan substantially completed fiscal year 2017 fiscal year 2014 restructuring plan fourth quarter fiscal year 2014 implemented fiscal year 2014 restructuring plan improve operational effectiveness peabody massachusetts leverage core competencies better across business incurred pretax charges 29 million fiscal year 2014 primarily relating severance personnel related costs 48 involuntarily terminated employees associated restructuring activities including improving operational effectiveness peabody massachusetts better leverage core competencies across business recognized consolidated statement operations restructuring 29 million charge recorded operating results medical imaging ultrasound security detection segments charges 19 million 05 million 05 million respectively restructuring plan completed fourth quarter fiscal year 2016 fiscal year 2013 restructuring plan may 2013 announced restructuring plan incurred pretax charges 41 million primarily relating severance personnel related costs 115 terminated employees well facility exit costs closure ultrasonix sales subsidiary paris france well closure ultrasound transducer operation englewood colorado consolidate transducer operations state college pennsylvania plan also include activities consolidate manufacturing certain support functions currently conducted ultrasonix facility vancouver canada facilities well optimization operations montreal canada peabody massachusetts pretax charges included operating results medical imaging segment ultrasound segment security detection segment lease englewood colorado facility settled january 2016 restructuring plan completed third quarter fiscal year 2016 analogic corporation notes consolidated financial statements continued millions except share per share data following table summarizes accrued restructuring costs activity july 31 2014 july 31 2016 restructuring charges fiscal year 2016 include 96 million respect fiscal year 2016 restructuring plan b cash payments fiscal year 2015 2016 pertain closure englewood colorado facility c activity fiscal year 2015 pertains fiscal year 2014 restructuring plan 2013 restructuring plan fiscal year 2015 restructuring adjustments 03 million cash payments 24 million relate fiscal year 2014 restructuring plan restructuring adjustments 01 million cash payments 05 million relate fiscal year 2013 restructuring plan activity fiscal year 2016 pertains fiscal year 2016 restructuring plan fiscal year 2014 restructuring plan 2013 restructuring plan fiscal year 2016 restructuring charges 96 million cash payments 44 million related fiscal year 2016 restructuring plan cash payments 02 million 04 million related fiscal year 2014 restructuring plan fiscal year 2013 restructuring plan respectively restructuring charges comprised balance sheet within accrued restructuring charges cash expenditures remaining paid july 31 2016 paid within next twelve months restructuring costs including actions associated acquisitions segment fiscal years 2016 2015 2014 follows net restructuring related charges comprised following analogic corporation notes consolidated financial statements continued millions except share per share data 5 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method options purchase common shares exercise prices exceeded market value underlying common stock excluded computation diluted earnings per share following table sets forth computation basic diluted net income per share fiscal years 2016 2015 2014 shares related outstanding stock options unvested restricted stock included calculations diluted earnings per share effect including would antidilutive 6 accounts receivable net customers accounts receivable arise primarily products sold services provided us europe asia balance accounts receivable represents amount due domestic foreign oem customers distributors end users majority accounts receivable standard payment terms require payment within 30 days perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified amounts determined uncollectible charged written reserve date historical writeoffs accounts receivable minimal ten largest customers group accounted 61 64 66 net product engineering revenue fiscal years 2016 2015 2014 respectively set forth table customers individually accounted 10 net revenue note total net revenue less 10 fiscal year analogic corporation notes consolidated financial statements continued millions except share per share data philips’ toshiba’s siemens’ revenues primarily medical imaging segment l3’s revenue security detection segment following table summarizes net accounts receivable due customers net accounts receivable balances greater equal 10 total net accounts receivable balance 7 derivative instruments certain foreign operations revenues expenses transacted currencies functional currency order mitigate foreign currency exchange risk use forward contracts lock exchange rates associated portion forecasted international expenses july 31 2016 forward contracts outstanding notional amounts totaling 186 million contracts designated cash flow hedges unrealized loss 02 million net tax contracts reported accumulated comprehensive income july 31 2016 assets liability derivatives designated hedging instruments presented assets liabilities respectively consolidated balance sheets july 31 2016 derivative liability 03 million included liabilities consolidated balance sheet july 31 2015 forward contracts outstanding notional amounts totaling 101 million contracts designated cash flow hedges unrealized loss 04 million net tax contracts reported accumulated comprehensive income july 31 2015 july 31 2015 derivative liability 05 million included liabilities consolidated balance sheet realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal years 2016 2015 2014 recorded approximately 07 million 05 million realized loss 02 million realized gain respectively included consolidated statements operations 8 fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs use fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities analogic corporation notes consolidated financial statements continued millions except share per share data following table provides assets liabilities carried fair value measured recurring basis july 31 2016 2015 assets held deferred compensation plans used pay benefits nonqualified deferred compensation plans investments primarily consist mutual funds publicly traded stock exchanges accordingly fair value assets categorized level 1 within fair value hierarchy fair value liabilities arising foreign currency forward contracts determined valuation models based market observable inputs including forward spot prices currencies accordingly fair value liabilities categorized level 2 within fair value hierarchy fair value contingent consideration obligation based significant unobservable inputs including management estimates assumptions measured based probabilityweighted present value payments expected made accordingly fair value liability categorized level 3 within fair value hierarchy analogic corporation notes consolidated financial statements continued millions except share per share data fair value contingent payments associated acquisition pocketsonics calculated utilizing 100 probability earn associated section 510k clearance obtained food drug administration fda april 9 2014 first commercial shipment defined purchase agreement fiscal year ending july 31 2016 fiscal year 2016 quarter revalue contingent consideration obligations associated acquisition pocketsonics current fair value record changes fair value consolidated statements operations changes contingent consideration result changes assumptions regarding probabilities estimated timing launch volume sales target payments discount rate used estimate fair value liability assumptions used estimating fair value require significant judgment use different assumptions judgments could result materially different estimate fair value adjustments 00 million 01 million fair value contingent consideration obligation years ended july 31 2016 2015 respectively july 31 2016 2015 fair value contingent consideration obligation reported longterm liabilities current liabilities 20 million 20 million respectively consolidated balance sheets fair value contingent payment obligation associated acquisition oncura valued using monte carlo simulation fair value contingent payment obligation oncura revalued quarter fair value record changes fair value contingent consideration expense within consolidated statement operations within general administrative operating expenses changes contingent consideration expense result changes assumptions regarding probabilities estimated future volume sales gross margin targets discount rate used estimate fair value liability assumptions used estimating fair value require significant judgment use different assumptions judgments could result different estimate fair value 01 million increase fair value contingent consideration obligation year ended july 31 2016 july 31 2016 fair value contingent consideration obligation associated oncura acquisition 25 million within shortterm contingent consideration 77 million within longterm contingent consideration consolidated balance sheets please refer note 3 business combinations information acquisition oncura following reconciliations changes fair value contingent consideration fiscal years 2016 2015 9 inventory components inventory net allowance obsolete unmarketable slowmoving inventories summarized follows analogic corporation notes consolidated financial statements continued millions except share per share data 10 goodwill intangible assets goodwill gross carrying value goodwill july 31 2016 2015 739 million 575 million respectively difference two periods relates goodwill associated acquisition oncura 164 million please refer note 3 business combinations information acquisition oncura determined goodwill impaired 2016 2015 2014 total amount goodwill deductible tax purposes 105 million fiscal year 2016 40 million fiscal year 2015 intangible assets intangible assets include value assigned intellectual property technology patents customer contracts relationships trade names inprocess research development estimated useful lives finitelived intangible assets 1 14 years indefinitelived intangibles consist trade names acquired business combinations carrying values indefinitelived intangible assets relating trade names 76 million july 31 2016 2015 finitelived intangible assets july 31 2016 2015 consisted following amortization expense related finitelived intangible assets 84 million 89 million 78 million fiscal years 2016 2015 2014 respectively amortization expense related customer relationships trade names recognized operating expenses amortization expense related developed technologies recognized cost sales consolidated statement operations estimated future amortization expenses related intangible assets succeeding fiscal years expected follows analogic corporation notes consolidated financial statements continued millions except share per share data performed annual impairment test goodwill intangible assets indefinite lives december 31 2015 first assess qualitative factors determine whether likely fair value reporting unit less carrying value basis determining whether necessary perform quantitative impairment test alternatively may elect bypass qualitative assessment proceed twostep quantitative impairment test quantitative impairment assessment considered market approach income approach calculate fair value reporting unit different weighting assigned market approach fair value reporting unit based trading multiples peer group companies determined based analysis selected guideline public companies’ business enterprise value “bev” plus control premium determined based analysis control premiums recent relevant acquisitions income approach fair value reporting unit based present value estimated future cash flows determined based upon company’s recent strategic operating plan considering market participant assumptions income approach dependent number significant management assumptions including estimates future revenues costs expenses number significant valuation inputs including discount rates working capital rates tax rates completed assessment goodwill december 31 2015 determined impairment goodwill please refer note 16 segment geographic information carrying amount goodwill reportable segment years ended july 31 2016 2015 compared fair value tradename indefinite life using relief royalty approach carrying value december 31 2015 relief royalty approach utilized aftertax royalty rate discount rate aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales tradename determined fair value tradename excess carrying value current economic environment uncertainties regarding impact business estimates forecasted revenue spending levels made purposes goodwill trade name impairment testing second quarter fiscal year 2016 may accurate predictions future assumptions regarding forecasted revenue margin growth rates reporting unit trade name achieved may required record impairment charge goodwill trade name future periods whether connection next annual impairment testing second quarter fiscal year ending july 31 2017 prior change constitutes triggering event outside quarter annual goodwill trade name impairment test performed july 31 2016 estimated fair value reporting unit significantly exceeded corresponding carrying value changes forecasts decreases value common stock could cause book values certain operations exceed fair values may result goodwill impairment charges future periods possible time determine future impairment charge would result whether charge would material 11 commitments guarantees contingencies guarantees indemnification obligations standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant indemnify hold harmless agree reimburse indemnified party losses suffered incurred indemnified party connection us patent analogic corporation notes consolidated financial statements continued millions except share per share data copyright intellectual property infringement claim third party respect products provisions generally survive termination expiration agreements potential amount future payments could required make indemnification provisions instances unlimited costs defend lawsuits settle claims related indemnification agreements insignificant date currently party significant indemnification claims result believe estimated exposure agreements currently minimal accordingly liabilities recorded agreements july 31 2016 generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery provide estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents accrued warranty liability fiscal years 2016 2015 july 31 2016 2015 deferred revenue extended product warranty contracts 02 million 05 million respectively revolving credit agreements november 23 2015 entered fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included jpmorgan chase bank na td bank na wells fargo bank na hsbc bank na people’s united bank na credit agreement provides 1000 million available credit expires november 23 2020 outstanding borrowings must paid full credit facility require amortization principal may reduced maturity whole part option without penalty upon entry credit agreement terminated without penalty 1000 million fiveyear revolving credit agreement entered october 11 2011 previously paid full accordance terms borrowings credit agreement may used general corporate purposes including permitted acquisitions amount available credit increased specified circumstances 2000 million aggregate sole borrower credit agreement obligations credit facility guaranteed required material domestic subsidiaries designated us time required credit agreement pledges capital stock assets international subsidiaries interest rates borrowings outstanding credit facility range 125 175 libor rate option range 000 100 defined base rate amount case varying based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio analogic corporation notes consolidated financial statements continued millions except share per share data credit agreement limits subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters earnings interest taxes depreciation amortization ebitda adjustments stipulated credit agreement greater 275100 temporary stepup event certain acquisitions • interest coverage ratio defined ratio consolidated trailing four quarters adjusted ebitda consolidated interest charges less 300100 time july 31 2016 leverage ratio 0004100 interest coverage ratio applicable attributable interest expense july 31 2016 full compliance financial operating covenants contained credit agreement failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering credit agreement incurred approximately 05 million transactions costs amortized fiveyear life credit facility july 31 2016 july 31 2015 approximately 12 million 12 million respectively revolving credit facilities banks available direct borrowings borrowing outstanding credit facilities july 31 2016 2015 respectively asset retirement obligations aro july 31 2016 2015 aro estimated future costs associated restoring leased facilities carrying value 11 million included liabilities consolidated balance sheet fiscal years 2016 2015 recorded insignificant amount accretion foreign currency translation related aro legal claims subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable believe valid defenses respect matters currently pending us intend defend vigorously outcome matters individually aggregate expected material impact cash flows results operations financial position record losses estimable probable accordance us gaap analogic corporation notes consolidated financial statements continued millions except share per share data investigation regarding danish subsidiary initially disclosed annual report form 10k fiscal year ended july 31 2011 identified certain transactions involving danish subsidiary bk medical aps bk medical certain foreign distributors respect raised questions concerning compliance law including danish law us foreign corrupt practices act business policies included transactions distributors paid bk medical amounts excess amounts owed bk medical transferred excess amounts direction distributors third parties identified distributors terminated employment certain bk medical employees also terminated relationships bk medical distributors involved transactions concluded identified transactions properly accounted reported financial statements material respects however unable ascertain certainty ultimate beneficiaries purpose transfers voluntarily disclosed matter danish government us department justice doj sec cooperated inquiries danish government doj sec reach resolution matter fiscal year ended july 31 2016 june 22 2016 issued press release announcing reached agreements sec doj danish government resolve matters voluntarily disclosed result resolutions paid total 149 million disgorgement interest penalties expect inquiries related matter second quarter fiscal 2016 accrued charge 133 million 101 million classified general administrative expense 32 million classified expense net consolidated statements operations connection matters addition 16 million charge accrued fourth quarter fiscal 2015 10 million classified general administrative expense 06 million classified expense net consolidated statements operations incurred inquiryrelated costs approximately 04 million 14 million 14 million fiscal years ended july 31 2016 2015 2014 respectively connection matter 12 leases commitments certain subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options lease certain real property equipment operating leases aggregate significant rent expense associated operating leases approximately 19 million 23 million 21 million fiscal years 2016 2015 2014 respectively following schedule year future minimum lease payments july 31 2016 july 31 2016 outstanding noncancelable purchase orders aggregating 239 million purchase orders manufacturing nonmanufacturing related goods services analogic corporation notes consolidated financial statements continued millions except share per share data 13 income expense income expense consists primarily interest income cash equivalents gains sale investments foreign exchange gains losses fiscal year 2016 recorded 32 million interest charge connection investigation related danish subsidiary bk medical fiscal year 2015 recorded 06 million interest charge connection investigation related danish subsidiary bk medical fiscal year 2014 recognized loss 05 million first quarter fiscal year 2014 related acquisitions pocketsonics please refer note 3 business combinations information acquisition pocketsonics foreign exchange losses totaling 27 million 04 million 02 million fiscal years 2016 2015 2014 respectively 14 retirement plans 401k plan qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions us employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salary wage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined irs matched employee contributions 4 eligible compensation addition 401k plan provided us employees also provide benefits defined contribution plans employees denmark china contributions defined contribution plans totaled 52 million 51 million 52 million fiscal years 2016 2015 2014 respectively defined benefit retirement plan canadian subsidiary analogic canada corporation formerly known anrad corporation sponsors defined benefit retirement plan called analogic canada corporation retirement plan “analogic canada plan” analogic canada plan frozen new accruals fiscal year 2015 analogic canada plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 recognize periodic pension expense consolidated statements operations associated assets liabilities consolidated balance sheet analogic corporation notes consolidated financial statements continued millions except share per share data following tables provide information benefit obligations plan assets funded status july 31 2016 2015 change benefit obligation change plan assets accumulated benefit obligation abo balances analogic canada plan 141 million 123 million july 31 2016 2015 respectively net periodic benefit cost components net periodic benefit cost follows analogic corporation notes consolidated financial statements continued millions except share per share data amounts recognized accumulated comprehensive income pretax estimated net actuarial loss analogic canada plan expected amortized stockholders’ equity net pension cost fiscal year 2017 03 million actuarial assumptions actuarial assumptions analogic canada plan described discount rates july 31 used measure fiscal year end benefit obligations earnings effects subsequent year discount rate based high quality corporate bond spot rates cash flows match timing amount expected benefit payments determine expected longterm rate return analogic canada plan assets considered current expected asset allocations well historical expected returns various categories plan assets amortize realized gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy analogic canada plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate fiscal years 2016 2015 2014 made contributions analogic canada plan 10 million 08 million 16 million respectively made payments benefits 15 million 04 million 09 million respectively fiscal year 2017 expect make contributions payments benefits 00 million 04 million respectively plan assets analogic canada plan assets held trust follows analogic corporation notes consolidated financial statements continued millions except share per share data pension committee analogic canada plan sets investment policies strategies analogic canada plan longterm strategic investment objectives include preserving funded status analogic canada plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range fair value analogic canada plan pension assets asset category july 31 2016 2015 follows comprises units segregated pooled funds insurance company funds underlying values primarily derived mutual funds debt equity securities traded active market based closing price trading day analogic corporation notes consolidated financial statements continued millions except share per share data estimated future benefit payments estimated future benefit payments analogic canada plan follows 15 income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2016 2015 2014 effective income tax rate based actual income year composition income different countries adjustments applicable quarterly periods potential tax consequences benefits resolution tax audits tax contingencies discrete items reconciliation income taxes us statutory rate effective tax rate follows effective tax rate fiscal year 2016 higher statutory rate 35 primarily due certain discrete tax provisions totaling 12 million discrete tax provision fiscal year 2016 consists primarily 15 million increase uncertain tax positions primarily associated bk medical matter offset 04 million benefit associated extension federal rd tax credit 03 million reduction uncertain tax positions primarily associated expiration statute limitations along 03 million provision items analogic corporation notes consolidated financial statements continued millions except share per share data effective tax rate discrete items fiscal year 2015 lower statutory rate 35 primarily due lower foreign tax rates tax credits us canada tax provision fiscal year 2015 includes certain discrete tax benefits totaling 29 million discrete tax benefit fiscal year 2015 consists primarily 34 million reduction uncertain tax positions primarily associated expiration statute limitations 08 million benefit associated extension federal rd tax credit offset 03 million provision reduction domestic production deduction due filing nol carryback claim along 10 million provision items components provision benefit income taxes follows income taxes domestic foreign operations follows analogic corporation notes consolidated financial statements continued millions except share per share data net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws july 31 2016 net operating loss carryforwards belgium approximately 29 million expiration date losses approximately 86 million denmark expiration date losses 60 million canada expire 2024 july 31 2016 also state tax credit carryforwards 149 million begin expire 2021 credit carryforwards 30 million canada begin expire 2025 also operating loss carryforwards luxembourg approximately 149 million believe possibility utilizing luxembourg loss carryforwards foreseeable future remote therefore provided full valuation allowance provide us federal income taxes undistributed earnings consolidated foreign subsidiaries approximately 859 million earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs circumstances would affect calculations would source location amount distribution underlying tax rate already paid earnings foreign withholding taxes opportunity use foreign tax credits determined likely recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2016 2015 change valuation allowance fiscal year 2016 primarily result addition current year operating loss carryforwards luxembourg use likely perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide us comprehensive model recognize measure present disclose financial statements certain tax positions taken expect take income tax returns analogic corporation notes consolidated financial statements continued millions except share per share data following table summarizes changes unrecognized income tax benefits fiscal years 2016 2015 unrecognized tax benefits increased 76 million july 31 2016 recognized future period timing estimable expect approximately 22 million would reduce effective tax rate net potential valuation allowances subject us federal income tax well income tax multiple state foreign jurisdictions concluded us federal income tax matters year ended july 31 2012 next four quarters statute limitations fiscal year ended july 31 2013 may expire us federal state income taxes foreign subsidiaries reasonably expected net unrecognized benefits including interest approximately 07 million may recognized fiscal year 2016 reduced uncertain tax benefits accrued interest 03 million result closing statutes limitation fiscal year 2012 domestic entities remeasurement uncertain tax benefits open years accrue interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2016 2015 approximately 04 million 03 million respectively accrued interest penalties unrecognized tax benefits refundable income taxes july 31 2016 consisted refundable income tax assets 30 million refundable income taxes july 31 2015 consisted refundable income tax assets 104 million refundable income tax assets include expected federal state foreign refunds expected received within next twelve months fiscal year 2016 corrected presentation table summarizing changes unrecognized income tax benefits fiscal year 2015 determined corrections impact balance sheet statement operations cash flows operating investing financing activities material consolidated financial statements fiscal year 2015 corrections resulted following fiscal year ended 2015 beginning balance 81 previously disclosed amount 69 analogic corporation notes consolidated financial statements continued millions except share per share data fiscal year ended 2015 increase based tax positions related current year 07 previously disclosed amount 06 fiscal year ended 2015 ending balance 60 previously disclosed amount 47 discussed note 1 recent accounting pronouncements second quarter fiscal year 2016 ended january 31 2016 retrospectively adopted asu 201517 “income taxes topic 740 balance sheet classification deferred taxes” effects accounting change july 31 2015 consolidated balance sheets follows 16 segment geographic information business strategically aligned three reportable segments medical imaging ultrasound security detection business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily urology surgery pointofcare markets • security detection includes advanced threat detecting ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide analogic corporation notes consolidated financial statements continued millions except share per share data table presents information reportable segments analogic corporation notes consolidated financial statements continued millions except share per share data includes restructuring charges 60 million 02 million 17 million fiscal years 2016 2015 2014 respectively b includes restructuring charges 19 million 01 million 14 million fiscal year 2016 2015 2014 respectively includes 101 million 10 million charge bk medical matter fiscal year 2016 2015 respectively c includes restructuring charges 17 million 01 million 04 million fiscal year 2016 2015 2014 respectively includes net intangible assets acquisitions 203 million 232 million july 31 2016 2015 respectively e includes net intangible assets acquisitions 152 million 152 million july 31 2016 2015 respectively 37 million net intangible assets relating acquisition oncura second quarter fiscal year 2016 f includes net intangible assets acquisitions 06 million 01 million july 31 2016 2015 respectively relating acquisition pathfinder first quarter fiscal year 2015 g includes cash equivalents marketable securities 973 million 862 million july 31 2016 2015 respectively h company past included balance goodwill identifiable assets segment table felt relevant disclose identifiable assets segment excluding associated goodwill balances goodwill balances separately stated segment prior period presentation modified exclude associated goodwill balances well comparability purposes revenues attributed countries based location customers oem sales customer location may differ location ultimate completed systems sold oem market information regarding sharebased compensation depreciation amortization segment fiscal years 2016 2015 2014 follows analogic corporation notes consolidated financial statements continued millions except share per share data information regarding geographic areas fiscal years 2016 2015 2014 follows property plant equipment primarily canada 17 common stock repurchases june 2 2014 board directors authorized repurchase 300 million common stock repurchase program funded available cash fiscal year 2016 repurchased retired 171899 shares common stock repurchase program 137 million average purchase price 7966 per share fiscal year 2015 repurchased retired 176611 shares common stock repurchase program 139 million average purchase price 7851 per share fiscal year 2014 repurchased 18683 shares common stock repurchase program 14 million average purchase price 7622 per share cumulative shares repurchased retired program 367193 shares common stock 29 million average price 7896 per share may 26 2016 board directors authorized repurchase 150 million common stock shares repurchased agreement 18 accumulated comprehensive income loss components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income consists reported foreign currency translation gains losses net taxes actuarial gains losses pension plan assets net taxes changes unrealized value foreign currency forward contracts net taxes deferred taxes provided cumulative translation adjustments expect earnings foreign subsidiary indefinitely reinvested income tax effect currency translation adjustments related foreign subsidiaries considered indefinitely reinvested recorded component deferred taxes offset comprehensive income analogic corporation notes consolidated financial statements continued millions except share per share data following table summarizes components accumulated comprehensive income loss ineffective portion unrealized gains losses foreign currency forward contracts realized gains losses currency translation included income expense consolidated statement operations realized gains losses pension plan included general administrative expenses consolidated statement operations 19 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2016 2015 analogic corporation notes consolidated financial statements continued millions except share per share data discussed note 4 restucturing charges recorded restructuring costs 33 million 31 million 18 million 14 million first quarter second quarter third quarter fourth quarter fiscal year 2016 respectively association 2016 restructuring plan discussed note 3 business combination second quarter fiscal year 2016 recorded acquisition related expense 04 million association oncura acquisition discussed note 11 commitments guarantees contingencies second quarter fiscal year 2016 recorded 101 million expenses related bk medical matter discussed note 13 income expense second quarter fiscal year 2016 recorded 32 million interest charge related bk medical matter discussed note 15 income taxes second quarter fiscal year 2016 recognized 15 million increase uncertain tax positions primarily associated bk medical matter discussed note 3 business combination first quarter fiscal year 2015 recorded acquisition related expense 01 million association pathfinder acquisition discussed note 15 income taxes third quarter fiscal year 2015 recognized discrete tax benefit 34 million reduction uncertain tax positions primarily associated expiration statute limitations 20 subsequent events september 16 2016 board directors declared dividend 010 per common share paid october 12 2016 stockholders record october 1 2016 analogic corporation schedule ii valuation qualifying accounts millions changes valuation allowance represents changes federal state foreign tax attributes believe likely able utilized index exhibits management contract compensatory plan arrangement submitted electronically herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated balance sheets july 31 2016 july 31 2015 ii consolidated statements operations years ended july 31 2016 2015 2014 iii consolidated statements comprehensive income years ended july 31 2016 2015 2014 iv consolidated statements changes stockholders’ equity years ended july 31 2016 2015 2014 v consolidated statements cash flows years ended july 31 2016 2015 2014 vi notes consolidated financial statementsitem 15 exhibits financial statement schedules page number 1 consolidated financial statements report independent registered public accounting firms consolidated balance sheets july 31 2017 2016 consolidated statements operations years ended july 31 2017 2016 2015 consolidated statements comprehensive loss income years ended july 31 2017 2016 2015 consolidated statements changes stockholders’ equity years ended july 31 2017 2016 2015 consolidated statements cash flows years ended july 31 2017 2016 2015 notes consolidated financial statements 2 financial statement schedule ii valuation qualifying accounts schedules omitted required applicable required information furnished consolidated statements notes hereto b index exhibits immediately following financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date fred b parks president chief executive officer principal executive officer director september 26 2017 fred b parks michael j bourque senior vice president chief financial officer treasurer principal financial accounting officer september 26 2017 michael j bourque bernard c bailey chairman board september 26 2017 bernard c bailey jeffrey p black director september 26 2017 jeffrey p black james j judge director september 26 2017 james j judge michael modic director september 26 2017 michael modic stephen odland director september 26 2017 stephen odland report independent registered public accounting firm board directors shareholders analogic corporation audited accompanying consolidated balance sheets analogic corporation july 31 2017 2016 related consolidated statements operations comprehensive loss income changes stockholders’ equity cash flows three years period ended july 31 2017 audit also included financial statement schedules listed index item 15a financial statements schedules responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position analogic corporation july 31 2017 2016 consolidated results operations cash flows three years period ended july 31 2017 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states analogic corporation’s internal control financial reporting july 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated september 26 2017 expressed unqualified opinion thereon ernst young llp boston massachusetts september 26 2017 report independent registered public accounting firm board directors shareholders analogic corporation audited analogic corporation’s internal control financial reporting july 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria analogic corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion analogic corporation’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion analogic corporation maintained material respects effective internal control financial reporting july 31 2017 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets analogic corporation july 31 2017 2016 related consolidated statements operations comprehensive loss income changes stockholders’ equity cash flows three years period ended july 31 2017 analogic corporation report dated september 26 2017 expressed unqualified opinion thereon ernst young llp boston massachusetts september 26 2017 analogic corporation consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements comprehensive loss income thousands accompanying notes integral part consolidated financial statements analogic corporation consolidated statements changes stockholders’ equity years ended july 31 2017 2016 2015 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements millions except share per share data 1 summary business operations significant accounting policies throughout annual report form 10k unless context states otherwise words “we” “us” “our” “analogic” refer analogic corporation subsidiaries taken whole “our board directors” refers board directors analogic corporation description business analogic corporation nasdaqalog designs manufactures commercializes innovative realtime guidance diagnostic imaging threat detection technologies advance practice medicine save lives operate report along three business segments medical imaging ultrasound security detection medical imaging segment provides critical enabling medical imaging systems subsystems computed tomography ct magnetic resonance imaging mri highresolution digital mammography sell medical imaging products primarily longstanding relationships wellknown multinational medical original equipment manufacturers oems new entrants emerging markets ultrasound segment provides realtime ultrasound procedure guidance systems urology surgery point care markets sell ultrasound products bk ultrasound brand direct sales force north america europe well network distributors clinical practitioners throughout world security detection segment designs manufactures automated threat detection systems aviation baggage inspection applications utilizing advanced ct technology systems used rapid dna analysis law enforcement government agencies sell aviation threat detection rapid dna systems multinational partners incorporated commonwealth massachusetts november 1967 headquarters based peabody massachusetts significant accounting policies consolidation consolidated financial statements include accounts us subsidiaries wholly owned intercompany accounts transactions eliminated consolidation determining whether primary beneficiary entity therefore required consolidate apply qualitative approach determines whether 1 power direct economically significant activities entity 2 obligation absorb losses right receive benefits entity could potentially significant entity required consolidate activity entity due considerations b cash equivalents company considers highly liquid investments original maturity three months less acquisition date cash equivalents c marketable securities company classified marketable debt securities availableforsale securities recorded fair value unrealized gains losses except otherthantemporarily impairments availableforsale securities recorded net tax component accumulated comprehensive income realized gains losses availableforsale securities reported income expense net specific identification basis company determines appropriate classification investments acquisition date reassesses classifications balance sheet date company classifies marketable debt securities either shortterm longterm based instrument’s underlying contractual maturity date marketable debt securities maturities 12 months less classified shortterm marketable debt securities maturities greater 12 months classified longterm availableforsale securities assessed impairment quarterly revenue recognition accounts receivable company recognizes revenue related product sales upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated persuasive evidence arrangement company uses contracts customer purchase order determine existence arrangement delivery company’s sales contracts generally provide customer accept title risk loss product leaves facilities shipping terms local laws allow passage title risk loss shipping point defer recognizing revenue title risk loss transfer customer product sales acceptance criteria successfully demonstrated upon shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company assesses whether sales price fixed determinable time transaction sales prices documented executed sales contract purchase order received prior shipment company’s standard terms allow trial evaluation periods rights return refund payments contingent upon customer obtaining financing terms could impact customer’s obligation company assesses whether collection reasonably assured based number factors including customer’s past transaction history credit worthiness grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified classify shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheets cash remitted tax authority include service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification limited basis company enters transactions involve multiple elements ie products services installation training typically products sold customer delivered time partial delivery occurs authorized customer company allocates revenue various products based vendorspecific objective evidence fair value vsoe exists according asc 60525 basis determining relative selling price element vsoe exist company may use third party evidence fair value tpe determine relative selling price element neither vsoe tpe exists company may use management’s best estimate sales price besp element determine relative selling price relative selling prices extended warranty based established price lists separate standalone sales elements installations trainings elements deemed perfunctory company establishes best estimates within range selling prices considering multiple factors including limited factors size transaction pricing strategies market conditions company believes use besp allows revenue recognition manner consistent underlying economics transaction company’s products require maintenance support additionally time may undelivered elements multiple element arrangement elements generally training extended warranty company defers revenue undelivered elements arrangement recognizes revenue recognition criteria met maintenance service revenues recognized ratably term contract provide engineering services customers contractual basis recognize revenue using percentage completion method completed contract method estimate progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate shortterm unbilled receivables included accounts receivable consolidated balance sheets total unbilled receivables july 31 2017 2016 42 million 40 million respectively longterm unbilled receivables either july 31 2017 2016 total cost estimates exceed revenues accrue estimated losses immediately deferred revenue primarily comprised maintenance service revenues payment received services yet performed situations collection receivable reasonably assured inventory expensed upon shipment revenue recognized cash received total deferred revenue july 31 2017 2016 68 million 72 million respectively july 31 2017 2016 longterm portion deferred revenue 20 million 18 million respectively included longterm liabilities e use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions may affect reported amounts assets liabilities equity revenue expenses related disclosures contingent assets liabilities ongoing basis evaluate estimates judgments methodologies base estimates historical experience various assumptions believed reasonable results forms basis making judgments carrying value assets liabilities actual results may differ estimates different assumptions conditions significant estimates changes near term considered reasonably possible may material impact financial statements disclosed notes consolidated financial statements f inventories value inventory lower cost inventory market manner approximates firstin firstout method management assesses recoverability inventory based types levels inventory held product life cycles changes technology variety methodologies used determine amount inventory writedowns necessary adjust excess obsolete inventory writedowns based age inventory lower cost market along significant management judgments concerning future demands inventory technological obsolescence actual demand products less estimates experience higher incidence inventory obsolescence rapidly changing technology customer requirements additional writedowns existing inventories might recorded future periods recorded inventory adjustments subsequently reversed inventory used disposed product held sales force field sales demonstration purposes classify value product based manner used sales force prior fiscal 2016 demonstration inventory amortized straight line basis four year period beginning fiscal 2016 ceased amortization demonstration inventory first year placed field based ability intent sell inventory normal profit margin implemented policy prospectively fiscal 2016 based changes demonstration inventory utilized field extent demonstration inventory unsold period year reclassified fixed assets amortized estimated remaining useful life 36 months amortization demonstration inventory recorded sales marketing expense inventory writedowns involve uncertainties calculation requires management make assumptions apply judgment regarding inventory aging forecasted customer demand technological obsolescence g income taxes account income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized information deferred tax valuation allowance please refer note 15 income taxes provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs h concentration credit risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents marketable securities derivative instruments accounts receivable cash equivalents required working capital purposes placed primarily shortterm bank deposits money market funds demand notes financial institutions banks meet stringent credit rating requirements collateralized securities issued us government agencies marketable securities portfolio primarily highlyrated short duration fixed income securities marketable securities include commercial paper us treasury securities us government agency securities corporate debt securities company’s investment policy generally requires investments investment grade primary objective minimizing potential risk principal loss grant credit domestic foreign original equipment manufacturers distributors end users perform ongoing credit evaluations customers’ financial condition require collateral security furnished counterparties derivative instruments property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected consolidated statement operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized property plant equipment consisted following land depreciated total depreciation amortization property plant equipment 174 million 150 million 141 million fiscal years 2017 2016 2015 respectively capitalize interest fiscal years 2017 2016 2015 fiscal year 2017 recorded asset impairment charge approximately 10 million fourth quarter fiscal 2017 amounts reported asset impairment charges caption accompanying consolidated statements operations impairment charges recorded fiscal 2016 2015 j intangible assets goodwill intangible assets consist intellectual property licenses certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology intangible assets finite lives amortized using either straightline method reliably determinable based pattern economic benefit asset expected utilized finitelived intangible assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact results operations indefinitelived intangible asset inprocess research development iprd trade names acquired business combinations tested impairment annually frequently indicators impairment present perform annual review second quarter fiscal year indefinitelived intangible asset may considered impaired determine carrying value exceeds assets’ fair value may first perform qualitative assessment determine whether necessary perform quantitative impairment test bypass qualitative assessment proceed directly performing quantitative impairment test quantitative impairment test based discounted estimated future cash flows assessing impairment indefinitelived intangible asset requires us make assumptions judgments regarding fair value asset using fair value technique discounted cash flow relief royalty method goodwill amortized reviewed impairment annually frequently whenever events changes circumstances indicate carrying value reporting unit may exceed fair value reporting unit purpose impairment test operating segment level constitutes business discrete financial information available regularly reviewed segment management perform annual reviews second quarter fiscal year may first assess qualitative factors determine whether likely fair value reporting unit less carrying value basis determining whether necessary perform twostep goodwill impairment test may also elect proceed directly twostep impairment test initial qualitative assessment indicates likely carrying value reporting unit exceeds estimated fair value additional quantitative evaluation performed twostep impairment test based quantitative evaluation fair value reporting unit less carrying amount perform analysis fair value assets liabilities reporting unit implied fair value reporting unit’s goodwill determined less carrying amount impairment recognized difference discussed note 1w recent accounting pronouncements second quarter fiscal year 2017 subsequent annual impairment test goodwill intangible assets indefinite lives december 31 2016 elected early adoption asu 201704 january 01 2017 “intangibles─goodwill topic 350 simplifying test goodwill impairment” result removed step 2 goodwill impairment test requires hypothetical purchase price allocation accordingly recorded impairment charges 552 million ultrasound reporting unit 66 million oncura reporting unit respectively third quarter fiscal 2017 based amount fair value reporting unit carrying value exceed carrying amount goodwill assessing impairment goodwill requires us make assumptions judgments regarding fair value reporting units estimate fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compare values estimated overall market capitalization k fair value financial instruments financial instruments consist primarily cash equivalents marketable securities accounts receivable accounts payable accrued liabilities derivative instruments carrying amounts financial instruments approximate fair value due shortterm nature fair values marketable securities investments pension deferred compensation plans estimated based quoted market price securities l asset retirement obligations establish asset retirement obligations “aros” present value estimated future costs return certain facilities original condition recorded liabilities accreted future value estimated restoration costs accretion liability depreciation capitalized cost recognized estimated useful lives facilities impairment longlived assets evaluate longlived assets whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate indicators impairment present respect longlived assets undiscounted cash flows attributable assets expected sufficient recover assets’ carrying amount additional analysis performed appropriate carrying value longlived assets written estimated fair value based discounted cash flow analysis market value n warranty costs provide estimated cost standard product warranties time products shipped although engage extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect operating results generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery research product development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries incentive compensation including sharebased compensation overhead materials used connection research product development activities research product development costs related nonrecurring engineering projects funded customers included within engineering cost sales project accounted percentage completion method completed contract method software development costs incurred subsequent establishing technological feasibility capitalized technological feasibility demonstrated completion detailed program design capitalized costs amortized higher straightline basis economic life software ranging 3 5 years b ratio product’s current gross revenues total current expected gross revenues unamortized capitalized software costs 05 million july 31 2017 2016 amortization expense capitalized software development costs 05 million 02 million 02 million fiscal years 2017 2016 2015 respectively included product cost sales p derivative instruments hedging activities recognize derivative instruments either assets liabilities fair value consolidated balance sheets changes fair value derivatives recorded period current earnings accumulated comprehensive income loss depending whether derivative designated part hedge transaction classify cash flows instruments category cash flows hedged items enter derivative transactions trading speculative purposes assess inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows fair values hedged items also assess hedge ineffectiveness quarterly basis record gain loss related ineffective portion current earnings determine forecasted transaction longer probable occurring discontinue hedge accounting affected portion hedge instrument related unrealized gain loss contract recognized current earnings q translation foreign currencies assets liabilities foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected component accumulated comprehensive income consolidated balance sheets foreign currency translation adjustments 14 million 23 million 126 million respectively included within consolidated statement comprehensive income fiscal years 2017 2016 2015 respectively exchange gains losses resulting foreign currency transactions denominated currency entity’s functional currency excluding intercompany transactions considered longterm investment nature included results operations period occur reported caption “other income expense net” foreign exchange gains losses included within consolidated statement operations totaling 01 million 27 million 04 million fiscal years 2017 2016 2015 respectively r advertising costs expensed incurred included selling marketing expenses totaled 01 million 03 million 04 million fiscal years 2017 2016 2015 respectively sharebased compensation recognize sharebased compensation expense equity instruments exchanged employee director services sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant net estimated forfeitures estimate fair value stock options using blackscholes valuation model fair value restricted stock awards include shares restricted stock restricted stock units based quoted market price common stock use montecarlo simulation model time servicebased awards recognize associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards earnings per share related target evaluate probability meeting performance criteria balance sheet date probable related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change earnings per share related target performance achieved compensation cost recognized previously recognized compensation cost reversed marketbased awards compensation cost amortized performance period straightline basis awards vest end measurement period probability actual shares expected earned considered grant date valuation therefore expense adjusted reflect actual units earned business combinations accordance acquisition method accounting fair values assets acquired liabilities assumed determined recorded date acquisition transaction costs related acquisition expensed incurred excess purchase price estimated fair value net assets acquired recorded goodwill excess fair value assets acquired purchase price recorded bargain purchase gain income expense net consolidated statements operations methodology involves uncertainties requires management make assumptions apply judgment estimate fair value acquired assets including intangible assets liabilities management estimates fair value assets liabilities based upon widely accepted valuation techniques including discounted cash flows market multiple analyses furthermore fair value contingent consideration recorded part acquisition determined valuation model incorporates probability adjusted assumptions related achieving related milestones likelihood us making contingent payments unanticipated events circumstances may occur could affect accuracy fair value estimates including assumptions regarding industry economic factors business strategies u net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common dilutive common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock units v segment information identify business operating segment engages business activities may earn revenues incur expenses ii operating results regularly reviewed chief operating decision maker chief executive officer iii available discrete financial information aggregate operating segments reportable segment operating segments determined similar economic characteristics similar nature products services nature production processes type class customer products services product service distribution method applicable nature regulatory environment three reportable segments medical imaging ultrasound security detection w recent accounting pronouncements accounting pronouncements issued recently adopted simplifying test goodwill impairment january 2017 fasb issued asu 201704 “intangiblesgoodwill topic 350” amendments remove step 2 goodwill impairment test requires hypothetical purchase price allocation goodwill impairment amount reporting unit’s carrying value exceeds fair value exceed carrying amount goodwill amendments effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted impairment tests performed january 1 2017 standard effective us annual interim goodwill impairment tests fiscal years beginning august 1 2020 elected early adoption asu 201704 january 1 2017 subsequent annual impairment test goodwill intangible assets indefinite lives december 31 2016 result removed step 2 goodwill impairment test interim goodwill impairment tests third fourth quarters fiscal 2017 accordingly recorded impairment charges 552 million ultrasound reporting unit 66 million oncura reporting unit respectively third quarter fiscal 2017 based amount fair value reporting unit carrying value exceed carrying amount goodwill cloud computing arrangements april 2015 fasb issued asu 201505 “intangibles goodwill otherinternaluse software subtopic 35040” amendments provide guidance whether cloud computing arrangement eg software service platform service infrastructure service similar hosting arrangements includes software license based determination account arrangements amendments effective fiscal years interim periods within years beginning december 15 2015 may applied either prospective retrospective basis early adoption permitted provisions effective us first quarter fiscal year ended july 31 2017 effective august 1 2016 adopted asu 201505 adoption update material impact consolidated financial statements disclosure uncertainties entity’s ability continue going concern august 2014 fasb issued asu 201415 “presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern” standard requires management evaluate entity’s ability continue going concern within one year date issuance entity’s financial statements amendments effective annual period ending december 15 2016 annual periods interim periods thereafter applied prospective basis early adoption permitted provisions would effective us annual period ending july 31 2017 elected early adoption asu 201415 first quarter fiscal year beginning august 1 2016 prospective basis assessed ability continue going concern july 31 2017 concluded substantial doubt ability continue going concern exist yet effective scope modification accounting may 2017 fasb issued asu 201709 “compensation stock compensation topic 718” amendments provide guidance changes terms conditions sharebased payment award require entity apply modification accounting asu 201709 effective fiscal years beginning december 15 2017 including interim periods within fiscal years applied prospectively award modified adoption date early adoption permitted standard effective us first quarter fiscal year ending july 31 2019 currently evaluating impact adoption update consolidated financial statements improving presentation net periodic pension cost net periodic postretirement benefit cost march 2017 fasb issued asu 201707 “compensation retirement benefits topic 715” standard improves presentation net periodic pension cost net periodic postretirement benefit cost requiring employer offers employees defined benefit pension postretirement benefit plans report service cost component line item items compensation costs arising services rendered pertinent employees period components net benefit cost required presented income statement separately service cost component outside subtotal income operations one presented standard effective fiscal years beginning december 15 2017 including interim periods within fiscal years early adoption permitted standard effective us fiscal year beginning august 1 2018 currently evaluating impact adoption update consolidated financial statements clarifying definition business january 2017 fasb issued asu 201701 “business combinations topic 805 clarifying definition business” amendments provide requirements needed set transferred assets activities business establish practical way determine set transferred assets activities business considered business acquisition would include input substantive process together significantly contribute ability create outputs output result inputs substantive processes provide goods services customers revenue investment income dividends interest amendments narrow definition outputs align outputs described topic 606 “revenue contracts customers” amendments effective annual periods beginning december 15 2017 including interim periods within periods early adoption permitted standard effective us fiscal year beginning august 1 2018 currently evaluating impact adoption update consolidated financial statements intraentity transfers assets inventory october 2016 fasb issued asu 201616 “income taxes topic 740” standard requires recognition income tax consequences intraentity transfer asset inventory transfer occurs two common examples assets included scope amendment intellectual property plant equipment amendments effective annual reporting periods beginning december 15 2017 including interim reporting periods within annual reporting periods early adoption permitted standard effective us fiscal year beginning august 1 2018 currently evaluating impact adoption update consolidated financial statements classification certain cash receipts cash payments august 2016 fasb issued asu 201615 “statement cash flows topic 230” amendments provide guidance eight specific cash flow statement presentation classification issues follows 1 debt prepayment debt extinguishment costs 2 settlement zerocoupon debt instruments debt instruments coupon interest rates insignificant relation effective interest rate borrowing 3 contingent consideration payments made business combination 4 proceeds settlement insurance claims 5 proceeds settlement corporateowned life insurance policies including bankowned life insurance policies 6 distributions received equity method investees 7 beneficial interests securitization transactions 8 separately identifiable cash flows application predominance principle amendments effective fiscal years beginning december 15 2017 interim periods within fiscal years early adoption permitted standard effective us first quarter fiscal year ending july 31 2019 currently evaluating impact adoption update consolidated financial statements measurement credit losses financial instruments june 2016 fasb issued asu 201613 “financial instruments credit losses topic 326” amendment modifies measurement expected credit losses certain financial instruments credit losses relating availableforsale debt securities recorded allowance credit losses availableforsale accounting recognizes value may realized either collection contractual cash flows sale security therefore amendments limit amount allowance credit losses amount fair value amortized cost classification available sale premised investment strategy recognizes investment could sold fair value cash collection would result realization amount less fair value allowance credit losses purchased availableforsale securities morethaninsignificant amount credit deterioration since origination determined similar manner availableforsale debt securities however initial allowance credit losses added purchase price rather reported credit loss expense subsequent changes allowance credit losses recorded credit loss expense interest income recognized based effective interest rate excluding discount embedded purchase price attributable acquirer’s assessment credit losses acquisition amendments effective fiscal years beginning december 15 2019 including interim periods within fiscal years standard effective us fiscal year beginning august 1 2020 currently evaluating impact adoption update consolidated financial statements improvements employee sharebased payment accounting march 2016 fasb issued asu 201609 “improvements employee sharebased payment accounting” amends asc 718 “stock based compensation” amendments require excess tax benefits recorded income tax benefit expense income statement classified operating activity statement cash flows entities may also elect estimate amount forfeitures recognize occur amendments effective fiscal years interim periods within years beginning december 15 2016 standard effective us first quarter fiscal year ending july 31 2018 early adoption permitted adopt asu 201609 first quarter fiscal 2018 currently excess tax benefits deficiencies company’s sharebased payment awards recorded capital excess par value apic consolidated balance sheets upon adoption company record excess tax benefits deficiencies sharebased payments consolidated statements operations reporting periods occur currently excess tax benefits deficiencies classified within financing activities statement cash flows upon adoption company classify excess tax benefits deficiencies operating activity statement cash flows currently process assessing adoption method analyzing impact adoption update believe adoption new standard material impact company’s consolidated financial statements leases february 2016 fasb issued asu 201602 “leases topic 842” standard requires lessees recognize assets liabilities leases balance sheet income statement purposes standard requires leases classified either operating finance standard effective annual interim periods beginning december 15 2018 early adoption permitted standard effective us first quarter fiscal year ending july 31 2020 adoption requires application new guidance periods presented currently evaluating impact adoption standard consolidated financial statements revenue contracts customers may 2014 fasb issued asu 201409 “revenue contracts customers topic 606” update affects entity either enters contracts customers transfer goods services enters contracts transfer nonfinancial assets update supersede existing revenue recognition requirements industryspecific guidance update also supersedes cost guidance including revenue recognition guidance constructiontype productiontype contracts update’s core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies need use judgment make estimates today’s guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation update applied either retrospective modified retrospective basis update originally effective us first quarter fiscal year ending july 31 2018 early adoption permitted august 2015 fasb approved one year delay effective date new revenue standard public entities therefore update would effective us first quarter fiscal year ending july 31 2019 standard permits entities early adopt original effective date ie one year earlier expected adopt new standard first quarter fiscal year 2019 effective august 01 2018 still early stage assessing adoption method analyzing impact adoption update consolidated financial statements unable quantify impact time established project plan implementation team implementation team continues apprise management audit committee project status recurring basis x reclassifications revisions prior period financial statements identified outofperiod adjustments prior quarterly periods fiscal 2017 corrected quarterly period three months ended july 31 2017 adjustments reflected prior filings deemed immaterial outofperiod adjustments aggregate approximately 22 million reflecting 11 million increase cost sales 11 million increase general administrative expenseswe determined adjustments individually aggregate material prior periods consolidated financial statements quarterly full annual periods ended july 31 2017 2 sharebased compensation expense january 29 2010 stockholders approved “2009 stock incentive plan” 2009 plan provided issuance 1600000 shares common stock stockholders approved amendments 2009 plan january 23 2012 january 21 2014 increased number shares available issuance 2009 plan 2200000 4453518 respectively july 31 2017 remaining number shares available issuance 2009 plan 1754003 company issues various awards 2009 plan nongaap eps performancebased nongaap eps awards performance based restricted stock unit rsu awards issued executive officers high level management employees analogic nongaap eps awards align compensation performance nongaap earnings per share total shareholder return performancebased tsr awards performance based rsu’s stock awards issued executive officers high level management employees analogic tsr awards align compensation performance analogic’s stock compared stock performance peer group time based rsu awards stock awards issued analogic employees board members time based rsu’s aligned performance measures generally vest 3 year period time stock options granted executive officers employees analogic give right purchase stock set price vested sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period net forfeitures following table sets forth stock option restricted stock transactions fiscal year 2017 1 performancebased unvested rsu’s shown table target except number shares vested reflect shares earned july 31 2017 maximum number performancebased unvested rsu’s available earned 343020 2 addition vested options expect portion unvested options vest point future stock options expected vest calculated applying estimated forfeiture rate unvested options following table presents sharebased compensation expense included consolidated statements operations july 31 2017 unrecognized compensation cost net estimated forfeitures related unvested stock options restricted stock 60 million cost recognized estimated weighted average amortization period 10 year assumes target performance nongaap eps rsu’s stock options estimate fair value stock options using blackscholes valuation model key input assumptions used estimate grant date fair values stock options include exercise price award expected option term expected volatility stock option’s expected term riskfree interest rate option’s expected term expected annual dividend yield estimates fair value intended predict actual future events value ultimately realized persons receive equity awards stock options granted fiscal years 2017 2016 total intrinsic value options exercised fiscal years 2017 2016 2015 22 million 09 million 43 million respectively intrinsic value defined difference market price date exercise grant date exercise price total amount cash received exercise options 83 million 42 million 73 million respectively actual tax benefit realized tax deductions option exercises less 01 million fiscal years 2017 2016 2015 restricted stock restricted stock units estimate fair value time based rsu’s vest based service conditions using quoted closing price common stock date grant sharebased compensation expense amortized award’s vesting period straightline basis awards service performance conditions vest end performance cycle accelerated method applies awards service performance conditions nongaap eps awards compensation cost amortized performance period straightline basis net forfeitures awards vest end performance period compensation cost based number shares deemed probable vesting end threeyear performance cycle probability assessment done quarter changes estimates result significant expense fluctuations due cumulative catchup adjustment estimate fair value nongaap eps awards using quoted closing price common stock date grant tsr awards compensation cost amortized performance period straightline basis net forfeitures awards vest end measurement period probability actual shares expected earned considered grant date valuation result expense adjusted reflect actual shares earned estimate fair value tsr awards using montecarlo simulation model granted 28749 24821 28455 tsr 62626 32444 36641 nongaap eps awards fiscal years 2017 2016 2015 respectively fair value tsr awards date grant estimated using montecarlo simulation model following assumptions 1 stock price closing price common stock date grant 2 expected volatility grant determined based historical volatility peer group companies common stock period equal remaining term performance period date grant awards 3 riskfree interest rate determined based yield zerocoupon us treasury securities period commensurate performance period 4 dividends considered reinvested calculating tsr dividend yield therefore considered 0 total fair value rsu’s vested fiscal years 2017 2016 2015 75 million 82 million 98 million respectively employee stock purchase plan november 4 1985 stockholders approved employee stock purchase plan espp authorizing issuances 700000 shares common stock espp allows qualified participants purchase common stock 85 market price first business day purchase period last business day sixmonth purchase period stockholders approved amendments espp january 22 1986 january 23 1998 january 17 2003 january 21 2014 stockholders approved amendments espp removed income limitation participation plan increased maximum value stock employee purchase two payment periods per year estimate fair value espp shares using blackscholes valuation model fiscal years 2017 2016 2015 compensation expense espp shares immaterial 3 business combination oncura partners diagnostics llc oncura january 8 2016 company wholly acquired oncura partners diagnostics llc privately held provider remote realtime ultrasound imaging teleconsulting services currently focused veterinary medicine market oncura included within ultrasound reportable segment see note 16 segment information details purchase price 202 million comprised upfront cash payment 84 million postclosing adjustments 04 million relief liabilities owed analogic 13 million fair value contingent consideration time acquisition 101 million acquisition accounted acquisition business finalized purchase accounting oncura acquisition second quarter fiscal year 2017 following table summarizes purchase price allocation based estimates fair values separately identifiable assets acquired liabilities assumed acquisition date fair value measurements intangibles property plant equipment deferred revenue contingent consideration based upon significant inputs observable market therefore represent fair value measurements based level 3 inputs defined note 8 fair value measurements estimated fair value identifiable acquisitionrelated intangible assets primarily based discounted cash flow projections arise assets use significant judgment regard assumptions used determination fair value discount rates projected cash flows determination estimated useful lives intangible assets connection acquisition recorded acquisition date fair value contingent consideration obligation 101 million within longterm contingent consideration consolidated balance sheets obligation payable upon achievement certain revenue gross margin targets four year period starting may 1 2016 limit earnout paid 101 million fair value estimated monte carlo valuation model incorporates probability adjusted assumptions relating achievement targets likelihood us making payments fair value measurement based upon significant inputs observable market therefore represents level 3 input measurement subsequent changes fair value obligation recognized adjustments contingent consideration liability reflected within consolidated statement operations within general administrative operating expenses fiscal 2017 2016 estimated fair value contingent consideration obligation changed 102 million 01 million total fair value contingent consideration obligation 00 million 102 million july 31 2017 2016 additional information related fair value obligation please refer note 8 fair value measurements recorded goodwill 164 million related oncura acquisition representing value opportunities addition oncuras product service portfolio within veterinary industry goodwill acquisition deductible tax purposes statutory 15 year period fiscal 2017 noted impairment indicators related oncura reporting unit annual impairment test goodwill intangible assets indefinite lives december 31 2016 third quarter fiscal 2017 interim impairment test goodwill result recorded 164 million goodwill impairment charge related oncura reporting unit additional information related goodwill impairment test please refer note 10 intangible assets goodwill fiscal 2017 incur acquisition costs fiscal 2016 incurred acquisition costs approximately 04 million consisted primarily legal due diligence expenses included general administrative expenses consolidated statements operations pro forma financial information fiscal 2017 2016 including revenue net income immaterial separately presented 4 restructuring charges fiscal year 2017 restructuring plan march 6 2017 company announced 2017 restructuring plan primarily focused restructuring ultrasound business designed improve profitability provide consistent long term growth part 2017 restructuring plan company consolidate activities currently conducted vancouver british columbia existing operations copenhagen denmark peabody massachusetts company substantially vancouver facility end fiscal 2017 company intends resize us sales global marketing well general administration organizations inline objectives activities result workforce reduction approximately 130 employees incurred pretax charges 72 million fiscal year 2017 cost consisted severance personnel related cost 130 terminated employees well cost relocation existing equipment project management cost recognized consolidated statement operations restructuring 72 million charge recorded operating results medical imaging ultrasound security detection segments charges 14 million 55 million 03 million respectively expect restructuring plan substantially completed fiscal year 2018 fiscal year 2016 restructuring plan september 16 2015 company announced fiscal year 2016 restructuring plan 2016 restructuring plan includes transition certain manufacturing activities peabody massachusetts location existing facility shanghai china reduction force order align research development investment expected customer funding incurred pretax charges 96 million fiscal year 2016 primarily relating severance personnel related costs 117 terminated employees costs attributable relocation existing equipment project management costs recognized consolidated statement operations restructuring 96 million charge recorded operating results medical imaging ultrasound security detection segments charges 60 million 19 million 17 million respectively 2016 restructuring plan completed fourth quarter fiscal year 2017 following table summarizes accrued restructuring costs activity july 31 2015 july 31 2017 restructuring charges fiscal year 2017 include 51 million respect fiscal year 2017 restructuring plan b cash payments fiscal year 2016 pertain closure englewood colorado facility fiscal 2017 01 million restructuring charges associated exit charlottesville facility part strategic strategy reorganize business cost c fiscal year 2017 noncash adjustments 19 million related fixed asset writeoffs incurred due strategic changes oncura sonic window ultrasound portfolio activity fiscal year 2016 pertains fiscal year 2016 restructuring plan fiscal year 2014 restructuring plan 2013 restructuring plan fiscal year 2016 restructuring charges 96 million cash payments 44 million related fiscal year 2016 restructuring plan cash payments 02 million 04 million related fiscal year 2014 restructuring plan fiscal year 2013 restructuring plan respectively e activity fiscal year 2017 pertains fiscal year 2017 restructuring plan fiscal year 2016 restructuring plan fiscal year 2017 restructuring charges 72 million cash payments 25 million related fiscal year 2017 restructuring plan cash payments 52 million related fiscal year 2016 restructuring costs including actions associated acquisitions segment fiscal years 2017 2016 2015 follows net restructuring related charges comprised following 5 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method options purchase common shares exercise prices exceeded market value underlying common stock excluded computation diluted earnings per share following table sets forth computation basic diluted net income per share fiscal years 2017 2016 2015 shares related outstanding stock options unvested restricted stock included calculations diluted earnings per share effect including would antidilutive 6 accounts receivable net customers accounts receivable arise primarily products sold services provided us europe asia balance accounts receivable represents amount due domestic foreign oem customers distributors end users majority accounts receivable standard payment terms require payment within 30 days perform ongoing credit evaluations customers’ financial condition continuously monitor collections payments customers maintain provision estimated credit losses based upon specific customer collection issues identified amounts determined uncollectible charged written reserve date historical bad debts charged reserve minimal ten largest customers group accounted 61 64 net product engineering revenue fiscal years 2017 2016 2015 respectively set forth table customers individually accounted 10 net revenue note total net revenue less 10 fiscal year philips’ toshiba’s siemens’ revenues primarily medical imaging segment l3’s revenue security detection segment following table summarizes net accounts receivable due customers net accounts receivable balances greater equal 10 total net accounts receivable balance note total net accounts receivable balance less 10 fiscal year 7 derivative instruments certain foreign operations revenues expenses transacted currencies functional currency order mitigate foreign currency exchange risk use forward contracts lock exchange rates associated portion forecasted international expenses july 31 2017 forward contracts outstanding notional amounts totaling 109 million contracts designated cash flow hedges unrealized gain 05 million net tax contracts reported accumulated comprehensive income july 31 2017 assets liability derivatives designated hedging instruments presented current assets current liabilities respectively consolidated balance sheets july 31 2017 derivative asset 06 million included current assets consolidated balance sheets july 31 2016 forward contracts outstanding notional amounts totaling 186 million contracts designated cash flow hedges unrealized loss 02 million net tax contracts reported accumulated comprehensive income july 31 2016 july 31 2016 derivative liability 03 million included current liabilities consolidated balance sheets realized gains losses cash flow hedges recognized income period payment expenses recognized fiscal years 2017 2016 2015 recorded approximately 06 million 07 million 05 million realized loss respectively included consolidated statements operations 8 fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs use fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities following table provides assets liabilities carried fair value measured recurring basis july 31 2017 2016 cash equivalents marketable securities following tables summarize company’s cash equivalent marketable securities significant investment categories recorded cash equivalents shortterm marketable securities longterm marketable securities july 31 2017 cash equivalents july 31 2016 year ended july 31 2017 recognize otherthantemporary impairment losses contractual maturities company’s longterm marketable securities generally range one five years year ended july 31 2016 investments marketable securities assets held deferred compensation plans used pay benefits nonqualified deferred compensation plans investments primarily consist mutual funds publicly traded stock exchanges accordingly fair value assets categorized level 1 within fair value hierarchy fair value liabilities arising foreign currency forward contracts determined valuation models based market observable inputs including forward spot prices currencies accordingly fair value liabilities categorized level 2 within fair value hierarchy fair value contingent consideration obligation based significant unobservable inputs including management estimates assumptions measured based probabilityweighted present value payments expected made accordingly fair value liability categorized level 3 within fair value hierarchy fair value contingent payments associated acquisition pocketsonics inc pocketsonics calculated utilizing 100 probability earn associated section 510k clearance obtained food drug administration fda april 9 2014 first commercial shipment defined purchase agreement fiscal year ending july 31 2016 fiscal year 2016 quarter revalue contingent consideration obligations associated acquisition pocketsonics current fair value record changes fair value consolidated statements operations changes contingent consideration result changes assumptions regarding probabilities estimated timing launch volume sales target payments discount rate used estimate fair value liability assumptions used estimating fair value require significant judgment use different assumptions judgments could result materially different estimate fair value change fair value contingent consideration obligation fiscal year 2017 paid 20 million contingent liability third quarter fiscal 2017 please refer note 3 business combination annual report form 10k fiscal year 2016 filed sec september 27 2016 information acquisition pocketsonics fair value contingent payment obligation associated acquisition oncura valued using monte carlo simulation fair value contingent payment obligation oncura revalued quarter fair value record changes fair value contingent consideration expense within consolidated statement operations within general administrative operating expenses changes contingent consideration expense result changes assumptions regarding probabilities estimated future sales volume gross margin targets discount rate used estimate fair value liability assumptions used estimating fair value require significant judgment use different assumptions judgments could result different estimate fair value 102 million decrease fair value contingent consideration obligation fiscal 2017 due revisions forecasted revenues oncura business reduced amount contingent consideration expect pay july 31 2017 fair value contingent consideration obligation associated oncura acquisition 00 million information acquisition oncura please refer note 3 business combination following reconciliations changes fair value contingent consideration fiscal years 2017 2016 9 inventory components inventory net allowance obsolete unmarketable slowmoving inventories summarized follows company incurred 83 million excess obsolescence charge related writedowns inventory associated certain strategic actions taken company fourth quarter 10 intangible assets goodwill intangible assets intangible assets include value assigned intellectual property technology patents customer contracts relationships trade names inprocess research development estimated useful lives finitelived intangible assets 1 14 years indefinitelived intangibles consist trade names acquired business combinations carrying values indefinitelived intangible assets relating trade names 76 million july 31 2017 2016 finitelived intangible assets july 31 2017 2016 consisted following amortization expense related finitelived intangible assets 74 million 84 million 89 million fiscal years 2017 2016 2015 respectively amortization expense related customer relationships trade names recognized operating expenses amortization expense related developed technologies recognized cost sales consolidated statement operations evaluate potential impairment finitelived intangible assets whenever events changes circumstances indicate carrying value assets may recoverable third quarter fiscal year 2017 management noted impairment indicators related oncura intangible assets carrying value 32 million oncura part ultrasound operating segment management performed impairment test based projected future cash flows disruption sales channel veterinary business fiscal year 2017 resulted lower revenues anticipated reduced revenue forecast oncura reporting unit compared prior estimates resulting recording impairment charge 32 million including writeoff customer relationships 24 million writeoff trade names 08 million third quarter fiscal 2017 recorded amounts asset impairment charges caption accompanying consolidated statements operations information acquisition oncura please refer note 3 business combination third quarter fiscal year 2017 management noted impairment indicators related pocketsonics intangible assets carrying value 81 million pocketsonics part ultrasound operating segment management performed impairment test based projected future cash flows based decision third quarter fiscal year 2017 forgo investment business company recorded impairment charge 81 million related acquired technology connection acquisition pocketsonics recorded amounts asset impairment charges caption accompanying consolidated statements operations information acquisition pocketsonics please refer note 3 business combination annual report form 10k fiscal year 2016 filed sec september 27 2016 second quarter fiscal year 2017 management noted impairment indicators related pathfinder intangible assets carrying value 06 million pathfinder part security detection operating segment management performed impairment test based projected future cash flows changes strategy discontinue investments commercializing technologies recorded impairment charge 06 million including writeoff developed technology 05 million writeoff trade names 01 million second quarter fiscal 2017 recorded amounts asset impairment charges caption accompanying consolidated statements operations information acquisition pathfinder please refer note 3 business combination annual report form 10k fiscal year 2016 filed sec september 27 2016 estimated future amortization expenses related intangible assets succeeding fiscal years expected follows goodwill carrying value goodwill july 31 2017 2016 23 million 739 million respectively review periodically frequently indicators present changes circumstances suggest likely impairment may exist perform formal goodwill impairment test second quarter fiscal year total amount goodwill deductible tax purposes 105 million fiscal years 2017 2016 respectively changes carrying amount goodwill reportable segment reporting unit twelve months ended july 31 2017 follows following rollforward accumulated goodwill impairment losses reportable segment reporting unit four reporting units goodwillmedical imaging ultrasound oncura security detection three reportable segmentsmedical imaging ultrasound security detection performed annual impairment test goodwill intangible assets indefinite lives december 31 2016 first assess qualitative factors determine whether likely fair value reporting unit less carrying value basis determining whether necessary perform quantitative impairment test alternatively may elect bypass qualitative assessment proceed twostep quantitative impairment test choose perform qualitative assessment determine likely carrying value net assets fair value related operations twostep impairment process performed otherwise testing required discussed note 1w recent accounting pronouncements second quarter fiscal year 2017 subsequent annual impairment test goodwill intangible assets indefinite lives december 31 2016 elected early adoption asu 201704 january 01 2017 “intangibles─goodwill topic 350 simplifying test goodwill impairment” result removed step 2 goodwill impairment test requires hypothetical purchase price allocation accordingly starting third quarter fiscal 2017 goodwill impairment amount recorded reporting unit’s carrying value exceeds fair value exceed carrying amount goodwill quantitative impairment assessment considered market approach income approach calculate fair value reporting unit different weights assigned market approach fair value reporting unit based trading multiples peer group companies determined based analysis selected guideline public companies’ business enterprise value “bev” plus control premium determined based analysis control premiums recent relevant acquisitions income approach fair value reporting unit based present value estimated future cash flows determined based upon company’s recent strategic operating plan considering market participant assumptions income approach dependent number significant management assumptions including estimates future revenues costs expenses number significant valuation inputs including discount rates working capital rates tax rates second quarter fiscal year 2017 medical imaging ultrasound oncura security detection reporting units used twostep quantitative impairment test security detection reporting unit performed market approach determined fair value security detection reporting unit excess carrying value concluded impairment annual impairment test goodwill intangible assets indefinite lives december 31 2016 medical imaging ultrasound reporting units used market approach income approach determined impairment goodwill annual impairment test goodwill intangible assets indefinite lives december 31 2016 medical imaging reporting unit determined estimated fair value medical imaging reporting unit substantially exceeds carrying value ultrasound reporting unit determined ultrasound reporting unit risk failing first step goodwill impairment test future reporting periods due forecast revisions changes strategy ultrasound business ultrasound reporting unit excess fair value carrying value approximately 25 annual test date held 552 million allocated goodwill december 31 2016 second quarter fiscal year 2017 oncura reporting unit recent changes strategy caused us decrease future forecasted revenues prior estimates result determined associated goodwill impaired recorded estimated charge 98 million second quarter fiscal 2017 annual impairment test goodwill intangible assets indefinite lives december 31 2016 recorded amount asset impairment charges caption accompanying consolidated statements operations amount charge finalized third quarter fiscal year 2017 change completed second step goodwill impairment test accordance asc topic 350 intangiblesgoodwill third quarter fiscal year 2017 strategic review oncura reporting unit noted decreased forecasted revenue compared prior estimates caused disruption sales channel veterinary business determined remaining goodwill impaired recorded charge 66 million third quarter fiscal year 2017 recorded amount asset impairment charges caption accompanying consolidated statements operations aggregate amount goodwill associated oncura reporting unit zero july 31 2017 also result decreased revenue forecast oncura recorded adjustment associated contingent consideration liability resulted gain 102 million fiscal 2017 recorded within general administrative expenses fair value contingent consideration obligation associated oncura acquisition zero july 31 2017 third quarter fiscal year 2017 company noted impairment indicators related ultrasound reporting unit additional delays related introduction commercialization general imaging platform sold technology partner general imaging caused company reassess revenue expectations product significant change well reduction revenue estimates fiscal 2017 impacted overall revenue growth expectations ultrasound future periods management performed interim impairment test based market approach income approach recorded estimated impairment charge 552 million result aggregate amount goodwill associated ultrasound reporting unit taken zero april 30 2017 amount charge finalized fourth quarter fiscal 2017 change addition required goodwill impairment analysis also assessed recoverability remaining book value finitelived intangible assets allocated ultrasound reporting unit failed undiscounted cash flow test finitelived intangible assets tested recoverability using relief royalty method excess earnings method fair values intangible assets exceeded carrying values impairment incurred remaining book value intangible assets allocated ultrasound reporting unit 86 million july 31 2017 compared fair value tradename indefinite life using relief royalty approach carrying value december 31 2016 relief royalty approach utilized aftertax royalty rate discount rate aftertax royalty rate determined based royalty research margin analysis discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales tradename determined fair value tradename excess carrying value current economic environment uncertainties regarding impact business estimates forecasted revenue spending levels made purposes goodwill trade name impairment testing may accurate predictions future assumptions regarding forecasted revenue margin growth rates reporting unit trade name achieved may required record impairment charge goodwill trade name future periods whether connection next annual impairment testing second quarter fiscal year ending july 31 2018 prior change constitutes triggering event outside quarter annual goodwill trade name impairment test performed made changes strategy ultrasound business part driven impairment charges changes forecasts decreases value common stock could cause book values certain operations exceed fair values may result goodwill impairment charges future periods possible time determine future impairment charge would result whether charge would material 11 commitments guarantees contingencies guarantees indemnification obligations standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant indemnify hold harmless agree reimburse indemnified party losses suffered incurred indemnified party connection us patent copyright intellectual property infringement claim third party respect products provisions generally survive termination expiration agreements potential amount future payments could required make indemnification provisions instances unlimited costs defend lawsuits settle claims related indemnification agreements insignificant date currently party significant indemnification claims result believe estimated exposure agreements currently minimal accordingly liabilities recorded agreements july 31 2017 generally warrant products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 60 months date delivery provide estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents accrued warranty liability fiscal years 2017 2016 july 31 2017 2016 deferred revenue extended product warranty contracts 04 million 02 million respectively revolving credit agreements november 23 2015 entered fiveyear revolving credit agreement credit agreement financial institutions identified therein lenders included jpmorgan chase bank na td bank na wells fargo bank na hsbc bank na people’s united bank na effective august 25 2017 hsbc exited credit agreement replaced citibank credit agreement provides 1000 million available credit expires november 23 2020 outstanding borrowings must paid full credit facility require amortization principal may reduced maturity whole part option without penalty upon entry credit agreement terminated without penalty 1000 million fiveyear revolving credit agreement entered october 11 2011 previously paid full accordance terms borrowings credit agreement may used general corporate purposes including permitted acquisitions amount available credit increased specified circumstances 2000 million aggregate sole borrower credit agreement obligations credit facility guaranteed required material domestic subsidiaries designated us time required credit agreement pledges capital stock assets international subsidiaries interest rates borrowings outstanding credit facility range 125 175 libor rate option range 000 100 defined base rate amount case varying based upon leverage ratio quarterly commitment fee ranging 020 035 per annum applicable undrawn portion credit facility based upon leverage ratio credit agreement limits subsidiaries’ ability among things incur additional indebtedness incur liens guarantee obligations pay dividends make distributions make investments dispose assets engage transactions affiliates except armslength basis addition credit agreement requires us maintain following financial ratios • leverage ratio defined consolidated funded indebtedness consolidated trailing four quarters earnings interest taxes depreciation amortization ebitda adjustments stipulated credit agreement greater 275100 temporary stepup event certain acquisitions • interest coverage ratio defined ratio consolidated trailing four quarters adjusted ebitda consolidated interest charges less 300100 time july 31 2017 leverage ratio 0004100 interest coverage ratio applicable attributable interest expense july 31 2017 full compliance financial operating covenants contained credit agreement failure comply financial operating covenants credit facility would prevent us able borrow would also constitute default permitting lenders among things accelerate repayment outstanding borrowings including accrued interest fees terminate credit facility change control defined credit agreement would also constitute event default permitting lenders accelerate repayment terminate credit agreement connection entering credit agreement incurred approximately 05 million transactions costs amortized fiveyear life credit facility july 31 2017 2016 approximately 12 million revolving credit facilities banks available direct borrowings borrowing outstanding credit facilities july 31 2017 2016 respectively asset retirement obligations aro july 31 2017 2016 aro estimated future costs associated restoring leased facilities carrying value 13 million 11 million included liabilities consolidated balance sheets fiscal years 2017 2016 recorded insignificant amount accretion foreign currency translation related aro legal claims subject litigation claims investigations audits arising time ordinary course business although legal proceedings inherently unpredictable believe valid defenses respect matters currently pending us intend defend vigorously outcome matters individually aggregate expected material impact cash flows results operations financial position record losses estimable probable accordance us gaap january 3 2017 companys subsidiary ultrasonix medical corporation umc received notice civil claim defendant lawsuit relates lease corporate office burnaby british columbia umc never took possession lawsuit claims umc indebted landlord unpaid accelerated rent amount approximately cad 10 million plus costs plus interest unpaid rent commencing april 2014 june 2017 company reached settlement matter company agreed pay cad 0775 million 06 million full satisfaction matters dispute 06 million settlement amount recorded general administrative expenses fiscal year 2017 july 31 2017 twentyfour former interestholders oncura partners diagnostics llc “plaintiffs” filed suit district court travis county texas analogic corporation “analogic” oncura partners diagnostics llc “oncura” together “defendants” alleging claims arising analogic’s acquisition oncura plaintiffs 2016 plaintiffs assert claims breach contract anticipatory repudiation fraud negligent misrepresentation breach implied duty good faith fair dealing unjust enrichment declaratory judgement seek unspecified damages excess 1 million august 25 2017 defendants timely removed action federal court texas case subsequently transferred consent united states district court southern district new york reasonably possible may incur loss connection matter unable time provide estimate possible loss range possible losses given early stage matter 12 leases commitments certain subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options lease certain real property equipment operating leases aggregate significant rent expense associated operating leases approximately 18 million 19 million 23 million fiscal years 2017 2016 2015 respectively following schedule year future minimum lease payments july 31 2017 july 31 2017 outstanding noncancelable purchase orders aggregating 232 million purchase orders relate primarily inventory procurement capital expenditures entered normal course business miscellaneous production related obligations discussed note 4 restructuring charges company exiting vancouver facility july 31 2017 company yet met cease use date incur restructuring charge associated exiting vancouver facility’s lease company expects incur charge restructuring associated exit vancouver facility 04 million first quarter fiscal 2018 ended october 31 2017 13 income expense income expense consists primarily interest income cash equivalents marketable securities gains sale investments foreign exchange gains losses fiscal year 2017 recorded 06 million interest income connection cash deposits marketable securities fiscal year 2016 recorded 32 million interest charge connection investigation related danish subsidiary bk medical fiscal year 2015 recorded 06 million interest charge connection investigation related danish subsidiary bk medical foreign exchange losses totaling 01 million 27 million 04 million fiscal years 2017 2016 2015 respectively 14 retirement plans 401k plan qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions us employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salary wage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined irs matched employee contributions 4 eligible compensation addition 401k plan provided us employees also provide benefits defined contribution plans employees denmark china contributions defined contribution plans totaled 50 million 52 million 51 million fiscal years 2017 2016 2015 respectively defined benefit retirement plan canadian subsidiary analogic canada corporation formerly known anrad corporation sponsors defined benefit retirement plan called analogic canada corporation retirement plan “analogic canada plan” analogic canada plan frozen new accruals fiscal year 2015 analogic canada plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 recognize periodic pension expense consolidated statements operations associated assets liabilities consolidated balance sheets following tables provide information benefit obligations plan assets funded status july 31 2017 2016 change benefit obligation change plan assets accumulated benefit obligation abo balances analogic canada plan 139 million 141 million july 31 2017 2016 respectively net periodic benefit cost components net periodic benefit cost follows amounts recognized accumulated comprehensive income pretax estimated net actuarial loss analogic canada plan expected amortized stockholders’ equity net pension cost fiscal year 2018 02 million actuarial assumptions actuarial assumptions analogic canada plan described discount rates july 31 used measure fiscal year end benefit obligations earnings effects subsequent year discount rate based high quality corporate bond spot rates cash flows match timing amount expected benefit payments determine expected longterm rate return analogic canada plan assets considered current expected asset allocations well historical expected returns various categories plan assets amortize realized gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy analogic canada plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate fiscal years 2017 2016 2015 made contributions analogic canada plan 00 million 10 million 08 million respectively made payments benefits 02 million 15 million 04 million respectively fiscal year 2018 expect make contributions payments benefits 00 million 04 million respectively plan assets analogic canada plan assets held trust follows pension committee analogic canada plan sets investment policies strategies analogic canada plan longterm strategic investment objectives include preserving funded status analogic canada plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range fair value analogic canada plan pension assets asset category july 31 2017 2016 follows comprises units segregated pooled funds insurance company funds underlying values primarily derived mutual funds debt equity securities traded active market based closing price trading day estimated future benefit payments estimated future benefit payments analogic canada plan follows 15 income taxes following table presents provision income taxes effective tax rate fiscal years ended july 31 2017 2016 2015 effective income tax rate based actual income year composition income different countries adjustments applicable quarterly periods potential tax consequences benefits resolution tax audits tax contingencies discrete items reconciliation income taxes us statutory rate effective tax rate follows effective tax rate fiscal year 2017 lower statutory rate 35 primarily due tax effect goodwill asset impairment charges recording additional valuation allowance certain goodwill asset impairment charges give rise tax deduction therefore give rise benefit tax rate tax provision fiscal year 2017 includes certain discrete tax provisions totaling 157 million discrete tax provision fiscal year 2017 consists primarily 166 million increase valuation allowance deferred tax assets 08 million decrease prepaid income taxes offset 07 million reduction uncertain tax positions associated expiration statute limitations 04 million decrease uncertain tax positions associated bk medical matter 05 million decrease uncertain tax positions associated settlement transfer pricing audit along 01 million benefit items effective tax rate fiscal year 2016 higher statutory rate 35 primarily due certain discrete tax provisions totaling 12 million discrete tax provision fiscal year 2016 consists primarily 15 million increase uncertain tax positions primarily associated bk medical matter offset 04 million benefit associated extension federal rd tax credit 03 million reduction uncertain tax positions primarily associated expiration statute limitations along 03 million provision items components provision benefit income taxes follows loss income taxes domestic foreign operations follows net deferred taxes detailed recognize impact temporary differences amounts assets liabilities recorded financial statement purposes amounts measured accordance tax laws july 31 2017 net operating loss carryforwards united states approximately 53 million expire 2037 credit carryforwards 08 million united states begin expire 2027 losses approximately 29 million belgium expiration date losses approximately 98 million denmark expiration date losses 49 million canada begin expire 2024 july 31 2017 also state tax credit carryforwards 152 million begin expire 2021 credit carryforwards 28 million canada begin expire 2021 also operating loss carryforwards luxembourg approximately 162 million believe possibility utilizing luxembourg loss carryforwards foreseeable future remote therefore provided full valuation allowance provide us federal income taxes undistributed earnings consolidated foreign subsidiaries approximately 574 million earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs circumstances would affect calculations would source location amount distribution underlying tax rate already paid earnings foreign withholding taxes opportunity use foreign tax credits addition luxembourg valuation allowances discussed determined likely recognize benefit certain foreign losses state losses tax credits deferred tax assets result valuation allowances established july 31 2017 2016 cumulative three year loss position following charges impairment goodwill intangible assets creates substantial negative evidence recoverability deferred tax assets even sources income potential benefits tax planning taken account could overcome substantial negative evidence booked valuation allowance relevant jurisdictions change valuation allowance fiscal year 2017 primarily result goodwill intangible assets impairment addition current year operating loss carryforwards deferred tax assets use likely perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide us comprehensive model recognize measure present disclose financial statements certain tax positions taken expect take income tax returns following table summarizes changes unrecognized income tax benefits fiscal years 2017 2016 unrecognized tax benefits decreased 63 million july 31 2017 recognized future period timing estimable expect approximately 23 million would reduce effective tax rate net potential valuation allowances subject us federal income tax well income tax multiple state foreign jurisdictions concluded us federal income tax matters year ended july 31 2013 next four quarters statute limitations fiscal year ended july 31 2014 may expire us federal state income taxes foreign subsidiaries reasonably expected net unrecognized benefits including interest approximately 07 million may recognized fiscal year 2017 reduced uncertain tax benefits accrued interest 18 million result closing statutes limitation fiscal year 2013 domestic entities remeasurement uncertain tax benefits open years settlement transfer pricing audit denmark accrue interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense july 31 2017 2016 approximately 01 million 04 million respectively accrued interest penalties unrecognized tax benefits refundable income taxes july 31 2017 consisted refundable income tax assets 47 million refundable income taxes july 31 2016 consisted refundable income tax assets 30 million refundable income tax assets include expected federal state foreign refunds expected received within next twelve months 16 segment geographic information business strategically aligned three reportable segments medical imaging ultrasound security detection business segments described follows • medical imaging primarily includes systems subsystems ct mri medical imaging equipment well stateoftheart seleniumbased detectors screening breast cancer diagnostic applications mammography • ultrasound includes ultrasound systems transducers primarily used urology surgery emed anesthesia markets • security detection includes advanced threat detecting ct systems utilizing expertise advanced imaging technology primarily used checked baggage screening airports worldwide table presents information reportable segments includes restructuring charges 14 million 60 million 02 million fiscal years 2017 2016 2015 respectively b includes restructuring charges 55 million 19 million 01million fiscal year 2017 2016 2015 respectively includes fiscal 2017 164 million impairment charge connection goodwill associated oncura reporting unit ii impairment charge 552 million connection goodwill associated ultrasound reporting unit iii writeoff technology 81 million connection pocketsonics iv writeoff customer relationships 24 million trade names 08 million connection oncura v 02 million asset impairment charge vi decrease contingent consideration 102 million related oncura includes 101 million 10 million charge bk medical matter fiscal year 2016 2015 respectively c includes restructuring charges 03 million 17 million 01 million fiscal year 2017 2016 2015 respectively includes fiscal 2017 writeoff developed technology 05 million trade name 01 million connection pathfinder fiscal 2017 ii 08 million asset impairment charge includes cash equivalents marketable securities 1352 million july 31 2017 includes cash equivalents 973 million july 31 2016 revenues attributed countries based location customers oem sales customer location may differ location ultimate completed systems sold oem market information regarding sharebased compensation depreciation amortization segment fiscal years 2017 2016 2015 follows information regarding geographic areas fiscal years 2017 2016 2015 follows property plant equipment primarily canada 17 common stock repurchases june 2 2014 board directors authorized repurchase 300 million common stock repurchase program funded available cash fiscal year 2017 repurchased retired 13578 shares common stock repurchase program 10 million average purchase price 7408 per share fiscal year 2016 repurchased retired 171899 shares common stock repurchase program 137 million average purchase price 7966 per share fiscal year 2015 repurchased retired 176611 shares common stock repurchase program 139 million average purchase price 7851 per share cumulative shares repurchased retired program 380771 shares common stock 30 million average price 7876 per share june 2 2014 repurchase program complete may 26 2016 board directors authorized repurchase 150 million common stock purchases repurchase program made time depending market conditions factors repurchase program expiration date boards authorization obligate company acquire particular amount common stock programs may suspended discontinued time companys discretion fiscal year 2017 repurchased retired 47708 shares common stock repurchase program 34 million average purchase price 7123 per share cumulative shares repurchased retired program 47708 shares common stock 34 million average price 7123 per share 18 accumulated comprehensive income loss components comprehensive income include net income certain transactions generally reported consolidated statements changes stockholders’ equity comprehensive income consists reported foreign currency translation gains losses net taxes actuarial gains losses pension plan assets net taxes changes unrealized value foreign currency forward contracts net taxes deferred taxes provided cumulative translation adjustments expect earnings foreign subsidiary indefinitely reinvested income tax effect currency translation adjustments related foreign subsidiaries considered indefinitely reinvested recorded component deferred taxes offset comprehensive income following table summarizes components accumulated comprehensive income loss ineffective portion unrealized gains losses foreign currency forward contracts realized gains losses currency translation included income expense consolidated statement operations realized gains losses pension plan included general administrative expenses consolidated statement operations 19 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2017 2016 20 subsequent events september 15 2017 board directors declared dividend 010 per common share paid october 13 2017 stockholders record september 29 2017 analogic corporation schedule ii valuation qualifying accounts millions changes valuation allowance represents changes federal state foreign tax attributes believe likely able utilized index exhibits † management contract compensatory plan arrangement submitted electronically herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated balance sheets july 31 2017 july 31 2016 ii consolidated statements operations years ended july 31 2017 2016 2015 iii consolidated statements comprehensive loss income years ended july 31 2017 2016 2015 iv consolidated statements changes stockholders’ equity years ended july 31 2017 2016 2015 v consolidated statements cash flows years ended july 31 2017 2016 2015 vi notes consolidated financial statementsnanitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated management’s annual report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect interim annual consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management participation chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting july 31 2007 based framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment company’s management concluded july 31 2007 company’s internal control financial reporting effective based criteria report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position analogic corporation subsidiaries july 31 2007 july 31 2006 results operations cash flows three years period ended july 31 2007 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included index appearing item 15a1 responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts pension obligations fiscal year 2007 sharebased compensation fiscal year 2006 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts september 27 2007 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements stockholders’ equity years ended july 31 2007 2006 2005 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation incorporated commonwealth massachusetts november 1967 analogic corporation subsidiaries “analogic” “company” engaged primarily design manufacture sale high performance data acquisition signal processing instruments original equipment manufacturer’s “oems” use advanced health security systems subsystems one analogic’s subsidiaries sells products name directly niche enduser markets significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries whollyowned investments companies ownership interests range 20 50 percent company exercises significant influence investee’s operating financial policies accounted using equity method investments accounted using cost method november 1 2005 company sold wholly owned subsidiary camtronics business reported discontinued operation accordance statement financial accounting standards “sfas” 144 “accounting impairment disposal longlived assets” periods presented restated accordingly reflect operations discontinued intercompany accounts transactions eliminated b inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory writedowns necessary excess obsolete inventory writedowns based upon age inventory lower cost market along significant management judgments concerning future demands inventory recorded inventory valuation provisions subsequently reversed inventory used disposed c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases life improvements upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized annual provisions depreciation amortization computed accordance following ranges estimated useful lives buildings 35 40 years manufacturing equipment 4 7 years furniture fixtures computer equipment 3 8 years leasehold improvements shorter useful life lease term motor vehicles 3 5 years analogic corporation notes consolidated financial statements continued company reviews property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following total depreciation property plant equipment 11766 11809 12776 fiscal years 2007 2006 2005 respectively company capitalize interest fiscal years 2007 2006 2005 revenue recognition accounts receivable company recognizes majority product revenue accordance securities exchange commission staff accounting bulletin “sab” 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification analogic corporation notes consolidated financial statements continued company’s transactions sometimes involve multiple elements ie products services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined vendor objective evidence “voe” recognized time delivery arrangement includes undelivered elements essential functionality delivered elements company defers fair value undelivered elements residual revenue allocated delivered elements fair value determined based upon price charged element sold separately sufficient evidence fair value undelivered elements revenue allocated delivered elements total consideration received deferred delivery elements objective reliable evidence fair value available maintenance service revenues recognized ratably life contract business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position “sop” 972 “software revenue recognition” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regard installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained company allocates revenue first fair value undelivered elements allocates residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term company provides engineering services customers contractual basis recognizes revenue using percentage completion method company generally estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs complete project company sufficient basis measure progress towards completion revenue related costs deferred recognized upon completion contract total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised 1 maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement voe vsoe fair value available components yet delivered accepted customer revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified determined current quarter sale collectible recognition revenue sale deferred collection made analogic corporation notes consolidated financial statements continued e warranty costs company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery f research development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries stock based compensation overhead materials used connection research product development projects software development costs incurred subsequent establishing technological feasibility general release software products capitalized accordance sfas 86 “accounting costs computer software sold leased otherwise marketed” technological feasibility demonstrated completion detailed program design capitalized costs amortized straightline basis economic lives related products generally three years amortization expense 739 1157 857 fiscal years 2007 2006 2005 respectively included product cost sales unamortized balance capitalized software 2319 2670 july 31 2007 2006 respectively g income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs h net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock analogic corporation notes consolidated financial statements continued cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents primarily shortterm investments government agencies discounted notes amounted 226545 252407 july 31 2007 2006 respectively j concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable company maintains limited bond investment portfolio various types maturities highcreditquality issuers cash equivalents required working capital purposes placed shortterm investments government agency discounted notes original maturities three months less company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition k marketable securities company’s marketable securities categorized availableforsale securities defined sfas 115 “accounting certain investments debt equity securities” unrealized marketable securities gains losses reflected net amount caption accumulated comprehensive income within statement stockholders’ equity realized gains losses recorded within statements operations caption income expenses purpose computing realized gains losses cost identified specific identification basis l use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates percentage completion contracts estimates fair value investments privately held companies intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes various estimates used calculation stockbased compensation actual results could differ estimates comprehensive income sfas 130 “reporting comprehensive income” established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders’ equity comprehensive income consists unrealized gains net taxes marketable securities 18 fiscal year 2006 foreign currency translation gains net taxes 10593 5941 fiscal years 2007 2006 respectively n stock based compensation effective august 1 2005 company adopted provisions sfas 123r “sharebased payment” established accounting equity instruments exchanged employee services analogic corporation notes consolidated financial statements continued provisions sfas 123r sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant prior august 1 2005 company accounted sharebased compensation employees accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” related interpretations company also followed disclosure requirements sfas 123 “accounting stockbased compensation” therefore stockbased employee compensation expense recorded connection issuance employee director stock options stock options granted plans fixed awards exercise price equal market value common stock time grant stockbased compensation expenses related restricted stock granted cost employees reflected net income company elected adopt modified prospective transition method provided sfas 123r accordingly financial statement amounts prior periods presented form 10k revised reflect fair value method expensing sharebased compensation fair value financial instruments carrying amounts cash equivalents receivables approximate fair value fair values marketable securities estimated based quoted market price securities p impairment longlived assets company evaluates recoverability longlived assets accordance sfas 144 “accounting impairment disposal longlived assets” sfas 144 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset compared recorded value asset q segment information company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consists three reporting segments medical imaging products consists primarily electronic systems subsystems medical imaging equipment patient monitoring digital radiography products consists primarily xray detectors direct digital radiography systems diagnostic interventional applications mammography cardiac orthopedic general radiology applications bk medical aps “bk medical” ultrasound systems probes urology surgery radiology markets security technology products consists advanced weapon threat detection systems subsystems fiscal year 2007 conjunction change management information reviewed company’s principal executive officer company determined additional reporting segment medical technology products called digital radiography products r translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date analogic corporation notes consolidated financial statements continued operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables investments included operations period occur foreign exchange transaction gains losses included results operations income company foreign exchange gains totaling 63 fiscal year 2007 foreign exchange losses totaling 161 fiscal year 2006 foreign exchange gains totaling 133 fiscal year 2005 new accounting pronouncements june 2006 financial accounting standards board “fasb” issued fasb interpretation “fin” 48 “accounting uncertainty income taxes” interpretation sfas 109 “accounting income taxes” fin 48 requires management perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns company required adopt fin 48 effective august 1 2007 company currently evaluating effect fin 48 financial statements company adopted sfas 158 “employer’s accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” effective december 15 2006 sfas 158 requires employer recognize statement financial position asset plan’s overfunded status liability plan’s underfunded status measure plan’s assets obligations determine funded status end employer’s fiscal year recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income separate component shareholder’s equity following table summarizes incremental effects initial adoption sfas 158 company’s consolidated balance sheet july 31 2007 company adopted sab 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” effective november 15 2006 sab 108 requires misstatements quantified based impact financial statements related disclosures adoption statement material impact company’s financial position results operations analogic corporation notes consolidated financial statements continued september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 prescribes single definition fair value price received asset sold paid transfer liability orderly transaction market participants measurement date sfas 157 effective company’s interim reporting period beginning august 1 2008 company currently evaluating effect sfas 157 financial statements however company believe time adoption material impact financial condition results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment sfas 115” new statement allows entities choose specified election dates measure eligible financial assets liabilities fair value otherwise required measured fair value company elects fair value option eligible item changes item’s fair value subsequent reporting periods must recognized current earnings sfas 159 effective fiscal years beginning november 15 2007 company currently evaluating effect sfas 159 financial statements however company believe time adoption material impact financial condition results operations basis presentation certain prior years’ financial statement items reclassified conform current year’s presentation reclassifications impact net income 2 discontinued operations second quarter fiscal year 2006 company sold wholly owned subsidiary camtronics medical systems ltd “camtronics” 40000 cash realized net proceeds 38906 transactional costs company recorded net gain sale camtronics 20207 net tax provision 8885 146 per diluted share determining gain company also provided estimated indemnification tax liabilities 1754 subsequent sale fourth quarter fiscal year 2006 company recorded additional indemnification liability 652 prior sale camtronics reported separate segment company sold camtronics operating segment better focus core lines business reported discontinued operation accordance sfas 144 periods presented revised accordingly reflect operations discontinued revenues net income loss camtronics fiscal years 2006 2005 follows 3 stockbased payment effective august 1 2005 company adopted provisions statement sfas 123r established accounting equity instruments exchanged employee services provisions sfas 123r sharebased compensation cost measured grant date based fair value analogic corporation notes consolidated financial statements continued award recognized expense employee’s requisite service period generally vesting period equity grant prior august 1 2005 company accounted sharebased compensation employees accordance apb 25 related interpretations company also followed disclosure requirements sfas 123 therefore stockbased employee compensation expense recorded connection issuance employee director stock options stock options granted plans fixed awards exercise price equal market value common stock time grant stockbased compensation expenses related restricted stock granted cost employees reflected net income company elected adopt modified prospective transition method provided sfas 123r accordingly financial statement amounts prior periods presented form 10k revised reflect fair value method expensing sharebased compensation following table presents sharebased compensation expenses continuing operations included company’s consolidated statements operations fiscal years 2007 2006 decrease pretax sharebased compensation expense 1781 fiscal year 2006 fiscal year 2007 due primarily lower amount equity awards granted recent years lesser extent higher actual forfeitures fiscal year 2007 originally estimated company estimates fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected volatility company’s stock option’s expected term riskfree interest rate option’s expected term company’s expected annual dividend yield company believes valuation technique approach utilized develop underlying assumptions appropriate calculating fair values company’s stock options granted year ended july 31 2007 estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions fiscal years 2007 2006 follows analogic corporation notes consolidated financial statements continued 1 option life determined estimating expected option life using either historical data simplified method sab 107 sharebased payment 2 stock volatility grant determined based review experience weighted average historical daily price changes company’s common stock recent five years approximates expected option life grant 3 riskfree interest rate periods equal expected term share option based us treasury yield curve effect time grant company recognize compensation expense employee stock option grants fiscal year 2005 exercise price company’s employee stock options granted fiscal year equaled market price underlying stock date grant company recognized compensation expense restricted stock grants upon adoption sfas 123r august 1 2005 using modified prospective method company recognized benefit 181 120 tax cumulative effect change accounting principle resulting requirement estimate forfeitures company’s restricted stock grants date grant instead recognizing incurred estimated forfeiture rate applied previously recorded compensation expense company’s unvested restricted stock determining cumulative effect change accounting principle cumulative benefit net tax increased basic diluted earnings per share 001 prior adoption sfas 123r company presented tax benefits resulting exercise stock options operating cash flows statements cash flows sfas 123r requires cash flows resulting tax benefits excess compensation cost recognized options “excess tax benefits” classified financing cash flows fiscal years 2007 2006 477 363 respectively excess tax benefit classified financing cash inflow company previously adopted provisions sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” disclosure following table illustrates effects net income earnings per share fiscal year 2005 company applied fair value recognition provisions sfas 123 sharebased employee awards analogic corporation notes consolidated financial statements continued fair value option grant estimated grant date using blackscholes option pricing model following assumptions stock incentive plans january 29 2007 company’s stockholders approved two new sharebased compensation plans named “2007 stock option plan” “2007 restricted stock plan” grants made either new plans prior july 31 2007 company’s 2007 stock option plan options may either nonqualified options incentive stock options may granted exercise price less 100 fair market value common stock date grant less 110 fair market value case incentive stock options granted optionees holding 10 voting power company options may granted term excess ten years five years case incentive stock options granted optionees holding 10 voting power company except certain circumstances options vest based continued service optionee may vest earlier one year date grant unless otherwise provided compensation committee company’s board directors “committee” specific option agreement option vest 25 number shares common stock underlying option second third fourth fifth anniversaries date grant company’s 2007 restricted stock plan recipients awarded shares common stock subject right company repurchase part shares recipient event conditions specified applicable award satisfied prior end applicable restriction period established award conditions may include achievement performance goals continued service company except certain circumstances awards vest based continued service may vest earlier three equal installments first three anniversaries date grant committee may condition award recipient competing company oneyear period following termination recipient’s employment company prior january 29 2007 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant analogic corporation notes consolidated financial statements continued company’s key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board directors generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions july 31 2007 1744811 shares reserved grant stock option bonus purchase plans following table sets forth stock option restricted stock transactions fiscal year 2007 analogic corporation notes consolidated financial statements continued weighted average fair value stock options granted fiscal years 2007 2006 2005 2149 1533 1509 per share respectively twelve months ended july 31 2007 2006 total intrinsic value options exercised ie difference market price paid employee exercise options 570 4009 respectively total amount cash received exercise options 5133 8772 respectively total fair value restricted stock grants vested year ended july 31 2007 2006 2109 2410 respectively following table summarizes information stock options outstanding july 31 2007 july 31 2007 4460 total unrecognized compensation cost related nonvested sharebased compensation arrangements granted company’s stock option restricted stock bonus plans cost expected recognized weightedaverage period 28 years company amortizes stockbased compensation straightline method actual tax benefit realized tax deductions option exercises totaled 818 fiscal year 2007 4 restructuring asset impairment charges cost sales fiscal years 2007 2006 company incurred asset impairment charges cost sales company’s consolidated statements operations caption “asset impairment charges” follows analogic corporation notes consolidated financial statements continued assets related digital radiography business result continuing losses digital radiography business related business outlook company evaluated net realizability assets related business october 31 2006 result company recorded asset impairment charge 9705 associated writedown company’s digital radiography system business assets estimated fair values group based upon present value estimated future cash flows business 9705 asset impairment charges 8625 recorded cost sales 1080 recorded operating expenses amounts recorded cost sales included 4144 related inventory 4191 related software license 290 related assets fiscal year 2007 company continued consider several alternatives regarding reduce future losses digital radiography business august 2007 company notified customers subsidiary anexa corporation “anexa” part digital radiography products segment sales marketing anexa products would cease immediately analogic would continue service support products currently customers foreseeable future inventory ct medical program conjunction ongoing discussions company oem customer fiscal year 2006 significant uncertainty arose respect viability ct medical development program realizability related assets result company recorded asset impairment charges 5772 fourth quarter fiscal year 2006 writedown inventories inventory sky fiscal year 2006 company decided close sky based continued lowerthanexpected sales restructuring charges related closure involved writedowns certain inventory 1589 operating expenses fiscal years 2007 2006 2005 company recorded restructuring asset impairment charges operating expense company’s consolidated statements operations caption “restructuring asset impairment charges” follows analogic corporation notes consolidated financial statements continued assets related digital radiography business 9705 asset impairment charges related digital radiography business 1080 recorded operating expenses 1080 asset impairment charge included 696 related capitalized software development time 384 related assets sahco company 446 equity interest sahco located people’s republic china company reviewed investment otherthantemporary impairment accordance apb 18 “the equity method accounting investment common stock” determined january 31 2006 investment sahco impaired based current fair value second quarter fiscal year 2006 company recorded asset impairment charge 275 related investment represented remaining book value investment pds may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 pds acton massachusetts pds privately held company developed proprietary detection systems highperformance positron tomography rapidly growing medical diagnostic imaging modality addition company also received convertible promissory note principal amount 1367 exclusive license pds technology nonpet products convertible promissory note convertible company 1025559 shares series b convertible participating preferred stock fiscal year 2005 upon pds’ achievement technology milestone exclusive license pds technology reverted back pds company received warrant purchase 2250563 shares series b convertible participating preferred stock since second quarter fiscal year 2005 company accounting investment cost method accounting accordance eitf 0214 “whether investor apply equity method accounting investments common stock” company reviewed investment otherthan temporary impairment accordance sfas 115 “ accounting certain investments debt equity securities” determined october 31 2005 investment pds impaired based current fair value therefore recorded asset impairment charge 216 quarter ended october 31 2005 fiscal year 2005 company recorded asset impairment charges pds 2160 based current fair value see note 10 discussion regarding pds capitalized software ct medical program company capitalized 5808 software development costs 3850 related medical ct workstation project 1958 related medical ct development program objective medical ct workstation program broaden current market opportunity company’s ct medical scanner back end subsystem developing front end system would provide complete solution customers fourth quarter fiscal year 2006 management concluded significant additional investment would required complete development efforts frontend system decided longer pursue development efforts recorded impairment charge 3850 regard medical ct development program fourth quarter 2006 company evaluated viability capitalized software respect future use realizability based evaluation company recorded impairment charge 1958 analogic corporation notes consolidated financial statements continued company previously capitalized 479 software development costs related medical imaging project fiscal year 2005 company determined project meet anticipated future market requirements decided focus effort existing development projects result company recorded fiscal year 2005 impairment charge 479 represents total amount capitalized company project manufacturing license ct medical program january 24 2003 company purchased manufacturing license 500 would allow company utilize mobile portable xray technology fiscal year 2005 management decided longer pursue research development efforts area due limited resources accordingly company put project hold uncertain whether company able utilize technology future company amortizing cost license fiveyear period company determined intangible asset impaired recorded impairment charge 361 fiscal year 2005 sky fiscal year 2006 company decided close business operations wholly owned subsidiary sky based continued lower expected sales closing sky involved 1 termination approximately 40 employees engaged product development sales administrative activities 2 writedown certain capital assets 3 writedown certain inventory accordance sfas 146 “accounting costs associated exit disposal activities” company recorded total charge 1216 fiscal year 2006 906 severance 310 writedown capital assets within operating expenses consolidated statements operations caption “restructuring asset impairment charges” november 1 2006 company sold certain assets liabilities sky including obligation service previously sold products price 405 includes 225 cash paid closing 150 cash paid december 2006 assumption 30 liabilities company recorded gain 205 sale fiscal year 2007 following table summarizes accrued severance activity fiscal years 2007 2006 relating sky analogic corporation notes consolidated financial statements continued 5 net income per share basic earnings per share computed using weighted average number common shares outstanding period diluted earnings per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method following table sets forth computation basic diluted earnings per share fiscal years 2007 2006 2005 antidilutive shares related outstanding stock options may become dilutive future years 6 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals analogic corporation notes consolidated financial statements continued customers company three customers set forth table accounted 10 net product engineering revenue fiscal years 2007 2006 2005 note total product engineering revenues less 10 fiscal year company’s ten largest customers group accounted 68 70 66 company’s net product engineering revenue fiscal years 2007 2006 2005 respectively although company seeking broaden customer base company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected united states foreign regulatory clearances approvals company’s products used number customers production medical devices subject high level regulatory oversight delay obtaining inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained might withdrawn modified medical devices cannot marketed united states without clearance fda medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling state may also regulate manufacture sale use medical devices medical devices also subject approval regulation foreign regulatory safety agencies analogic corporation notes consolidated financial statements continued 7 marketable securities marketable securities categorized availableforsale securities summarized follows investments held july 31 2007 due within one year realized gains losses marketable securities company sold marketable securities included periods presented cost approximated fair value maturity dates 8 balance sheet information additional information certain balance sheet accounts follows years ended analogic corporation notes consolidated financial statements continued 9 intangible assets intangible assets july 31 2007 july 2006 continue amortized consisted following amortization expense related acquired intangible assets 1662 1626 1612 fiscal years 2007 2006 2005 respectively estimated life intangible assets five years estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows 10 investments advances affiliated companies company 446 equity ownership interest sahco located people’s republic china fiscal year 2006 company recorded 455 expense share equity losses 474 income share gains sahco fiscal year 2005 also fiscal year 2006 company reviewed investment otherthantemporary impairment accordance apb 18 determined investment sahco impaired based fair value company recorded asset impairment charge related investment 275 represented company’s book value carrying value company’s investment sahco 0 july 31 2007 2006 may 21 2003 company acquired 1251313 shares series b convertible participating preferred stock equity interest approximately 11 pds privately held company developed proprietary detection systems highperformance positron emission tomography “pet” rapidly growing medical diagnostic imaging modality pet scanning tool diagnosis management cancer specifically detecting earlystage tumors determining tissue characteristics treatment addition company also received convertible promissory note principal amount 1367 exclusive license pds technology nonpet products convertible promissory note convertible company 1025559 shares series b convertible participating preferred stock converted company’s equity interest would increase 9 fiscal year 2005 upon pds’ achievement technology milestone exclusive license pds technology reverted back pds company received warrant purchase 2250563 shares series b convertible participating preferred stock exercise warrant would increase company’s equity interest 20 company’s current equity interest potential conversion promissory note series b convertible participating preferred stock potential exercise warrant could result company 40 equity interest pds additionally certain circumstances future company may discretion may required purchase remaining 60 equity fair value analogic corporation notes consolidated financial statements continued company accounted investment equity method due company’s ability exercise significant influence operating financial policies effective second quarter fiscal year 2005 company changed accounting method investment pds equity method cost method accounting accordance eitf 0214 subsequently company reviewed investment otherthantemporary impairment accordance sfas 115 company determined investment pds impaired based current fair value therefore recorded asset impairment charge totaling 216 first quarter fiscal year 2006 compared 2160 second third fourth quarters fiscal year 2005 prior effective date eitf 0214 company recorded share pds losses 759 research product development expenses fiscal year 2005 july 31 2005 company’s investment pds recorded net impairment charges 0 value second quarter fiscal year 2006 company invested 471 pds company reviewed investment otherthantemporary impairment determined investments pds impaired based current fair value february 2006 company elected convert outstanding principle represented convertible promissory note exercise warrant received shares pds series b convertible participating preferred stock increasing company’s equity interest pds 438 following increase equity interest company reevaluated accounting investment pds including consideration fin 46 revised december 2003 “consolidation variable interest entities” interpretation arb 51” eitf 0214 determined investment accounted equity method company evaluated change cost equity method apb 18 determined adjustment required remainder fiscal years 2007 2006 company recorded equity share pds losses 667 332 respectively company’s investments pds net additional investments july 31 2007 2006 0 667 respectively fiscal year 2005 company 146 equity interest cedara software corporation “cedara” publicly traded canadian company april 1 2004 company’s guarantee certain debt owed cedara lender cancelled along security agreement company cedara’s lending bank november 8 2004 two affiliates company appointed cedara board directors resigned cedara board result company november 8 2004 changed accounting investment equity method cost method accounting company’s ability exercise significant influence operating financial policies cedara ceased february 17 2005 company sold equity interest cedara 50752 realized gain approximately 43829 sale fiscal year 2005 company entered sixyear license agreement cedara 6000 allows company incorporate cedara’s software products company’s equipment resell equipment company’s customers company entered maintenance contract amount 150 first year company’s option maintenance contract may renewed year 150 company option extend license agreement additional four years similar terms company capitalized costs license agreement amortized cost ratably life agreement company’s product cost sales fiscal years 2006 2005 remaining unamortized capitalized costs license agreement writtendown fiscal year 2007 may 23 2007 bioimaging research inc “bir” company approximately 17 ownership interest declared dividend 1429 paid company may 24 2007 investment accounted cost method april 30 2007 book value 200 may 24 2007 company sold entire ownership interest bir approximately 3714 2807 paid cash upon closing remaining 907 held escrow period two years date closing secure indemnification claims company recorded income taxes sale analogic corporation notes consolidated financial statements continued related dividend income approximately 4036 fourth quarter fiscal year 2007 based cash received escrowed balance less amounts used satisfy indemnification claims recognized income cash received september 4 2007 company received 84 907 held escrow recorded income first quarter fiscal year 2008 11 commitments guarantees company agreements whereby indemnifies officers directors certain events occurrences officer director serving company’s request capacity term indemnification period officer’s director’s lifetime potential amount future payments company could required make indemnification agreements unlimited also extent permitted massachusetts law company’s articles organization require company indemnify directors company’s bylaws require company indemnify present former directors officers company also permit indemnification employees agents company’s board directors “board” time authorizes indemnification instance however indemnification granted director otherwise entitled thereto determined committed breach loyalty company stockholders b committed acts omissions good faith involved intentional misconduct knowing violation law c derived improper personal benefit connection particular transaction claim indemnification made person covered said agreements andor relevant provisions company’s articles organization bylaws company believes estimated exposure indemnification obligations currently minimal accordingly company liabilities recorded indemnity agreements requirements july 31 2007 august 2006 dispute arose company oem customer company development agreement regarding medical ct program dispute related whether either party breached agreement february 2007 settlement finalized resulting total charge 221 fiscal year 2007 november 2002 fasb issued fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” “fin 45” fin 45 requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee following summary agreements company determined within scope fin 45 company’s standard original equipment manufacturing supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2007 analogic corporation notes consolidated financial statements continued generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents company’s product warranty liability years ended august 2007 oem customer notified company one products experiencing performance issues company working oem customer resolve issues exist accrued best estimate potential costs related resolution matter july 31 2007 amount accrued july 31 2007 related issues material however actual costs upon final resolution could different company currently approximately 23954 revolving credit facilities various banks available direct borrowings direct borrowings fiscal year 2007 fiscal year 2006 12 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 1625 1418 2307 fiscal years 2007 2006 2005 respectively following schedule year future minimum lease payments july 31 2007 july 31 2007 company outstanding noncancelable purchase orders aggregating 35484 purchase orders manufacturing nonmanufacturing related goods services analogic corporation notes consolidated financial statements continued 13 income expense income consists primarily interest income short longterm marketable securities gain loss attributable investments unconsolidated affiliates company accounts cost equity method foreign exchange gains losses income loss sale property plant equipment company recorded income taxes sale investment bir related dividend income approximately 4036 fourth quarter fiscal year 2007 based cash received see note 10 discussion bir transaction fiscal year 2005 company realized gain 43829 sale marketable securities related company’s sale equity interest cedara fiscal years 2007 2005 company foreign exchange gains 63 133 respectively versus foreign exchange loss 161 fiscal year 2006 respect intercompany transactions 14 retirement plans 401k plan company qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions employer contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board directors company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service beginning fiscal year 2003 company decided contribute 5 net income defined plan beginning fiscal year 2007 company decided contribute plan greater 5 net income defined plan 1200 company review plan board approval made decision increase contribution fiscal year 2007 1200 1471 company’s contributions plan totaled 1471 1303 1493 fiscal years 2007 2006 2005 respectively defined benefit retirement plan company’s canadian subsidiary anrad corporation sponsors defined benefit retirement plan called anrad retirement plan “anrad plan” anrad plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 company recognizes periodic pension expense consolidated statement operations associated assets liabilities consolidated balance sheet effective july 31 2007 company adopted sfas 158 see note 1 incremental effects initial adoption sfas 158 company’s consolidated balance sheet july 31 2007 analogic corporation notes consolidated financial statements continued anrad plan participants number participants follows july 31 2007 estimated net prior service cost net transition asset net actuarial loss anrad plan amortized stockholders’ equity pension cost fiscal year 2008 9 15 25 respectively comparable amortized amounts fiscal year 2007 respectively 9 24 59 net periodic benefit cost actuarial assumptions actuarial assumptions anrad plan described discount rates july 31 used measure yearend benefit obligations earnings effects subsequent year determine expected longterm rate return anrad plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company amortizes experienced gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees analogic corporation notes consolidated financial statements continued funding policy funding policy anrad plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts company may determine appropriate fiscal years 2007 2006 2005 company made contributions anrad plan 1531 1045 437 respectively made payments benefits administrative expenses 687 288 58 respectively fiscal year 2008 company expects make contributions payments benefits administrative expenses 1176 144 respectively benefit obligations benefit obligations described following tables accumulated projected benefit obligations “abo” “pbo” represent obligations pension plan past service measurement date abo present value benefits earned date benefits computed based current compensation levels pbo abo increased reflect expected future compensation projected benefit obligation accumulated benefit obligation abo balances anrad plan 2433 2301 july 31 2007 2006 respectively fair value plan assets analogic corporation notes consolidated financial statements continued plan asset allocation anrad plan assets held trust follows pension committee anrad plan sets investment policies strategies anrad plan longterm strategic investment objectives include preserving funded status anrad plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range estimated future benefit payments estimated future benefit payments anrad plan follows prepaid pension asset company’s recorded assets liabilities anrad plan follows analogic corporation notes consolidated financial statements continued 15 income taxes components provision income taxes operations follows income loss continuing operations income taxes domestic foreign operations follows analogic corporation notes consolidated financial statements continued components deferred tax assets liabilities follows analogic corporation notes consolidated financial statements continued reconciliation income taxes united states statutory rate effective tax rate follows company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs third quarter fiscal year 2006 company recorded provisiontoreturn adjustment provided outofperiod tax benefit 329 july 31 2007 company net operating loss carryforwards belgium germany approximately 4024 296 respectively expiration date loss carryforward 524 italy expire 2012 july 31 2007 company state net operating losses 2609 expire fiscal year 2012 july 31 2007 company also state tax credit carryforwards 3544 expire 2022 management determined likely company recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2007 july 31 2006 change valuation allowance fiscal year 2007 primarily result income belgium addition state tax net operating loss carryovers credits use cannot assured fiscal year 2005 company identified potential additional tax benefits realized fiscal years 2000 2004 related federal state tax credits research development expenditures study completed amended returns filed fiscal years 2000 2003 amount federal state credits claimed net thirdparty costs incurred related tax study approximately 6150 date 645 received related fiscal year 2000 fiscal year 2001 benefited tax rate fiscal year 2004 return amended returns currently irs state revenue department audits accordingly company recognize remaining tax benefits related tax credits completion irs state revenue tax audits contingent thirdparty costs incurred related analogic corporation notes consolidated financial statements continued refunds recognized benefit recognized approximately 1200 company comparable benefits subsequent fiscal years 2005 2007 approximately 900 also recognized upon completion audit refundable deferred tax assets include us federal state refund claims fiscal year 2004 federal net operating loss carried back offset fiscal year 2002 fiscal year 2003 federal income tax returns expected generate refund 4918 completion irs audit discussed addition state tax credits net federal tax cost 236 claimed amended state tax returns additional credits addition rd credits discussed refunds expected received completion tax audits discussed 16 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal year 2007 fiscal year 2006 analogic corporation notes consolidated financial statements continued company recorded asset impairment charges 1179 6182 8625 quarters ended october 31 2005 july 31 2006 october 31 2006 respectively b company recorded restructuring asset impairment charges 2204 503 84 12085 9705 quarters ended october 31 2005 january 31 2006 april 30 2006 july 31 2006 october 31 2006 respectively also company recorded gain sale investments 4036 quarter ended july 31 2007 related company’s sales equity interests bir 17 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows 18 segment geographic information company operates primarily within two major markets within electronics industry medical technology products security technology products medical technology products consists three reporting segments medical imaging products consists primarily electronic systems subsystems medical imaging equipment patient monitoring digital radiography products consists primarily xray detectors direct digital radiography systems diagnostic interventional applications mammography cardiac orthopedic general radiology applications bk medical ultrasound systems probes urology surgery radiology markets security technology products consists advanced weapon threat detection systems subsystems company’s corporate represents company’s hotel business net interest income company operations primarily analogtodigital converters supporting modules embedded multiprocessing equipment meet materiality requirements separate disclosure accounting policies segments described summary significant accounting policies analogic corporation notes consolidated financial statements continued table presents information company’s reportable segments fiscal year 2006 includes asset impairment charges 12071 related writedown 11580 inventories capitalized software two medical ct development programs due uncertainty future use realizability 491 related writedown certain assets net realizable values fiscal year 2005 includes gain 43829 related company’s sale equity interest cedara asset impairment charge 3000 b includes asset impairment charges 9705 related company’s digital radiography business fiscal year 2007 c includes gains sales sky interest bir 205 4036 respectively well interest income 12155 fiscal year 2007 includes interest income 9643 partially offset restructuring asset impairment charges 2805 related restructuring sky operations fiscal year 2006 includes interest income 4916 fiscal year 2005 analogic corporation notes consolidated financial statements continued includes cash equivalents marketable securities 193654 232188 july 31 2007 2006 respectively information regarding geographic areas fiscal years 2007 2006 2005 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada 19 common stock repurchases june 7 2005 board approved repurchase 25000 company’s common stock repurchase program company authorized repurchase next twelve months outstanding shares common stock brokers dealers public market privately negotiated transactions fiscal year 2006 company repurchased 80000 shares common stock plan approximately 3883 average purchase price 4853 per share repurchase program expired june 7 2006 june 7 2007 company announced board june 5 2007 authorized repurchase 60000 company’s common stock repurchase program funded using company’s available cash fourth quarter fiscal year 2007 company repurchased 818030 shares common stock repurchase program 60000 average purchase price 7335 per share repurchase program completed july 26 2007 20 related party transactions july 31 2007 2006 company net receivable 0 37 respectively affiliate sahco sales sahco fiscal years 2007 2006 2005 approximately 94 1102 3546 respectively fiscal year 2007 ross brown john tarello serve board received payments company 216 200 respectively consulting services provided company fiscal year 2006 ross brown received payment 40 company consulting services provided company fiscal years 2007 2006 company received approximately 2 59 respectively neurologica corp bernard gordon member board chief executive officer related primarily certain contract manufacturing activities analogic corporation notes consolidated financial statements continued 21 subsequent events september 24 2007 company announced board september 20 2007 declared dividend 010 per common share payable october 18 2007 shareholders record october 4 2007 analogic corporation schedule iivaluation qualifying accounts thousands represents increase valuation allowance resulting additional unused state tax credits b represents decrease valuation allowance belgium c represents increase valuation allowance resulting additional losses belgium establishment valuation allowance state tax credits represents decrease valuation allowance singapore e represents increase valuation allowance resulting additional losses canada belgium losses singapore index exhibits management contract compensatory plan arrangementitem 15 exhibits financial statement schedule page number 1 financial statements report independent registered public accounting firm consolidated balance sheets july 31 2009 2008 consolidated statements operations years ended july 31 2009 2008 2007 consolidated statements stockholders’ equity years ended july 31 2009 2008 2007 consolidated statements cash flows years ended july 31 2009 2008 2007 notes consolidated financial statements 2 financial statement schedule iivaluation qualifying accounts schedules omitted required applicable required information furnished consolidated statements notes hereto b index exhibits immediately following company’s financial statements financial statement schedule ii incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders analogic corporation opinion consolidated financial statements listed accompanying index present fairly material respects financial position analogic corporation subsidiaries july 31 2009 july 31 2008 results operations cash flows three years period ended july 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting july 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s annual report internal control financial reporting item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 16 consolidated financial statements company changed method accounting uncertain tax positions august 1 2007 discussed note 15 consolidated financial statements company changed method accounting pension obligations july 31 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp boston massachusetts september 29 2009 analogic corporation consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements stockholders’ equity years ended july 31 2009 2008 2007 thousands except share data accompanying notes integral part consolidated financial statements analogic corporation consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements analogic corporation notes consolidated financial statements thousands except share per share data 1 summary business operations significant accounting policies business operations analogic corporation “company” incorporated commonwealth massachusetts november 1967 company high technology company designs manufactures advanced medical imaging security systems subsystems sold original equipment manufacturers “oems” end users healthcare homeland security markets company recognized worldwide advancing stateoftheart technology areas medical computed tomography “ct” magnetic resonance imaging “mri” digital radiography specialized ultrasound automatic explosives detection systems airport security company’s oem customers incorporate technology systems inturn sell various medical security applications company also sells ultrasound products directly specialized clinical enduser markets direct worldwide sales force business name bk medical aps “bk medical” company reports financial condition results operations fiscal year basis ending july 31st year significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries wholly owned investments companies ownership interests range 20 50 percent company exercises significant influence investee’s operating financial policies accounted using equity method investments accounted using cost method intercompany accounts transactions eliminated b inventories company values inventory lower cost market using firstin firstout fifo method management assesses recoverability inventory based types levels inventory held product life cycle changes technology variety methodologies used determine amount inventory write downs necessary excess obsolete inventory write downs based upon age inventory lower cost market along significant management judgments concerning future demands inventory recorded inventory valuation provisions subsequently reversed unless inventory used disposed c property plant equipment property plant equipment recorded cost depreciated using straightline method estimated useful lives leasehold improvements amortized shorter estimated useful lives term respective leases upon retirement disposal cost asset disposed related accumulated depreciation removed accounts gain loss reflected company’s statements operations expenditures maintenance repairs charged expense incurred costs significant improvements extend life underlying asset capitalized analogic corporation notes consolidated financial statements continued annual provisions depreciation amortization computed accordance following ranges estimated useful lives company reviews property plant equipment impairment whenever events changes circumstances indicate carrying amount assets may recoverable recoverability assets measured comparison carrying amount future undiscounted cash flows assets expected generate remaining economic lives assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique assets impaired useful lives decreased remaining net book value amortized revised useful life property plant equipment consisted following total depreciation property plant equipment 13373 12209 11766 fiscal years 2009 2008 2007 respectively company capitalize interest fiscal years 2009 2008 2007 revenue recognition accounts receivable company recognizes product revenue accordance securities exchange commission staff accounting bulletin “sab” 104 “revenue recognition financial statements” revenue related product sales recognized upon shipment provided title risk loss passed customer persuasive evidence arrangement sales price fixed determinable collection related receivable reasonably assured customer acceptance criteria successfully demonstrated product sales acceptance criteria successfully demonstrated prior shipment revenue recognized upon customer acceptance provided revenue recognition criteria met analogic corporation notes consolidated financial statements continued company’s sales contracts generally provide customer accept title risk loss product leaves company’s facilities shipping terms local laws allow passage title risk loss shipping point company defers recognizing revenue title risk loss transfer customer company classifies shipping handling invoiced customers revenue related costs cost sales taxes collected customers subsequently remitted government authorities recorded accounts receivable corresponding offset recorded sales taxes payable balances removed consolidated balance sheet cash remitted tax authority company includes service revenue related primarily extended warranty contracts repairs product revenue line item consolidated statement operations deemed immaterial separate classification company’s transactions sometimes involve multiple elements ie products services revenue multiple element arrangements recognized accordance emerging issues task force “eitf” issue 0021 “accounting revenue arrangements multiple deliverables” method element determined separate unit accounting revenue element based fair value determined vendor objective evidence “voe” recognized time delivery arrangement includes undelivered elements essential functionality delivered elements company defers fair value undelivered elements residual revenue allocated delivered elements fair value determined based upon price charged element sold separately sufficient evidence fair value undelivered elements revenue allocated delivered elements total consideration received deferred delivery elements objective reliable evidence fair value available maintenance service revenues recognized ratably life contract business units sell software licenses products software considered incidental company recognizes revenue accordance american institute certified public accountants “aicpa”’s statement position “sop” 972 “software revenue recognition” application sop 972 requires judgment including whether software arrangement includes multiple elements whether vendorspecific objective evidence “vsoe” fair value exists elements license revenue recognized upon delivery provided persuasive evidence arrangement exists significant obligations regard installation implementation remain fees fixed determinable collectibility probable customer acceptance applicable obtained company allocates revenue first fair value undelivered elements allocates residual revenue delivered elements hardware software maintenance marketed annual multiyear arrangements revenue recognized ratably contracted maintenance term company provides engineering services customers contractual basis recognizes revenue using percentage completion method company generally estimates progress towards completion contracts fixedfee arrangement monthly basis utilizing costs incurred date percentage total estimated costs completion project milestone basis based contractual terms appropriate total cost estimates exceed revenues company accrues estimated losses immediately deferred revenue comprised 1 maintenance service revenues payment received services yet performed 2 revenues related delivered components multipleelement arrangement voe vsoe fair value available components services yet delivered accepted customer analogic corporation notes consolidated financial statements continued revenue related hotel operations recognized services performed company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition company continuously monitors collections payments customers maintains provision estimated credit losses based upon specific customer collection issues identified e warranty costs company provides estimated cost product warranties time products shipped although company engages extensive productquality programs processes warranty obligations affected product failure rates service delivery costs incurred correct product failures actual product failure rates service delivery costs differ company’s estimates based specific warranty claims historical data engineering estimates applicable revisions estimated warranty liability would required revisions could adversely affect company’s operating results generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery f research development capitalized software development costs research product development costs expensed incurred include primarily engineering salaries sharebased compensation overhead materials used connection research product development projects software development costs incurred subsequent establishing technological feasibility general release software products capitalized accordance statement financial accounting standards “sfas” 86 “accounting costs computer software sold leased otherwise marketed” technological feasibility demonstrated completion detailed program design capitalized costs amortized straightline basis economic lives related products generally three years amortization expense software development expense 809 926 739 fiscal years 2009 2008 2007 respectively included product cost sales unamortized balance capitalized software 5037 4422 july 31 2009 2008 respectively g income taxes company accounts income taxes asset liability method requires recognition deferred tax assets subject valuation allowances liabilities expected future tax consequences events included financial statements tax returns deferred income taxes reflect net tax effects temporary differences carrying amounts asset liabilities financial reporting income tax purposes valuation allowance established likely portion net deferred tax assets realized company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings considered indefinitely reinvested operations disclosure purposes calculations potential deferred income tax liability undistributed earnings practicable liability dependent circumstances existing remittance occurs analogic corporation notes consolidated financial statements continued h net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using weighted average number common diluted common equivalent shares outstanding period dilutive common equivalent shares consist stock options restricted stock cash equivalents company considers highly liquid investments maturity three months less acquisition date cash equivalents cash equivalents primarily shortterm investments certificates deposit 100 insured federal depository insurance corporation “fdic” july 31 2009 government agency discounted notes july 31 2008 amounted 119855 173912 july 31 2009 2008 respectively j concentration credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable cash equivalents required working capital purposes placed shortterm investments government agency discounted notes certificates deposit 100 insured fdic company grants credit domestic foreign original equipment manufacturers distributors end users performs ongoing credit evaluations customers’ financial condition k marketable securities company’s marketable securities categorized availableforsale heldtomaturity securities defined sfas 115 “accounting certain investments debt equity securities” unrealized marketable securities gains losses reflected net amount caption “accumulated comprehensive income” within statement stockholders’ equity availableforsale securities realized gains losses recorded within statements operations caption “other income expense” purpose computing realized gains losses cost identified specific identification basis l use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts sales expenses reporting periods management estimates include allowances doubtful accounts receivable provisions inventory reflect net realizable value estimates percentage completion contracts estimates fair value investments privately held companies intangible assets valuation allowances deferred tax assets accruals product warranty liabilities income taxes various estimates used calculation sharebased compensation actual results could differ estimates comprehensive income sfas 130 “reporting comprehensive income” established standards reporting display comprehensive income components comprehensive income include net income certain transactions generally reported consolidated statements stockholders’ equity analogic corporation notes consolidated financial statements continued comprehensive income consists reported net income plus foreign currency translation gains losses net taxes changes unrealized value marketable securities net taxes actuarial gains losses pension plan assets net taxes july 31 2009 2008 accumulated comprehensive income stockholders’ equity totaled 10096 18572 respectively n sharebased compensation company accounts sharebased compensation expense accordance sfas 123r “sharebased payment” establishes accounting equity instruments exchanged employee director services provisions sfas 123r sharebased compensation cost measured grant date based fair value award recognized expense employee’s requisite service period generally vesting period equity grant company estimates fair value stock options using blackscholes optionpricing model fair value company’s restricted stock awards based quoted market price common stock time service based awards company recognizes associated sharebased compensation expense straightline basis vesting periods awards net estimated forfeitures forfeiture rates estimated based historical prevesting forfeitures updated vesting dates reflect actual forfeitures performancebased awards management evaluates probability meeting performance criteria balance sheet date related compensation cost amortized performance period straightline basis awards vest end measurement period changes probability assessment estimate shares expected vest result adjustments related sharebased compensation expense recorded period change performance achieved compensation cost recognized previously recognized compensation cost reversed fair value financial instruments carrying amounts cash equivalents receivables approximate fair value due shortterm nature fair values marketable securities estimated based quoted market price securities p impairment longlived assets company evaluates recoverability longlived assets accordance sfas 144 “accounting impairment disposal longlived assets” sfas 144 requires recognition impairment longlived assets event net book value assets exceeds estimated future undiscounted cash flows attributable assets impairment indicated asset written estimated fair value based discounted cash flow analysis company reviews longlived assets impairment whenever events changes business circumstances indicate carrying amount assets may fully recoverable useful lives assets longer appropriate impairment test based comparison estimated undiscounted cash flows asset compared recorded value asset q segment information company operates primarily within two major markets medical technology products security technology products medical technology products consists three reporting segments medical imaging products consists primarily electronic systems subsystems ct mri medical imaging analogic corporation notes consolidated financial statements continued equipment bk medical ultrasound systems probes urology surgery radiology markets digital radiography products consists primarily stateoftheart direct conversion amorphous seleniumbased digital flatpanel xray detectors diagnostic interventional applications mammography security technology products consists advanced weapon threat detection aviation security systems subsystems r translation foreign currencies assets liabilities company’s foreign subsidiaries whose cash flows primarily local currency translated us dollars using current exchange rates balance sheet date operating results foreign subsidiaries translated average exchange rates prevailed reporting period adjustments resulting translation foreign currency financial statements reflected accumulated comprehensive income consolidated balance sheet exchange gains losses resulting foreign currency transactions denominated currency entities primary cash flow excluding longterm intercompany receivables payables investments included operations period occur reflected results operations caption “other net” company foreign exchange losses totaling 828 fiscal year 2009 foreign exchange gains totaling 440 63 fiscal years 2008 2007 respectively business combinations accordance purchase method accounting sfas 141 “business combinations” fair values assets acquired liabilities assumed determined recorded date acquisition costs acquire business including transaction costs allocated fair value net assets acquired excess purchase price estimated fair value net assets acquired recorded goodwill part allocation purchase price company records liabilities including idle facility space certain employee severance costs accordance eitf issue 953 “recognition liabilities connection purchase business combination” intangible assets goodwill intangible assets consist intellectual property licenses capitalized software certain identifiable intangible assets resulting business combinations including trade names customer relationships backlog developed technology assets reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable recoverability assets measured comparison carrying value future undiscounted cash flows assets expected generate remaining economic life assets considered impaired impairment recognized earnings equals amount carrying value assets exceeds fair market value determined either quoted market price value determined utilizing discounted cash flow technique evaluation impairment longlived assets requires estimates future operating results used preparation expected future undiscounted cash flows actual future operating results remaining economic lives longlived assets could differ estimates used assessing recoverability assets differences could result impairment charges could material adverse impact company’s results operations analogic corporation notes consolidated financial statements continued company performs annual reviews second quarter fiscal year impairment goodwill related acquisitions whenever events changes circumstances indicate carrying values may recoverable goodwill may considered impaired company determines carrying value reporting unit including goodwill exceeds reporting unit’s fair value assessing impairment goodwill requires company make assumptions judgments regarding fair value net assets reporting units company estimates fair value reporting units using combination valuation techniques including discounted cash flows cash earnings multiples compares values estimated overall market capitalization u new accounting pronouncements sfas 157 “fair value measurements” defines fair value establishes methodology measuring fair value expands required disclosure fair value measurements calendar year 2008 financial accounting standards board “fasb” issued following amendments sfas 157 • fasb staff position “fsp” fas 1571 “application fasb statement 157 fasb statement 13 accounting pronouncements address fair value measurements purposes lease classification measurement statement 13” amends sfas 157 remove certain leasing transactions scope • fsp fas 1572 “effective date fasb statement 157” delays effective date sfas 157 fiscal year 2009 fiscal year 2010 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually company currently evaluating potential impact sfas 157 nonfinancial assets nonfinancial liabilities financial position results operations • fsp fas 1573 “determining fair value financial asset market asset active” clarifies application sfas 157 market active provides example illustrate key considerations determining fair value financial asset market financial asset active fsp fas 1573 effective upon issuance october 10 2008 including prior periods financial statements issued company adopted fsp fas 1571 fsp fas 1573 first quarter fiscal year 2009 concurrent adoption sfas 157 adoption sfas 157 amended impact company’s financial position results operations cash flows see note 8 additional sfas 157 disclosures april 2009 fasb issued fsp fas 1574 “determining fair value volume level activity asset liability significantly decreased identifying transactions orderly” provides additional guidance estimating fair value accordance sfas 157 fsp states significant decrease volume level activity asset liability compared normal market activity indication transactions quoted prices may determinative fair value may increased instances transactions orderly market conditions accordingly analysis transactions quoted prices needed significant adjustment transactions quoted prices may necessary estimate fair value fsp effective company beginning april 1 2009 impact company’s financial position results operations cash flows february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment sfas 115” new statement allows entities choose analogic corporation notes consolidated financial statements continued specified election dates measure eligible financial assets liabilities fair value otherwise required measured fair value company elects fair value option eligible item changes item’s fair value subsequent reporting periods must recognized current earnings company adopted sfas 159 august 1 2008 concurrent adoption sfas 157 adoption sfas 159 impact company’s financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations” sfas 141r requires acquiring entity business combination record assets acquired liabilities assumed respective acquisition date fair values changes recognition assets acquired liabilities assumed arising contingencies changes recognition measurement contingent consideration requires expensing acquisitionrelated costs incurred sfas 141r also requires additional disclosure information surrounding business combination users entity’s financial statements fully understand nature financial impact business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company’s fiscal year 2010 entity may apply date provisions sfas 141r impact company party business combination july 31 2009 december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners statement effective company beginning august 1 2009 company currently evaluating potential impact adoption sfas 160 financial position results operations cash flows april 2008 fasb issued fsp fas 1423 “determining useful life intangible assets” fsp fas 1423 amends factors entity consider developing renewal extension assumptions used determining useful lives recognized intangible assets fsp fas 1423 effective fiscal years beginning december 15 2008 company believe adoption fsp fas 1423 material impact results operations financial position cash flows may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” provides framework selecting accounting principles used preparing financial statements presented conformity gaap nongovernmental entities prior issuance sfas 162 gaap hierarchy defined american institute certified public accountants’ aicpa statement auditing standards 69 “the meaning present fairly conformity generally accepted accounting principles” sfas 162 became effective 60 days following sec’s approval september 16 2008 public company accounting oversight board amendments au section 411 “the meaning present fairly conformity generally accepted accounting principles” statement became effective second quarter fiscal year 2009 impact company’s financial position results operations cash flows june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” classifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid analogic corporation notes consolidated financial statements continued participating securities requires included computation earnings per share pursuant twoclass method described sfas 128 “earnings per share” fsp effective financial statements issued fiscal years beginning december 15 2008 interim periods within years priorperiod earnings per share data presented adjusted retrospectively including interim financial statements summaries earnings selected financial data conform provisions fsp early application permitted company currently evaluating effect adoption fsp eitf 0361 financial position results operations cash flows april 2009 fasb issued fsp fas 141r1 “accounting assets acquired liabilities assumed business combination arise contingencies” amends clarifies initial recognition measurement subsequent measurement accounting related disclosures assets liabilities arising contingencies business combination sfas 141r company adopt fsp first quarter fiscal year 2010 impact adoption company’s consolidated financial statements largely depend size nature business combinations provisions fsp impact company party business combination july 31 2009 may 2009 fasb issued sfas 165 “subsequent events” objective standard establish general standards accounting disclosure events occur balance sheet date financial statements issued available issued statement effective interim annual financial periods ending june 15 2009 statement became effective fiscal year 2009 impact company’s financial position results operations cash flows june 2009 fasb issued sfas 166 “accounting transfers financial assetsan amendment fasb statement 140” sfas 166 amends sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” eliminate concept qualified specialpurpose entity related guidance creates stringent conditions reporting transfer portion financial asset sale clarifies saleaccounting criteria changes initial measurement transferor’s interest transferred financial assets statement effective beginning first annual reporting period begins november 15 2009 company currently evaluating effect adoption sfas 166 financial position results operations cash flows june 2009 fasb issued sfas 167 “amendments fasb interpretation 46r” sfas 167 amends fasb interpretation “fin” 46r “consolidation variable interest entities” require former qualified specialpurpose entities evaluated consolidation also changes approach determining variable interest entity’s “vie” primary beneficiary requires companies frequently reassess whether must consolidate vies statement effective beginning first annual reporting period begins november 15 2009 company currently evaluating effect adoption sfas 167 financial position results operations cash flows v basis presentation fourth quarter 2009 company identified certain amounts totaling 1072 recorded within “effect exchange rate changes cash” unaudited condensed consolidated statements cash flows first three quarters fiscal year 2009 classified within cash flow operating activities investing activities company determined change classification material consolidated financial statements corrected classification fourth quarter fiscal year 2009 present appropriate classification fiscal year 2009 future quarterly filings company adjust amounts analogic corporation notes consolidated financial statements continued related prior periods current presentation result following increases “net cash used operating activities” “net cash used investing activities” 1448 206 respectively corresponding decrease “effect exchange rate changes cash” 1654 three months ended october 31 2008 ii increases “net cash used operating activities” “net cash used investing activities” 1276 160 respectively corresponding decrease “effect exchange rate changes cash” 1436 six months ended january 31 2009 iii increases “net cash provided operating activities” “net cash used investing activities” 935 137 respectively corresponding decrease “effect exchange rate changes cash” 1072 nine months ended april 30 2009 2 sharebased payment following table presents sharebased compensation expenses continuing operations included company’s consolidated statements operations fiscal years 2009 2008 2007 company estimates fair value stock options using blackscholes valuation model key input assumptions used estimate fair value stock options include exercise price award expected option term expected volatility company’s stock option’s expected term riskfree interest rate option’s expected term company’s expected annual dividend yield company believes valuation technique approach utilized develop underlying assumptions appropriate calculating fair values company’s outstanding stock options granted fiscal years 2009 2008 2007 estimates fair value intended predict actual future events value ultimately realized persons receive equity awards fair value option grant estimated grant date using blackscholes optionpricing model following assumptions fiscal years 2009 2008 2007 follows 1 option life determined estimating expected option life using either historical data simplified method sab 107 “sharebased payment” analogic corporation notes consolidated financial statements continued 2 stock volatility grant determined based review experience weighted average historical daily price changes company’s common stock recent five years approximates expected option life grant 3 riskfree interest rate periods equal expected term stock option based us treasury yield curve effect time grant stock incentive plans january 28 2008 company’s stockholders approved new sharebased director compensation plan nonemployee members company’s board directors “board” named “analogic corporation nonemployee director stock plan” “director plan” fiscal years 2009 2008 2800 1104 shares respectively granted plan director plan provides annual share retainer granted participant february 1 annual share retainer calendar years 2009 2008 value 35 participant may elect receive annual share retainer given calendar year ii annual cash retainer consists annual base cash compensation receives service board committees board applicable compensation received service chairman board committee chairman form “deferred stock units” elected participant later december 15 preceding calendar year value deferred stock units credited account changes relation changes value share company’s common stock additional deferred stock units credited account based value dividend equivalents earned deferred stock units equal dividends paid corresponding number shares common stock payout deferred stock units value shall made single cash payment within thirty days following director’s termination service board sooner elected director fiscal year 2009 approximately 210 annual share retainers 38 annual cash retainers deferred approximately 9580 deferred stock units weighted average price 2583 per share dividend equivalents deferred stock units deferred approximately 99 deferred stock units fiscal year 2009 fiscal year 2008 approximately 245 annual share retainers 13 annual cash retainers deferred approximately 4065 deferred stock units weighted average price 6335 per share dividend equivalents deferred stock units deferred approximately 13 deferred stock units fiscal year 2008 fiscal year 2007 company’s stockholders approved two sharebased compensation plans named “2007 stock option plan” “2007 restricted stock plan” company’s 2007 stock option plan options may either nonqualified options incentive stock options may granted exercise price less 100 fair market value common stock date grant less 110 fair market value case incentive stock options granted optionees holding 10 voting power company options may granted term excess ten years five years case incentive stock options granted optionees holding 10 voting power company except certain circumstances options vest based continued service optionee may vest earlier one year date grant unless otherwise provided compensation committee board “committee” specific option agreement option vest 25 number shares common stock underlying option second third fourth fifth anniversaries date grant analogic corporation notes consolidated financial statements continued company’s 2007 restricted stock plan recipients awarded shares common stock subject right company repurchase part shares recipient event conditions specified applicable award satisfied prior end applicable restriction period established award conditions may include achievement performance goals continued service company except certain circumstances awards vest based continued service may vest earlier three equal installments first three anniversaries date grant committee may condition award recipient competing company oneyear period following termination recipient’s employment company beginning fiscal year 2008 committee began granting performance contingent restricted stock awards august 1 2007 july 31 2009 committee granted 145934 performance contingent restricted shares “performance awards” company’s 2007 restricted stock plan 8025 shares forfeited shares vest specific preestablished levels performance achieved end threeyear performance cycle july 31 2010 outstanding 93245 shares granted fiscal year 2008 july 31 2011 outstanding 44664 shares granted fiscal year 2009 performance goal performance awards based solely cumulative growth adjusted earnings per share metric actual number shares issued determined end threeyear performance cycle range zero 200 target award 275816 shares based upon shares outstanding actual number shares issued also include payment dividends actual number shares earned maximum compensation expense performance awards 16146 based weighted average grant date fair value 5855 per share compensation expense recognized performance period based number shares deemed probable vesting end threeyear performance cycle july 31 2009 company estimated total awards covering 19443 shares value 1143 deemed probable vesting awards totaling 137909 outstanding shares fiscal years 2009 2008 compensation expense income 286 1020 respectively recognized performance awards based amount shares deemed probable vesting prior fiscal year 2007 company two key employee stock option plans one lapsed granting options two key employee stock bonus plans two nonemployee director stock option plans one lapsed granting options one employee stock purchase plan options granted two key employee stock option plans generally become exercisable installments commencing earlier two years date grant ending later six years date grant unexercised options expire seven years date grant options issued plans nonqualified options incentive stock options issued prices less 100 fair market value common stock date grant options granted two nonemployee director stock option plans become exercisable equal installments three years commencing one year date grant remain exercisable ten years date grant options issued plans nonqualified options issued prices 100 fair market value common stock date grant company’s key employee stock bonus plans restricted common stock may granted key employees terms conditions determined board generally participants stock bonus plans may dispose otherwise transfer stock granted three years date grant stock granted plans generally vest four equal installments beginning third year date grant employee stock purchase plan eligible participants granted options purchase company’s common stock twice year lower 85 market value beginning end analogic corporation notes consolidated financial statements continued period calculation number options granted subsequent purchase shares based upon voluntary payroll deductions sixmonth period number options granted employee plan combined options issued plans limited maximum outstanding value 25 calendar year fair value option granted employee stock purchase plan estimated expected grant date using blackscholes option pricing model following assumptions july 31 2009 1107691 shares reserved grant stock option bonus purchase plans following table sets forth stock option restricted stock transactions fiscal year 2009 weighted average fair value stock options granted fiscal years 2009 2008 2007 1814 2246 2149 per share respectively fiscal years 2009 2008 2007 total intrinsic value options exercised ie difference market price paid employee exercise options 101 1750 2890 respectively total amount cash received exercise options 198 2660 5133 respectively total fair value restricted stock grants vested fiscal years 2009 2008 2007 1580 1774 2109 respectively analogic corporation notes consolidated financial statements continued following table summarizes information stock options outstanding july 31 2009 july 31 2009 7134 total unrecognized compensation cost related nonvested sharebased compensation arrangements granted company’s stock option restricted stock bonus plans cost expected recognized weightedaverage period 213 years company amortizes sharebased compensation straightline method exception performance contingent restricted stock actual tax benefit realized tax deductions option exercises totaled 25 366 818 fiscal years 2009 2008 2007 respectively 3 business combination april 14 2008 company acquired outstanding capital stock copley controls corporation “copley” copley supplier gradient amplifiers mri precision motion control systems used computercontrolled automation systems acquisition enabled company expand product offerings oem customers enhance position provider medical subsystems mri scanners provide additional opportunities hightechnology automation market purchase price net cash acquired 74032 consisted 76875 cash paid upon closing 734 transaction costs primarily consisted fees incurred company financial advisory legal accounting services 1066 working capital adjustment payments entire amount paid prior july 31 2008 350 due former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes net cash acquired 4993 total amount paid july 31 2009 net cash acquired 74032 company’s consolidated financial statements include results copley date acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date analogic corporation notes consolidated financial statements continued following represents purchase price allocation determining purchase price allocation company considered among factors intention use acquired assets historical estimated future demand copley products services fair value developed technology tradename intangible assets based upon relief royalty approach customer relationship backlog intangible assets based income approach rate used discount estimated future net cash flows present values intangible asset based upon weighted average cost capital ranging 155 200 discount rate determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales related technology assets acquired copley total weighted average amortization period intangible assets approximately 12 years intangible assets amortized straightline basis consistent pattern economic benefits intangible assets expected utilized based upon estimated cash flows generated assets goodwill classified within company’s medical imaging products segment connection acquisition copley company commenced integration activities resulted recognizing 1276 liabilities personnelrelated costs 150 idle facility space company paid 1025 liabilities associated personnelrelated costs july 31 2009 reduced goodwill remaining 375 paid following pro forma unaudited information gives effect acquisition copley acquisition occurred beginning period pro forma results shown pro forma results necessarily indicative actually would occurred acquisition effect periods presented pro forma results fiscal years 2008 2007 include 3661 expenses related amortization backlog intangible asset inventory fair value adjustment purchase accounting backlog inventory valuation adjustment completely amortized 6 3 months respectively date acquisition analogic corporation notes consolidated financial statements continued 4 restructuring voluntary retirement charges second quarter fiscal year 2009 company reduced workforce 145 employees worldwide recorded restructuring charge 3488 severance personnel related costs included second quarter restructuring 29 employees copley severance personnel related costs copley employees 323 accrued fiscal year 2008 connection acquisition fourth quarter fiscal year 2009 company recorded restructuring charge 3131 restructuring charge included 2073 severance personnel related costs reduction workforce 85 employees worldwide 1058 facility exit costs due primarily company vacating 50 office facility canton july 31 2009 result moving certain operations peabody facility exit costs consist primarily ongoing lease payments less estimated sublease income vacated portion canton lease remainder lease term ends 2011 fourth quarter fiscal year 2008 company recorded restructuring voluntary retirement charges 4016 costs included 3419 severance personnel related costs 52 employees participated company’s us voluntary retirement program substantially completed september 30 2008 also included restructuring charge 597 severance personnel related costs 32 employees various departments organization terminated following table summarizes accrued voluntary retirement restructuring costs activity july 31 2007 july 31 2009 1426 copley acquisition restructuring accrual included copley purchase price allocation included operating expenses company’s consolidated statements operations caption “restructuring voluntary retirement charges” cash expenditures subsequent july 31 2009 approximately 2728 employee severance paid within next 12 months analogic corporation notes consolidated financial statements continued 5 asset impairment charges result continuing losses digital radiography systems business related business outlook company evaluated net realizability assets related business october 31 2006 result company recorded asset impairment charge 9705 fiscal year 2007 associated write company’s digital radiography systems business assets estimated fair values group based upon present value estimated future cash flows business 9705 asset impairment charges 8625 recorded cost sales 1080 recorded operating expenses amounts recorded cost sales included 4144 related inventory 4191 related software license 290 related assets amounts recorded operating expenses included 696 related capitalized software development time 384 related assets 6 net income per share basic net income per share computed using weighted average number common shares outstanding period diluted net income per share computed using sum weighted average number common shares outstanding period dilutive weighted average number potential shares common stock including unvested restricted stock assumed exercise stock options using treasury stock method following table sets forth computation basic diluted net income per share fiscal years 2009 2008 2007 antidilutive shares related outstanding stock options may become dilutive future years 7 risks uncertainties company subject risks common companies medical security technology industries risks could material negative impact company’s business financial condition results operations include limited loss significant customer dependence key suppliers united states foreign regulatory clearances approvals analogic corporation notes consolidated financial statements continued customers company three customers set forth table accounted 10 net product engineering revenue fiscal years 2009 2008 2007 note total net product engineering revenue less 10 fiscal year philips’s product engineering revenues medical imaging products segment toshiba’s product engineering revenues medical imaging products digital radiography products segments l3’s product engineering revenues security technology products segment company’s ten largest customers group accounted 67 68 company’s net product engineering revenue fiscal years 2009 2008 2007 respectively two customers l3 philips also accounted 13 12 respectively net accounts receivable july 31 2009 customers accounted 10 company’s net accounts receivable july 31 2008 although company seeking broaden customer base company continue depend sales relatively small number major customers often takes significant time replace lost business likely operating results would adversely affected one major customers cancel delay reduce significant orders future customer agreements typically permit customer discontinue future purchases timely notice addition company generates significant accounts receivable connection products sells services provides major customers although major customers large well established corporations one customers become insolvent otherwise unable pay company’s products services company’s operating results financial condition could adversely affected suppliers raw materials components company orders raw materials components complete customers’ orders raw materials components ordered solesource suppliers although company works customers suppliers minimize impact shortages raw materials components company sometimes experiences shortterm adverse effects due price fluctuations delayed shipments past industrywide shortages electronics components significant shortage raw materials components occur company might delay shipments pay premium pricing could adversely affect operating results cases supply shortages particular components could substantially curtail company’s production products using components company always able pass price increases customers accordingly raw material component price increases could adversely affect company’s operating results company also depend small number suppliers provide many raw materials components company uses business suppliers affiliated customers competitors others small companies company unable continue purchase raw materials components suppliers company’s operating results could adversely affected many company’s costs fixed margins depend volume output facilities reduction volume could adversely affect company’s margins analogic corporation notes consolidated financial statements continued united states foreign regulatory clearances approvals company’s products used number customers production medical devices subject high level regulatory oversight delay obtaining inability obtain necessary united states foreign regulatory clearances approvals products could material adverse effect business process obtaining clearances approvals costly timeconsuming risk approvals clearances obtained might withdrawn modified medical devices cannot marketed united states without clearance food drug administration “fda” medical devices sold united states must also manufactured compliance fda rules regulations regulate design manufacture packing storage installation medical devices moreover medical devices required comply fda regulations relating investigational research labeling state may also regulate manufacture sale use medical devices medical devices also subject approval regulation foreign regulatory safety agencies 8 marketable securities fair value effective august 1 2008 company adopted sfas 157 financial assets liabilities remeasured fair value reporting period february 2008 fasb issued fsp fas 1572 provides oneyear deferral effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed financial statements fair value least annually adoption sfas 157 respect financial assets liabilities nonfinancial assets liabilities measured fair value least annually impact financial position results operations company sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles requires enhanced disclosures fair value measurements fair value defined sfas 157 exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value sfas 157 must maximize use observable inputs minimize use unobservable inputs sfas 157 describes fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities company’s cash equivalents marketable securities comprised primarily certificates deposit us government agency discount notes company financial nonfinancial assets liabilities measured fair value sfas 157 july 31 2009 2008 analogic corporation notes consolidated financial statements continued marketable securities categorized heldtomaturity securities summarized follows investments held july 31 2009 due within one year 100 insured fdic realized gains losses marketable securities company sold marketable securities periods presented cost approximated fair value maturity dates 9 balance sheet information additional information certain balance sheet accounts follows years ended 10 goodwill intangible assets carrying amount goodwill july 31 2009 2008 2043 3534 acquisition copley completed april 14 2008 decrease goodwill 1491 july 31 2008 july 31 2009 due primarily adjustment purchase price 650 amount initially accrued subsequently paid former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes also contributing decrease adjustments recorded fiscal year 2009 deferred taxes 466 purchase price allocation reduce accrued liabilities purchase price allocation unpaid severance related costs 375 analogic corporation notes consolidated financial statements continued intangible assets include value assigned intellectual property technology patents customer contracts relationships trade name estimated useful lives intangible assets excluding tradename considered indefinite life 05 14 years intangible assets july 31 2009 2008 consisted following amortization expense related acquired intangible assets 3782 2441 1662 fiscal years 2009 2008 2007 respectively estimated future amortization expenses related intangible assets five succeeding fiscal years expected follows sfas 142 “goodwill intangible assets” requires goodwill indefinite lived intangible assets tested impairment reporting unit level annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying value goodwill represents purchase price excess net amount assigned assets acquired liabilities assumed company connection acquisition copley april 14 2008 tradename represents value allocated copley tradename connection acquisition copley goodwill copley tradename part oem reporting unit “reporting unit” company tests impairment second quarter fiscal year company performed first step twostep impairment test sfas 142 compared fair value reporting unit carrying value second quarter fiscal year 2009 company’s approach considered market approach income approach market approach fair value reporting unit based trading acquisition multiples trading multiple approach company assumed control premium 25 reporting unit determined based range control premiums relevant recent acquisitions income approach fair value reporting unit based present value estimated future cash flows income approach dependent number significant management assumptions including estimates future sales future gross margin percentage discount rates analogic corporation notes consolidated financial statements continued discount rate 145 determined consideration market rates return debt equity capital weighted average return invested capital risk associated achieving forecasted sales reporting unit due current market conditions greater weighting attributed market approach weighted 60 income approach weighted 40 arriving fair value reporting unit company determined fair value reporting unit carrying value net assets reporting unit thus necessary company perform step two impairment test company’s assumptions regarding forecasted revenue margin growth rates certain reporting units achieved company may required record impairment charge goodwill indefinite lived intangible asset future periods whether connection company’s next annual impairment testing second quarter fiscal year 2010 prior change constitutes triggering event outside quarter annual goodwill impairment test performed possible time determine future impairment charge would result whether charge would material 11 investments advances affiliated companies sahco january 30 2008 company entered shares purchase agreement “shares purchase agreement” chonqing anke medical equipment co “ca” pursuant company agreed sell ca 20 existing 45 equity interest shenzhen anke high tech co ltd “sahco” aggregate cash consideration us 2000 upon conclusion transaction july 2008 analogic held 25 equity interest sahco company recognized 2000 gain investment fiscal year 2008 received july 2008 prior fiscal year 2008 company determined 275 receivables due sahco probable collected result recorded bad debt expense 275 december 2007 company collected approximately 132 original receivable due sahco reduced bad debt allowance 132 fiscal year 2008 january 30 2008 conjunction shares purchase agreement company ca entered debt repayment agreement remaining outstanding receivable 143 additional 500 due license agreement company recorded revenue prior period due uncertainty collected 643 received company february 2008 company recorded reduction bad debt allowance 143 revenue 500 fiscal year 2008 carrying value company’s investment sahco 0 july 31 2009 2008 photodetection systems inc “pds” pds privately held company develops proprietary detection systems highperformance positron emission tomography “pet” pet scanning tool diagnosis management cancer specifically detecting earlystage tumors determining tissue characteristics treatment fiscal year 2008 company’s equity interest pds declined 26 july 31 2008 due capital restructuring fiscal year 2008 pursuant capital restructuring fiscal year 2008 company surrendered shares pds series b convertible participating preferred stock held company converted remainder pds series b convertible participating preferred stock held company pds analogic corporation notes consolidated financial statements continued common stock converted 4483 outstanding notes pds common stock certain contractual arrangements pursuant company would certain circumstances right could required purchase outstanding equity pds terminated pds company also entered marketing support agreement general release claims fiscal year 2009 infusion additional capital third party stockholder pds reduced company’s equity interest approximately 20 august 2009 pds ceased operations began wind business company’s investment pds accounted equity method carrying value 0 july 31 2009 2008 bioimaging research inc “bir” may 23 2007 bir company approximately 17 ownership interest declared dividend 1429 paid company may 24 2007 investment accounted cost method april 30 2007 book value 200 may 24 2007 company sold entire ownership interest bir approximately 3714 2807 paid cash upon closing remaining 907 held escrow period two years date closing security indemnification claims company recorded income taxes sale related dividend income approximately 4036 fourth quarter fiscal year 2007 based cash received escrowed balance less amounts used satisfy indemnification claims recognized income cash received september 4 2007 company received 84 907 held escrow recorded gain sale investments fiscal year 2008 fiscal year 2009 company received 838 funds held escrow included 15 interest recorded gain sale investments 12 commitments guarantees contingencies august 2009 company reached settlement former distributor medical imaging products cas medical systems inc “cas” company agreed pay cas sum 811 full satisfaction matters dispute 811 recorded general administrative expenses fiscal year 2009 company cas negotiated orderly conclusion contractual relationship allowing cas continue distributing products july 31 2010 connection settlement agreement company also incurred 534 related charges fiscal year 2009 november 2002 fasb issued fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” fin 45 requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee following summary agreements company determined within scope fin 45 company’s standard oem supply agreements entered ordinary course business typically contain indemnification provision pursuant company indemnifies holds harmless agrees reimburse indemnified party losses suffered incurred indemnified party connection united states patent copyright intellectual property infringement claim third party respect company’s products provisions generally survive termination expiration agreements potential amount future payments company could required make indemnification provisions instances unlimited company never incurred costs defend lawsuits settle claims related indemnification agreements result company believes analogic corporation notes consolidated financial statements continued estimated exposure agreements currently minimal accordingly company liabilities recorded agreements july 31 2009 generally company warrants products perform material respects accordance standard published specifications effect time delivery products customer period ranging 12 24 months date delivery company provides estimated cost product service warranties based specific warranty claims claim history engineering estimates applicable following table presents company’s product warranty liability years ended company currently approximately 22474 revolving credit facilities banks available direct borrowings company’s revolving credit facility agreements contains number covenants including covenant requiring company maintain tangible net worth defined revolving credit facility agreement less 255000 end fiscal quarter company compliance covenant july 31 2009 tangible net worth approximately 350000 july 31 2009 direct borrowings offbalance sheet arrangements 13 leases commitments certain company’s subsidiaries lease manufacturing office space noncancelable operating leases contain renewal options company leases certain real property equipment operating leases aggregate significant rent expense associated company’s operating leases approximately 3539 2205 1625 fiscal years 2009 2008 2007 respectively following schedule year future minimum lease payments july 31 2009 july 31 2009 company outstanding noncancelable purchase orders aggregating 45155 purchase orders manufacturing nonmanufacturing related goods services analogic corporation notes consolidated financial statements continued 14 income expense income expense consists primarily interest income short longterm marketable securities gain loss attributable investments unconsolidated affiliates company accounts cost equity method foreign exchange gains losses company recorded gain sale investments fiscal year 2008 2000 sale 20 45 equity interest sahco remaining interest 25 company recorded income taxes sale investment bir related dividend income approximately 838 84 4036 fiscal years 2009 2008 2007 respectively based cash received see note 12 discussion transactions company foreign exchange losses totaling 828 fiscal year 2009 foreign exchange gains totaling 440 63 fiscal years 2008 2007 respectively 15 retirement plans 401k plan company qualified retirement plan called analogic 401k plan “plan” provide retirement income eligible employees employee contributions employer contributions company employer contributions discretionary may form direct profit sharing contribution discretionary matching contribution determined approved board company contribution year shall event exceed maximum allowable applicable provisions internal revenue code contributions vest immediately plan allowed section 401k internal revenue code permits taxdeferred salarywage deductions eligible employees may contribute 1 80 eligible compensation plan limited maximum annual amount determined internal revenue service beginning fiscal year 2003 company decided contribute 5 net income defined plan fiscal years 2008 2007 company decided contribute plan greater 5 net income defined plan 1200 company review plan board approval made decision increase contribution fiscal year 2007 1200 1471 beginning fiscal year 2009 company began matching employee contributions 4 eligible compensation company’s contributions plan totaled 2792 1285 1471 fiscal years 2009 2008 2007 respectively defined benefit retirement plan company’s canadian subsidiary anrad corporation sponsors defined benefit retirement plan called anrad retirement plan “anrad plan” anrad plan provides benefits employees based formula recognizing length service final average earnings measurement date used plan july 31 company recognizes periodic pension expense consolidated statement operations associated assets liabilities consolidated balance sheet analogic corporation notes consolidated financial statements continued effective july 31 2007 company adopted sfas 158 “employer’s accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” incremental effects initial adoption sfas 158 company’s consolidated balance sheet july 31 2007 follows fiscal year 2009 balance accumulated comprehensive income decreased 1998 net tax benefit 1309 due actuarial losses fiscal year 2008 balance accumulated comprehensive income increased 271 net tax provision 178 due actuarial gains anrad plan participants number participants follows july 31 2009 estimated net prior service cost net transition asset net actuarial loss anrad plan expected amortized stockholders’ equity pension cost fiscal year 2010 9 25 169 respectively comparable amortized amounts net prior service cost net transition asset net actuarial loss fiscal year 2009 8 23 0 respectively net periodic benefit cost analogic corporation notes consolidated financial statements continued actuarial assumptions actuarial assumptions anrad plan described discount rates july 31 used measure yearend benefit obligations earnings effects subsequent year determine expected longterm rate return anrad plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company amortizes experienced gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees funding policy funding policy anrad plan contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts company may determine appropriate fiscal years 2009 2008 2007 company made contributions anrad plan 1156 1275 1531 respectively made payments benefits administrative expenses 363 449 687 respectively fiscal year 2010 company expects make contributions payments benefits administrative expenses 1194 213 respectively benefit obligations benefit obligations described following tables accumulated projected benefit obligations “abo” “pbo” respectively represent obligations pension plan past service measurement date abo present value benefits earned date benefits computed based current compensation levels pbo abo increased reflect expected future compensation projected benefit obligation analogic corporation notes consolidated financial statements continued accumulated benefit obligation abo balances anrad plan 4510 2438 july 31 2009 2008 respectively fair value plan assets plan asset allocation anrad plan assets held trust follows pension committee anrad plan sets investment policies strategies anrad plan longterm strategic investment objectives include preserving funded status anrad plan balancing risk return pension committee oversees investment allocation process includes selecting investment managers commissioning periodic assetliability studies setting longterm strategic targets monitoring asset allocations target allocation ranges guidelines limitations occasionally pension committee approve allocations target range estimated future benefit payments estimated future benefit payments anrad plan follows analogic corporation notes consolidated financial statements continued prepaid pension asset company’s recorded assets liabilities anrad plan follows 16 income taxes components provision benefit income taxes operations follows income loss income taxes domestic foreign operations follows analogic corporation notes consolidated financial statements continued components deferred tax assets liabilities follows analogic corporation notes consolidated financial statements continued reconciliation income taxes united states statutory rate effective tax rate follows company provide us federal income taxes undistributed earnings consolidated foreign subsidiaries earnings intended indefinitely reinvested operations determination potential deferred income tax liability undistributed earnings practicable liability dependent circumstances exist remittance occurs july 31 2009 company net operating loss carryforwards belgium germany denmark approximately 4608 254 6734 respectively expiration date july 31 2009 company also state tax credit carryforwards 6321 expire 2024 management determined likely company recognize benefit certain foreign losses state losses tax credits result valuation allowances established july 31 2009 july 31 2008 change valuation allowance fiscal year 2009 primarily result reversal valuation allowance belgium 1820 addition state tax credits use cannot assured company adopted fin 48 “accounting uncertainty income taxes” interpretation sfas 109 “accounting income taxes” beginning fiscal year 2008 fin 48 requires management perform twostep evaluation tax positions ensuring tax return positions meet “more likely not” recognition threshold measured sufficient precision determine benefit recognized financial statements evaluations provide management comprehensive model company recognize measure present disclose financial statements certain tax positions company taken expects take income tax returns result implementation fin 48 company recognized net increase 2239 august 1 2007 retained earnings balance consisted noncurrent asset accrued income taxes 3806 1567 respectively adoption date august 1 2007 total amount gross unrecognized tax benefits excludes interest penalties discussed approximately 17359 unrecognized tax benefits decreased 12877 july 31 2009 recognized future period timing estimable net unrecognized tax benefit approximately 12877 would reduce company’s effective tax rate fiscal year 2009 company received irs refunds 8143 included 1262 analogic corporation notes consolidated financial statements continued interest carryback loss research development credits fiscal year 2004 additional research development tax credits timing items claimed amended income tax returns fiscal years 2001 2006 company recognized 2701 refunds related interest within stockholders’ equity upon adoption fin 48 impact refunds related interest reduction unrecognized tax benefits approximately 3280 1356 recorded tax benefit fiscal year 2009 following table summarizes changes company’s unrecognized income tax benefits fiscal years 2009 2008 company subject us federal income tax well income tax multiple state foreign jurisdictions company concluded us federal income tax matters fiscal year 2002 fiscal year 2005 next four fiscal quarters statute limitations may close 2003 2004 2006 federal state income tax returns fiscal years 2004 2005 tax returns filed various foreign jurisdictions reasonably expected net unrecognized benefits 2174 jurisdictions may recognized within next four quarters fiscal year 2009 company reversed 920 tax reserves due expiration statutes limitations partially offset additional provisions agreed federal state adjustments typical taxes owed related company’s operations period company accrues interest applicable penalties uncertain tax positions interest penalty expense treated component income tax expense date adoption fin 48 august 1 2007 july 31 2009 company approximately 1025 1341 respectively accrued interest unrecognized tax benefits refundable deferred income taxes july 31 2009 consisted deferred tax assets 6748 refundable income tax assets 4383 refundable deferred income taxes july 31 2008 consisted deferred tax assets 6742 refundable income tax assets 10687 refundable income tax assets include expected federal state refunds expected received within next twelve months noncurrent assets included receivable 1105 july 31 2008 state tax refunds received fiscal year 2009 rd credit claims analogic corporation notes consolidated financial statements continued 17 quarterly results operations unaudited following summary unaudited quarterly results operations fiscal years 2009 2008 company recorded restructuring voluntary retirement charges 4016 3488 3131 quarters ended july 31 2008 january 31 2009 july 31 2009 respectively company also recorded 811 general administrative expenses settlement dispute customer quarter ended july 31 2009 also company recorded gains sale investments follows • 84 838 quarters ended october 31 2007 july 31 2009 respectively related company’s sale equity interest bir • 2000 quarter ended july 31 2008 related sale 20 company’s 45 equity interest sahco remaining interest 25 lastly company recorded tax benefits follows • 1232 quarter ended january 31 2009 related irs refund related interest 6459 received december 2008 • 856 quarter ended april 30 2009 reversal tax reserves due expiration statutes limitations • 1820 quarter ended july 31 2009 reversal valuation allowance belgium net operating loss carryforwards management determined likely recognized analogic corporation notes consolidated financial statements continued 18 supplemental disclosure cash flow information changes operating assets liabilities net impact acquisitions follows supplemental disclosure noncash investing activities connection acquisition copley company estimated july 31 2008 would pay 1000 former stockholders copley reimburse additional tax costs making election treat acquisition asset sale tax purposes final amount actually paid former stockholders copley additional tax costs third quarter fiscal year 2009 350 19 segment geographic information company operates primarily within two major markets medical technology products security technology products medical technology products consists three reporting segments medical imaging products consists primarily electronic systems subsystems ct mri medical imaging equipment bk medical ultrasound systems probes urology surgery radiology markets digital radiography products consists primarily stateoftheart direct conversion amorphous seleniumbased digital flatpanel xray detectors diagnostic interventional applications mammography security technology products consists advanced weapon threat detection aviation security systems subsystems corporate segment represents hotel business general corporate income expenses company’s corporate segment represents company’s hotel business general corporate income expenses analogic corporation notes consolidated financial statements continued table presents information company’s reportable segments includes copley net revenue 62490 18300 fiscal years 2009 2008 respectively copley revenue fiscal year 2008 includes period april 14 2008 july 31 2008 copley acquired april 14 2008 b includes restructuring voluntary retirement charges 4581 811 settlement dispute customer fiscal year 2009 includes restructuring voluntary retirement charges 3624 fiscal year 2008 includes copley loss income taxes 799 2328 fiscal years 2009 2008 respectively copley income taxes fiscal year 2008 includes period april 14 2008 july 31 2008 copley acquired april 14 2008 c includes restructuring voluntary retirement charges 21 fiscal year 2009 includes restructuring voluntary retirement charges 46 fiscal year 2008 includes asset impairment charges 9705 related company’s digital radiography systems business fiscal year 2007 analogic corporation notes consolidated financial statements continued includes restructuring voluntary retirement charges 1591 fiscal year 2009 includes restructuring voluntary retirement charges 77 fiscal year 2008 e includes restructuring voluntary retirement charges 426 fiscal year 2009 includes restructuring voluntary retirement charges 269 fiscal year 2008 f includes gains sales interests bir 838 well interest income 2589 fiscal year 2009 includes gains sales interests sahco bir 2000 84 respectively well interest income 6699 fiscal year 2008 includes gains sales anasky assets interest bir 205 4036 respectively well interest income 12155 fiscal year 2007 g includes goodwill net intangible assets acquisition copley 2043 40792 respectively july 31 2009 3534 44574 respectively july 31 2008 h includes cash equivalents marketable securities 131084 132433 july 31 2009 2008 respectively information regarding geographic areas fiscal years 2009 2008 2007 follows revenues attributed countries based location company’s customers longlived assets primarily denmark canada 20 common stock repurchases october 13 2008 company announced date board authorized repurchase 25000 company’s common stock company completed repurchase program funded using company’s available cash second quarter fiscal year 2009 fiscal year 2009 company repurchased 736694 shares common stock repurchase program 25022 average purchase price per share 3397 included 25022 paid common stock program 22 commissions fees company’s broker june 7 2007 company announced board june 5 2007 authorized repurchase 60000 company’s common stock repurchase program funded using company’s available cash fourth quarter fiscal year 2007 company repurchased 818030 shares common stock repurchase program 60000 average purchase price 7335 per share repurchase program completed july 26 2007 21 related party transactions july 31 2009 2008 company net receivable 160 245 respectively affiliate sahco sales sahco fiscal years 2009 2008 2007 approximately 1915 989 94 respectively analogic corporation notes consolidated financial statements continued fiscal years 2008 2007 ross brown serves board received payments company 4 216 respectively consulting services provided company fiscal year 2007 john tarello served board received payment 200 company consulting services provided company fiscal year 2007 company received approximately 2 neurologica corporation bernard gordon served board executive chairman related primarily certain contract manufacturing activities 22 subsequent events september 25 2009 company announced board september 22 2009 declared dividend 010 per common share payable october 19 2009 stockholders record october 5 2009 company evaluated subsequent events september 29 2009 represents date financial statements issued company identify subsequent events require disclosure analogic corporation schedule iivaluation qualifying accounts thousands represents increase valuation allowance state tax credits b represents decrease valuation allowance belgium c represents increase valuation allowance belgium losses state tax credits represents decrease valuation allowance state tax losses e represents increase valuation allowance resulting additional unused state tax credits f represents decrease valuation allowance belgium index exhibits management contract compensatory plan arrangement