UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 0-26832
Lumisys Incorporated
(Exact name of registrant as specified in its charter)
Delaware
77-0133232
(State of incorporation)
(I.R.S. Employer Identification No.)
225 Humboldt Court, Sunnyvale, CA
94089
(Address of principal executive offices)
(Zip Code)
(408) 733-6565
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes / X / |
No / / |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of November 1, 1999, 9,228,852 shares of the registrant's Common Stock, $.001 par value, were outstanding.
Lumisys Incorporated
Index
Part I. FINANCIAL INFORMATION |
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Item 1. |
Financial Statements: |
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Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 (unaudited) |
3 |
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Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 (unaudited) |
4 |
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Condensed Consolidated Statements of Cash Flow for the Nine Months Ended September 30, 1999 and 1998 (unaudited) |
5 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
6 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
9 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
17 |
Part II. OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
17 |
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Item 2. |
Changes in Securities and Use of Proceeds |
17 |
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Item 3. |
Defaults Upon Senior Securities |
17 |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
17 |
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Item 5. |
Other |
18 |
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Item 6. |
Exhibits and Reports on Form 8-K |
18 |
SIGNATURES |
19 |
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lumisys Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
September 30, |
December 31, |
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|
1999 |
1998 |
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ASSETS |
|||||||
Current assets: |
|||||||
|
Cash and cash equivalents |
$10,185 |
|
$10,651 |
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|
Short-term investments |
5,776 |
|
7,007 |
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|
Accounts receivable, net of allowances of $1,524 and $717 |
2,515 |
|
4,206 |
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Inventories |
3,650 |
|
4,046 |
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Other current assets |
2,025 |
|
2,024 |
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|
|
Total current assets |
24,151 |
|
27,934 |
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Property and equipment, net |
667 |
|
753 |
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Purchased software, net |
--- |
|
1,919 |
||||
|
|
$24,818 |
|
$30,606 |
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LIABILITES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
|
|
|
||||
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Accounts payable |
1,149 |
|
1,601 |
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Accrued expenses |
2,590 |
|
2,791 |
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Merger and related costs |
809 |
|
900 |
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Total current liabilities |
4,548 |
|
5,292 |
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Note payable to related party |
159 |
|
146 |
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Commitments and contingencies |
|
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|
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Stockholders' equity: |
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Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding |
--- |
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--- |
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Common stock, $0.001 par value; 25,000 shares authorized; 9,229 and 9,597 shares issued and outstanding, respectively |
9 |
|
10 |
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Additional paid-in capital |
27,666 |
|
28,887 |
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Accumulated deficit |
(7,564) |
|
(3,725) |
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Deferred compensation |
--- |
|
(4) |
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Total stockholders' equity |
20,111 |
|
25,168 |
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|
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|
$24,818 |
|
$30,606 |
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
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|
Three Months Ended |
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Nine Months Ended |
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September 30, |
September 30, |
September 30, |
September 30, |
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|
1999 |
|
1998 |
|
1999 |
|
1998 |
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Sales |
$3,875 |
|
$4,654 |
|
$14,811 |
|
13,938 |
||||
Cost of sales |
2,532 |
|
2,002 |
|
8,269 |
|
6,066 |
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Gross profit |
1,343 |
|
2,652 |
|
6,542 |
|
7,872 |
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Operating expenses: |
|
|
|
|
|
|
|
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Sales and marketing |
1,089 |
|
777 |
|
2,598 |
|
1,979 |
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Research and development |
728 |
|
1,035 |
|
1,986 |
|
3,403 |
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General and administrative |
583 |
|
561 |
|
1,990 |
|
2,002 |
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Total operating expenses |
2,400 |
|
2,373 |
|
6,574 |
|
7,384 |
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Income (loss) from operations |
(1,057) |
|
279 |
|
(32) |
|
488 |
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Interest income |
202 |
|
211 |
|
579 |
|
724 |
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Income (loss) from continuing operations before taxes |
(855) |
|
490 |
|
547 |
|
1,212 |
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Provision (benefit) for income taxes |
(333) |
|
190 |
|
218 |
|
469 |
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Net income (loss) from continuing operations |
(522) |
|
300 |
|
329 |
|
743 |
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Discontinued operations, net of taxes |
259 |
|
(124) |
|
(4,168) |
|
(268) |
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Net income (loss) |
$(263) |
|
$176 |
|
$(3,839) |
|
$475 |
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Net income (loss) from continuing operations per share: |
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|
Basic |
$(0.06) |
|
$0.03 |
|
$0.03 |
|
$0.07 |
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Diluted |
$(0.06) |
|
$0.03 |
|
$0.03 |
|
$0.07 |
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Net income (loss) per share: |
|
||||||||||
|
Basic |
$(0.03) |
|
$0.02 |
|
$(0.40) |
|
$0.05 |
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Diluted |
$(0.03) |
|
$0.02 |
|
$(0.40) |
|
$0.05 |
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Shares used to compute net income (loss) from continuing operations per share: |
|||||||||||
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Basic |
9,354 |
|
9,742 |
|
9,493 |
|
10,016 |
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Diluted |
9,354 |
|
9,835 |
|
9,573 |
|
10,185 |
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Shares used to compute net income (loss) per share: |
|||||||||||
|
Basic |
9,354 |
|
9,742 |
|
9,493 |
|
10,016 |
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Diluted |
9,354 |
|
9,835 |
|
9,573 |
|
10,185 |
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
|
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Nine Months Ended |
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September 30, |
September 30, |
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1999 |
|
1998 |
Cash flow from operating activities: |
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|
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Net income (loss) |
|
$(3,839) |
|
$475 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation and amortization |
|
533 |
|
230 |
|
Non-cash charge related to discontinued operations |
|
3,550 |
|
--- |
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Other |
|
13 |
|
9 |
|
Changes in assets and liabilities: |
|
|
|
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Accounts receivable |
|
1,391 |
|
804 |
|
Inventories |
|
(879) |
|
(701) |
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Other assets |
|
(1) |
|
26 |
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Accounts payable |
|
(502) |
|
(195) |
|
Accrued expenses |
|
(496) |
|
(878) |
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Merger and related costs |
|
(91) |
|
(1,214) |
Net cash used in operating activities |
|
(321) |
|
(1,444) |
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Cash flows from investing activities: |
|
|
|
|
|
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Sales of short-term investments, net |
|
1,231 |
|
2,984 |
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Proceeds from sale of discontinued operations |
|
250 |
|
--- |
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Purchases of property and equipment |
|
(404) |
|
(193) |
Net cash provided by investing activities |
|
1,077 |
|
2,791 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
Purchases of common stock, net |
|
(1,222) |
|
(3,172) |
Net cash used in financing activities |
|
(1,222) |
|
(3,172) |
|
Net decrease in cash and cash equivalents |
|
(466) |
|
(1,825) |
|
Cash and cash equivalents at beginning of period |
|
10,651 |
|
7,522 |
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Cash and cash equivalents at end of period |
|
$10,185 |
|
$5,697 |
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The condensed consolidated financial statements of Lumisys Incorporated (the "Company") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheet as of September 30, 1999 and December 31, 1998, the condensed consolidated statements of operations for the three and nine months ended September 30, 1999 and 1998, and the condensed consolidated statements of cash flow for the nine months ended September 30, 1999 and 1998 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the results for these interim periods.
The prior period financial statements have been restated to present a discontinued operation as a separate line item in the accompanying consolidated statements of operations (see Note 6).
The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 1999 or any future period.
Note 2 - Net Income (Loss) Per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the weighted-average common shares outstanding plus the potential effect of dilutive securities which are convertible to common shares such as options, warrants, convertible debt and preferred stock.
The following is a reconciliation between the components of the basic and diluted net income (loss) per share calculations for the periods presented below (in thousands):
Three Months Ended |
|
Nine Months Ended |
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Sept. 30, |
|
Sept. 30, |
|
Sept. 30, |
|
Sept. 30, |
|
1999 |
|
1998 |
|
1999 |
|
1998 |
Net income (loss) from continuing operations |
$(522) |
|
$300 |
|
$329 |
|
$743 |
Net income (loss) |
$(263) |
|
$176 |
|
$(3,839) |
|
$475 |
Shares used to compute net income (loss) from continuing operations per share: |
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Weighted average shares outstanding - basic |
9,354 |
|
9,742 |
|
9,493 |
|
10,016 |
Effect of dilutive securities: |
|
|
|
|
|
|
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Potential common stock, stock options and warrants |
--- |
|
93 |
|
80 |
|
169 |
Weighted average shares outstanding - diluted |
9,354 |
|
9,835 |
|
9,573 |
|
10,185 |
Shares used to compute net income (loss) per share: |
|
||||||
Weighted average shares outstanding - basic |
9,354 |
|
9,742 |
|
9,493 |
|
10,016 |
Effect of dilutive securities: |
|
||||||
Potential common stock, stock options and warrants |
--- |
|
93 |
|
80 |
|
169 |
Weighted average shares outstanding - diluted |
9,354 |
|
9,835 |
|
9,573 |
|
10,185 |
For the three months ended September 30, 1999 and 1998, 1,605,000 and 1,721,000 shares, respectively, and for the nine months ended September 30, 1999 and 1998, 1,617,000 and 1,359,000 shares, respectively, of potential common stock are considered anti-dilutive using the treasury stock method and are excluded from the calculation of dilutive net income (loss) from continuing operations per share and net income (loss) per share. Due to the net loss from operations for the three months ended September 30, 1999, all potential common stock outstanding is considered anti-dilutive and is excluded for the calculation of dilutive net loss per share from continuing operations and net loss per share.
Note 3 - Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive earnings such as unrealized gains or losses on available-for-sale short-term investments. The Company's unrealized gains and losses on available-for-sale short-term investments have been insignificant for all periods presented.
Note 4 - Composition of Certain Financial Statement Amounts
Sept. 30, |
Dec. 31, |
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|
|
1999 |
|
1998 |
|
Inventories: |
|
|
|
|
|
|
Raw materials |
|
$4,152 |
|
$3,649 |
|
Work-in-process |
|
1,201 |
|
1,031 |
|
Finished goods |
|
727 |
|
457 |
|
|
|
6,080 |
|
5,137 |
|
Less: inventory reserves |
|
(2,430) |
|
(1,091) |
|
|
|
$3,650 |
|
$4,046 |
|
|||||
Accrued expenses: |
|
|
|
|
|
|
Payroll and related benefits |
|
$895 |
|
$1,066 |
|
Warranty |
|
347 |
|
468 |
|
Professional fees |
|
141 |
|
129 |
|
Unearned revenue |
|
105 |
|
599 |
|
Accrued expenses related to discontinued operations |
|
634 |
|
--- |
|
Income taxes |
|
--- |
|
354 |
|
Other |
|
468 |
|
175 |
|
|
|
$2,590 |
|
$2,791 |
Note 5- Segment Information
The Company organizes its business into two reportable segments: the Lumisys division ("Lumisys") and the AuntMinnie.com division ("AuntMinnie.com"). The Company's reportable business segments are strategic business units that offer different products. Each segment is managed separately because they require different technologies and market to distinct classes of customers. Lumisys manufactures and markets an integrated suite of hardware and software products for digitizing medical images. AuntMinnie.com, established in July 1999, is an Internet portal intended to be the most comprehensive Internet site for radiologists and professionals in the medical imaging industry.
The segments' accounting policies are the same as those described in the summary of significant accounting policies included in the notes to the financial statements for the year ended December 31, 1998, included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The Company evaluates performance based on net income or loss before income taxes. Lumisys' total assets include the initial investment in AuntMinnie.com and amounts receivable from AuntMinnie.com, which are eliminated in consolidation.
|
Lumisys |
AuntMinnie.com |
Consolidating Entries |
Consolidated |
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Three months ended September 30, 1999: |
|
|
|
|
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Sales |
$3,875 |
--- |
--- |
$3,875 |
||
Income (loss) from operations before taxes |
$(358) |
$(497) |
--- |
$(855) |
||
Nine months ended September 30, 1999: |
|
|
|
|
||
Sales |
$14,811 |
--- |
--- |
$14,811 |
||
Income (loss) from operations before taxes |
$1,044 |
$(497) |
--- |
$547 |
||
|
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Total assets at September 30, 1999 |
$25,098 |
$159 |
$(439) |
$24,818 |
Note 6- Discontinued Operations
On June 3, 1999, the Company signed a definitive technology transfer agreement with Foresight Imaging, LLC ("Foresight") under which certain assets and technology of the Company's Imagraph subsidiary were sold to Foresight for approximately $300,000, with additional royalties to be paid to the Company over a three year period. In addition, Foresight holds an option to purchase other assets of Imagraph including inventory, furniture and equipment. All remaining operations of Imagraph were terminated. The principals of Foresight were all employees of Imagraph and one was an officer of the Company until the execution of the technology transfer agreement. For the nine months ended September 30, 1999, the loss from discontinued operations totaled $4.2 million (net of tax) and consisted primarily of write-downs of certain assets and accrual of costs related to closure of the Imagraph facility, and operating losses of Imagraph through June 3, 1999. This was offset by the proceeds of the technology transfer agreement, proceeds of the sale of other assets to Foresight, and proceeds of a non-exclusive software license agreement with a third party completed in September 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of uncertainties that could cause actual results to differ materially from the statements. The words "expect," "believe," "anticipate," "intend" and words of similar import are intended to identify these statements as forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as those discussed in the Company's 1998 Annual Report on Form 10-K and other documents filed by the Company with the Securities and Exchange Commission. The Company does not undertake any obligation to update forward-looking statements.
Overview
Lumisys Incorporated ("Lumisys" or the "Company") designs, manufactures and markets computed radiography ("CR") systems that scan medical or industrial images from a reusable phosphor plate and a family of precision digitizers that convert medical images on film or video into digital format. Once in digital form, the medical images can be stored, transmitted, viewed, enhanced, manipulated and printed within a medical imaging network. The Company currently offers a comprehensive family of products for digitizing medical images under the Lumiscan label. These CR and film digitizers process images from all commercially available medical imaging modalities, including x-ray, computed tomography ("CT"), magnetic resonance imaging ("MRI"), ultrasound and nuclear medicine. The Company is the leading supplier of laser-based film digitizers, with sales of approximately 5,000 Lumiscan units since its first product was introduced in 1990.
In December 1998, the Company introduced a CR system for use in the medical market, the ACR-2000 DeskTopCR
ä . The medical CR system utilizes many of the design features of the CR system the Company developed for use in the industrial inspection market in 1996. The CR system reads medical or industrial images from reusable phosphor plates, replacing the need for film and film processing. The Company's CR system is a low cost, small system and is particularly suited for low volume environments. Since it's introduction in December 1998, the Company has sold over 150 ACR-2000 DeskTopCRä systems.In September 1999, the Company introduced the iLuminator, an affordable, self-contained device that brings electronic imaging and computed radiography capabilities to any medical setting. Based on the ACR-2000 DesktopCR™, the iLuminator fully integrates image acquisition, diagnostic display, telecommunications and archiving capabilities into one device.
Lumisys intends to maintain and enhance its market leadership by leveraging its reputation for high quality, reliable and cost-effective products, broadening its product lines through internal product development, acquiring complementary businesses or technologies and penetrating new geographic markets. The Company sells its products primarily to original equipment manufacturers ("OEMs") and value added resellers ("VARs"), who then integrate the Company's products into teleradiology and Picture Archiving and Communication Systems ("PACS") and mini-PACS networks. Lumisys has established close working relationships with leading suppliers of these systems including Emed, Agfa, GE, Kodak and Philips.
In November 1997, Lumisys merged with CompuRAD, a leading provider of software that enables healthcare clinicians to access medical images and clinical information at any point of care. CompuRAD pioneered the use of personal computer software in the point-to-point, on call teleradiology market, with the introduction of its PC Teleradiology product. As part of a restructuring of its software group, the Company no longer sells software through a direct sales force. The Company currently sells its software products exclusively to its existing OEM and VAR customers. In 1998, the Company began bundling digitizer software with its family of laser and CCD film digitizers and CR software with its new ACR-2000 product.
On June 3, 1999, the Company signed a definitive technology transfer agreement with Foresight Imaging LLC ("Foresight"), under which certain assets and technology of the Company's Imagraph subsidiary, a manufacturer of high quality board-level digitization and compression products, were sold to Foresight. All remaining operations of Imagraph were discontinued. The principals of Foresight were all employees of Imagraph and one was an officer of the Company until the execution of the technology transfer agreement.
In July 1999, the Company established a separate business entity, AuntMinnie.com, to develop an Internet portal intended to be the most comprehensive Internet site for radiologists and professionals in the medical imaging industry. AuntMinnie.com expects to provide a vertical portal for radiologists, imaging managers, technologists, members of organized medicine, industry, and radiology practices to meet, transact, research, and collaborate on topics within the field of radiology with the ease and speed that only the Internet can provide. Organized into various sections of interest to the radiology community, AuntMinnie.com will set itself apart from other medical information sites by its singular and unified focus on radiology professionals, aggregating the information they require and facilitating the commerce in which they engage.
Results of Operations
Sales for the three months ended September 30, 1999 decreased 16.7% to $3.9 million from $4.7 million for the same period in 1998. Sales for the nine months ended September 30, 1999 increased 6.3% to $14.8 million from $13.9 million for the same period in 1998. Included in these amount are sales of the Company's digitizer products which declined to $2.6 million and $8.3 million for the three and nine month periods ended September 30, 1999 from $3.4 million and $8.3 million for the same periods in 1998, respectively. Sales of the ACR2000 product for the nine month period made up for the decline in the digitizers sales during that period, but lower sales of the ACR2000 product in the third quarter compared to earlier quarters resulted in the overall decrease for the three month period.
Gross profit for the three and nine months ended September 30, 1999 decreased to $1.3 million and $6.5 million, respectively, compared to $2.7 million and $7.9 million for the three and nine months ended September 30, 1998. Gross margin decreased to 34.7% and 44.2% for the three and nine months ended September 30, 1999 from 57.0% and 56.5% for the three and nine month periods ended September 30, 1998, primarily due to the transfer of the manufacturing engineering function from research and development to manufacturing overhead in late 1998 upon the completion of the ACR-2000, and lower sales volume. If sales volume of the ACR-2000 increases, the Company believes its gross margins should improve.
Sales and marketing expenses for the three and nine months ended September 30, 1999 increased 40.2% and 31.3% to $1.1 million and $2.6 million, respectively, from $777,000 and $2.0 million for the three and nine months ended September 30, 1998, respectively. The increase was due primarily to the establishment of AuntMinnie.com in July 1999 and the increased sales support for the ACR-2000, including expansion of the Company's direct sales force. The Company expects its sales and marketing expenses to increase to further develop and support the CR distribution channel and the AuntMinnie.com business. As a percentage of sales for the three and nine months ended September 30, 1999, these expenses increased to 28.1% and 17.5%, respectively, from 16.7% and 14.2% for the three and nine months ended September 30, 1998, respectively.
Research and development expenses for the three and nine months ended September 30, 1999 decreased 29.7% and 41.7% to $728,000 and $2.0 million, respectively, from $1.0 million and $3.4 million for the three and nine months ended September 30, 1998, respectively, due primarily to restructuring following the acquisition of CompuRAD and the transfer of the ACR-2000 project to manufacturing in late 1998. As a percentage of sales for the three and nine months ended September 30, 1999, these expenses also decreased to 18.8% and 13.4%, respectively, from 22.2% and 24.4% for the three and nine months ended September 30, 1998, respectively. The Company expects CR and video film digitizer development expenditures to remain constant and to incur additional research and development expenditures related to the AuntMinnie.com business.
General and administrative expenses increased 3.9% in the three months ended September 30, 1999 to $583,000 from $561,000 for the same period in 1998. The increase primarily relates to the establishment of AuntMinnie.com. As a percentage of sales, general and administrative expenses increased to 15.0% from 12.1% for the three months ended September 30, 1999 compared to 1998. For the nine months ended September 30, 1999 and 1998, general and administrative expenses were $2.0 million for each period. Economies achieved by the restructuring following the acquisition of CompuRAD were offset by costs incurred for the settlement of a lawsuit in 1999. The Company expects increased general and administrative expenditure related to the AuntMinnie.com business. As a percentage of sales for the nine months ended September 30, 1999, these expenses decreased to 13.4% from 14.4% for the same period in the prior year.
The Company recognized a benefit for income taxes for the three months ended September 30, 1999 of $333,000 due to the loss from continuing operations, compared to a provision of $190,000 for the same period in 1998. The provision for income taxes for continuing operations for nine months ended September 30, 1999 was $218,000, compared with $469,000 for the same period in 1998. The Company has provided a partial valuation allowance against the balance of its deferred tax assets remaining as of September 30, 1999. The Company expects continuing operations to be subject to an effective tax rate of approximately 39% for the remainder of 1999.
For the three months ended September 30, 1999, the Company recognized income from discontinued operations, net of tax, of $259,000 related to proceeds of a non-exclusive software license agreement executed in September 1999. For the nine months ended September 30, 1999, the loss from discontinued operations totaled $4.2 million, net of tax, and consisted primarily of write-downs of certain assets and accrual of costs related to closure of the Imagraph facility, and operating losses of Imagraph through June 3, 1999. This was offset by the proceeds of the technology transfer agreement, proceeds of the sale of other assets to Foresight, and proceeds of the non-exclusive software license agreement with a third party executed in September 1999. Losses of $124,000 and $268,000 in the three and nine months ended September 30, 1998, related to the net operating losses of the subsidiary. In future periods, the Company expects to continue to recognize income from the discontinued operations related to royalty payments to be paid by Foresight.
Liquidity and Capital Resources
At September 30, 1999, the Company's working capital was $19.6 million. The Company had cash, cash equivalents and short-term investments of approximately $16.0 million at September 30, 1999, compared with $17.7 million at December 31, 1998. The decrease is primarily due to $1.3 million used to repurchase 422,500 shares of the Company's common stock under its stock repurchase plan and $404,000 of expenditures for capital property and equipment, related to the upgrades to the manufacturing facility for production of the ACR-2000 and the establishment of AuntMinnie.com.
The Company believes that its existing cash, cash equivalents, short-term investments and funds to be generated by operations will satisfy the Company's cash flow requirements through at least 2000. Thereafter, if cash generated from operations is insufficient to satisfy the Company's projected requirements, the Company or its subsidiary, AuntMinnie.com, may be required to sell additional equity or debt securities or obtain bank or other credit facilities. There can be no assurance that the Company or its subsidiary will be able to sell such securities or obtain such credit facilities on acceptable terms in the future, if at all. The sale of additional equity or debt securities could result in additional dilution to the Company's stockholders.
Impact of the Year 2000
The rapid approach of Year 2000 presents significant issues for many computer systems, since much of the software in use today may not accurately process data beyond 1999. The Company has recently implemented new information systems and accordingly does not anticipate any internal Year 2000 issue from its own information systems, databases or programs. However, the Company could be adversely impacted by Year 2000 issues faced by major distributors, suppliers, customers, vendors and financial service organizations with which the Company interacts. The Company has taken steps to address the impact, if any, of the Year 2000 issue on the operations of the Company. There can be no assurances that the review detected all potential failures of the Company's and/or third-party's computer systems. A significant failure of the Company's or a third-party's computer system could have a material adverse effect on the Company's business, financial condition and results of operations.
Certain of the Company's software products currently installed at customer sites will require upgrade or other remediation to become Year 2000 compliant. The Company believes that it is not legally responsible for costs incurred by its customers to achieve their Year 2000 compliance. However, the Company has taken steps to identify affected customers, raise customer awareness related to noncompliance of the Company's older products, and assist the customer base to assess their risks. To date, costs incurred by the Company to assist the customer base in this matter have not been significant, but the Company could incur additional costs related to these actions over the next year. The potential impact on the Company's business, financial condition and results of operations is not known at this time.
Risk Factors
Significant Fluctuations in Operating Results. The Company reported a loss from continuing operations for the three months ended September 30, 1999. There can be no assurance that the Company will be profitable on a quarterly or annual basis in the future. The Company has experienced quarterly fluctuations in operating results caused by various factors, including the timing of orders by major customers, customer inventory levels, mergers and acquisitions by the Company's customers, shifts in product mix, the incurrence of acquisition-related costs by the Company and general conditions in the healthcare industry which have reduced capital equipment budgets and delayed or reduced the adoption of teleradiology, Picture Archiving and Communications Systems ("PACS") and mini-PACS. The Company expects that these fluctuations will continue.
The Company typically does not obtain long-term volume purchase contracts from its customers, and a substantial portion of the Company's backlog is scheduled for delivery within 60 days or less. Customers may cancel orders and change volume levels or delivery times without penalty. Quarterly sales and operating results therefore depend on the volume and timing of the backlog as well as bookings received during the quarter. A significant portion of the Company's operating expenses are fixed, and planned expenditures are based primarily on sales forecasts and product development programs. If sales do not meet the Company's expectations in any given period, the materially adverse impact on operating results may be magnified by the Company's inability to adjust operating expenses sufficiently or quickly enough to compensate for such a shortfall. Furthermore, the Company's gross margins may decrease in the future due to increasing sales of lower margin products and volume discounts. Results of operations in any period should not be considered indicative of the results to be expected for any future period. Fluctuations in operating results may also result in fluctuations in the price of the Company's Common Stock.
New Product Development in Hardware and Software Products; Uncertainty of Market Acceptance. The Company's success is dependent on market acceptance of its new and existing products. There can be no assurance that sales of new products will achieve significant market acceptance in the future. The market for PACS and teleradiology software is uncertain. Current and future competitors are likely to introduce competing hardware and software, making it difficult to predict the rate at which the market will grow, if at all, or the rate at which new or increased competition will result in market saturation. If the market for such software and hardware fails to grow or grows more slowly than anticipated, the Company's business, financial condition and results of operations would be materially adversely affected. The Company expects that the sales cycle for PACS and teleradiology software and computed radiography ("CR") hardware through the OEM and System Integrator sales channels will be longer than that for its other existing hardware products. Accordingly, the Company's quarterly revenues and operating results may be subject to greater fluctuation as the Company begins to market and sell PACS and teleradiology software and CR hardware through these new channels. Additionally, the Company has limited experience in marketing, installing and supporting its software and CR hardware through these sales channels, and there can be no assurance that the Company can obtain the necessary resources to market, install and support its PACS and teleradiology software and CR hardware in an efficient, cost-effective and competitive manner. The failure of PACS and teleradiology software to achieve market acceptance for any reason could have a material adverse effect on the Company's business, financial condition and results of operations.
Significant Risks Associated with Acquisitions. The integration of any acquisition will require special attention from management, which may temporarily distract its attention from the day-to-day business of the Company. Any acquisitions will also require integration of the companies' product offerings and coordination of research and development and sales and marketing activities. Furthermore, as a result of acquisitions, the Company may enter markets in which it has no or little direct prior experience. There can also be no assurance that the Company will be able to retain key technical personnel of an acquired company or recruit new management personnel for the acquired businesses, or that the Company will, or may in the future, realize any benefits as a result of such acquisitions. Acquisitions by the Company may result in potentially dilutive issuances of equity securities, the incurrence of debt, one-time acquisition charges and amortization expenses related to goodwill and intangible assets, each of which could be significant and could materially adversely affect the Company's financial condition and results of operations. In addition, the Company believes that it may be required to expand and enhance its financial and management controls, reporting systems and procedures as it integrates acquisitions. There can be no assurance that the Company will be able to do so effectively, and failure to do so when necessary would have a material adverse effect upon the Company's business and results of operations.
New Product Development; Rapid Technological Change; Risk in Delays of Product Development. The market for the Company's products is characterized by rapid technological advances, changes in customer requirements and frequent new product introductions and enhancements. The Company's future success will depend upon its ability to enhance its current products, to develop and introduce new products that keep pace with technological developments and to respond to evolving customer requirements. Any failure by the Company to anticipate or respond adequately to technological developments by its competitors or to changes in customer requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness or revenues. In the past, the Company has experienced delays in the development and introduction of new products and product enhancements, and there can be no assurance that the Company will not experience such delays in the future. In addition, new product introductions or enhancements by the Company's competitors or the use of other technologies that do not depend on film digitization or computed radiography could cause a decline in sales or loss of market acceptance of the Company's products. In particular, several companies have announced developments leveraging the technology used in flat panel displays to produce high-resolution, two dimensional image sensor arrays that make it possible for x-ray images to be captured digitally without film or chemical processing. While this emerging technology, known as digital radiography ("DR"), is expensive, there can be no assurance that future advances in this technology or other technologies will not produce systems better positioned for the marketplace that will therefore reduce the digitizer and CR market to the then installed base of imaging systems. There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements on a timely or cost-effective basis, and such failure could have a material adverse effect on the Company's business and results of operations. The Company established a new business entity, AuntMinnie.com, and is incurring costs to establish this business line. There can be no assurance that the Company will be successful in implementing and developing the radiology portal, meeting the expectations as to revenue generation, attracting executive talent, strategic partnerships and sponsors, competing with other internet sites, or achieving market acceptance by the radiology community, and such failure could have a material adverse effect on the Company's business and results of operations.
Risks Associated With Software Products. Software and systems as complex as those offered by the Company frequently contain undetected errors or failures when first introduced or when new versions are released. The Company has in the past discovered bugs and system errors in certain of its software enhancements, both before and after initial shipment. There can be no assurance that, despite testing by the Company, errors will not occur in the Company's products resulting in loss of, or delay in, the Company recognizing revenue or collecting payments for these products. The Company's reputation from such errors could also be damaged, resulting in fewer orders. Peripherals and hardware from third party manufacturers also may contain defects and incompatibilities which could adversely affect market acceptance of the Company's software products.
Long Sales Cycles. The OEM and System Integrator sales cycle for the Company's products is lengthy. The sales cycle of the Company's products is subject to delays associated with changes or the anticipation of changes in the regulatory environment affecting healthcare enterprises, changes in the customer's strategic system initiatives, competing information systems projects within the customer organization such as, but not limited to, the year 2000 compliance issues, consolidation in the healthcare industry in general, the highly sophisticated nature of the Company's software and competition in the PACS and teleradiology markets in general. The time required from initial contact to purchase order typically ranges from one to nine months, and the time from purchase order to delivery and recognition of revenue typically ranges from one to nine months. During the sales process, the Company expends substantial time, effort and funds preparing a contract proposal, demonstrating the software and negotiating the purchase order. For these and other reasons, the Company cannot predict when or if the sales process with a prospective customer will result in a purchase order.
Competition. Competition in the CR market is well established and includes Fuji, Agfa and Kodak. In addition, PhorMax plans to debut a desktop-sized CR in the near future. Furthermore, other healthcare and non-healthcare equipment companies not presently offering competing products may enter the CR market. Increased competition could result in price reduction, reduced gross margins and loss of market share, any of which could materially adversely effect the Company's business, financial condition and results of operations. In addition, many of the Company's competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and market recognition than the Company in the CR area. Many of the Company's competitors also currently have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result of these factors, the Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than the Company. There can be no assurances that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a materially adverse effect on its business, financial condition or results of operations.
Competition in the United States laser-based film digitizer market has not been significant. In 1996, CLS entered the market with a product similar to the laser-based film digitizers offered by Lumisys and in 1998, General Scanning introduced a laser-based film digitizer. To date, the Company is unaware of any sales made by CLS or General Scanning. In addition, several Japanese competitors such as Konica, Nishimoto Sangyo and Abe Sekkei offer competitive products on an international basis and may decide in the future to devote additional resources to marketing competitive products in the United States. The markets for medical film digitizers incorporating CCD's are highly competitive. Lumisys faces competition from companies such as Vidar Systems Inc., Canon Inc., Hell Linotype and Howtek in the CCD-based film digitizer market. There can be no assurance that Lumisys' competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features that render Lumisys' products less competitive or obsolete.
In addition, large companies, such as Kodak, Sterling, Fuji, GE, Siemens, Philips and Agfa, have the technical and financial ability to design and market CR and digitizer products competitive with Lumisys' products, and some of them have in the past produced and marketed such products. While many of these companies currently purchase products from Lumisys, Lumisys believes that it will be required to continue to improve the price and performance characteristics of its products to retain their business especially in view of the fact that these customers are not contractually required to purchase their CR and digitizers exclusively or at all from Lumisys. All of these companies have significantly greater financial, marketing and manufacturing resources than Lumisys and would be significant competitors if they decided to enter this market.
Competition in the markets for PACS and teleradiology software products and services is intense and is expected to increase. The Company's software products support the Company's CR and film digitizers and do not generate significant income as stand-alone products. By bundling software with the CR and film digitizers the Company allows its OEM and VAR customers to utilize either the Company's software or at their discretion, their own or competing software. The principal providers of software in the PACS and teleradiology market are ISG, Applicare Medical Imaging B.V., Mitra Imaging Inc., and Access Radiology Corporation. The success of the Company's software does not have a direct impact on the Company's financial condition or results of operations but rather adds additional value to the Company's CR and digitizer products. There can be no assurances that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a materially adverse effect on its business, financial condition or results of operations.
Competition in the Internet portal business is intense and includes Radiology.com, RadCenter, Radcom, Radiolgy Central and MedWeb. Some of the Company's competitors and potential competitors may have significantly greater financial, technical, product development, marketing and other resources and market recognition than the Company in the Internet portal business. Many of the Company's competitors also currently have, or may develop or acquire, substantial market acceptance by the radiology community. As a result of these factors, the Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than the Company. There can be no assurances that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a materially adverse effect on its business, financial condition or results of operations.
Proprietary Rights. The Company relies on a combination of trade secrets, copyright and trademark laws, nondisclosure and other contractual provisions to protect its proprietary rights. The Company currently has no blocking patents covering its technology and it has not registered any of its trademarks. There can be no assurance that measures taken by the Company to protect its intellectual property will be adequate or that the Company's competitors will not independently develop systems and services that are substantially equivalent or superior to those of the Company. Substantial litigation regarding intellectual property rights exists in the industry, and the Company expects that its products may be increasingly subject to third-party infringement claims as the number of competitors in the Company's industry segment grows and the functionality of systems overlap. Although the Company believes that its systems and applications do not infringe upon the proprietary rights of third-parties, there can be no assurance that third-parties will not assert infringement claims against the Company in the future, that the Company would prevail in any such dispute or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. In addition, any such claim may require the Company to incur substantial litigation expenses or subject the Company to significant liabilities and could have a material adverse effect on the Company's business, financial condition and results of operations.
Customer Concentration; Reliance on OEMs. For the nine months ended September 30, 1999, no customer represented more than 10% of the Company's total sales. A number of large customers accounted for a significant portion of the Company's backlog at September 30, 1999. The Company expects to continue to depend upon its principal customers for a significant portion of its sales, although there can be no assurance that the Company's principal customers will continue to purchase products and services from the Company at current levels, if at all. The loss of one or more major customers or a change in their buying patterns could have a material adverse effect on the Company's business and results of operations.
Single-Source Suppliers. The Company purchases industry-standard parts and components for the assembly of its products, generally from multiple vendors. Although the Company relies on single-source suppliers for certain components, such as lasers, photomultiplier tubes and certain electronic components primarily to control price and quality, the Company believes that alternate sources of supply are available from other vendors for such components and has qualified second source suppliers for some, but not all, single-sourced parts. The Company maintains good relationships with its vendors and, to date, has not experienced any material supply problems. While the Company seeks to maintain an adequate inventory of single-sourced components, there can be no assurance that such inventories will be sufficient or that delays in part or component deliveries will not occur in the future, which could result in delays or reductions in product shipments. Furthermore, even if currently single-sourced components could be replaced by other qualified parts, product redesign and testing could be costly and time consuming. These factors could have a material adverse effect on the Company's business, financial condition and results of operations.
Government Regulation. The manufacturing and marketing of the Company's digitizer, CR product, video board, and software products are subject to extensive government regulation in the United States and in other countries, and the process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. If a medical device manufacturer can establish that a newly developed device is "substantially equivalent" to a device that was legally marketed prior to May 1976, the date on which the Medical Device Amendments of 1976 were enacted, or to a device the FDA found to be substantially equivalent to a legally marketed pre-1976 device, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) premarket notification. The 510(k) premarket notification must be supported by appropriate data establishing the claim of substantial equivalence to the satisfaction of the FDA. Receipt of 510(k) clearance normally takes at least three months, but may take much longer and may require the submission of clinical safety and efficacy data to the FDA. All of the Company's laser-based film digitizers, the CCD-based film digitizer, CR product and software products that are commercially available have received 510(k) clearance. There can be no assurance that 510(k) clearance for any future product or any modification of an existing product will be granted, or that the process will not be unduly lengthy. In the future, the FDA may require manufacturers of certain medical devices to engage in a more thorough and time consuming approval process than the 510(k) process, which could have a material adverse effect on the Company's business and results of operations.
The Company is also required to register as a Class II medical device manufacturer with the FDA and state agencies, such as the California Department of Health Services ("CDHS"). As such, the Company may be inspected on a routine basis by both the FDA and the CDHS for compliance with the FDA's Good Manufacturing Practices ("GMP"), Quality Standard Regulations ("QSR") and other applicable regulations. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner with respect to manufacturing, reporting of product malfunctions and other matters. If the FDA believes that a company is not in compliance with federal regulatory requirements, it can institute proceedings to detain or seize products, issue a recall, prohibit marketing and sales of the company's products and assess civil and criminal penalties against the company, its officers or its employees. Failure to comply with the regulatory requirements could have a material adverse effect on the Company's business and results of operations. The Sunnyvale facility of the Company was inspected by the CDHS and the FDA in 1996 and was found to be compliant with both the CDHS's and FDA's GMP regulations. In the second quarter of 1998 the Tucson facility of the Company was inspected by the FDA and was found to have some items not in compliance with the FDA's GMP regulations. The Company took corrective action on the FDA's observations and was re-inspected at the Tucson facility in the first quarter of 1999 and found to be in compliance with the FDA's GMP regulations.
Sales of the Company's products outside the United States are subject to foreign regulatory requirements that vary from country to country. Additional approvals from foreign regulatory authorities may be required, and there can be no assurance that the Company will be able to obtain foreign approvals on a timely basis or at all, or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. Starting in mid 1998, the Company has been required to obtain certifications necessary to enable the "CE" mark to be affixed to the Company's products to continue commercial sales in member countries of the European Union. The CE mark is an international symbol of quality and complies with applicable European information device equipment directives. The Company has obtained this CE certification. Failure to comply with foreign regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations.
Litigation. On July 9, 1997 and July 10, 1997 two securities class action lawsuits were filed in the Superior Court of the State of California, County of Santa Clara, and the United States District Court for the Northern District of California against the Company, several of its current and former officers and directors, and its underwriters. The complaints are brought on behalf of all persons who purchased the Company's common stock between November 15, 1995 and July 11, 1996. The complaints allege that defendants made material false statements and omitted to disclose material information concerning the Company's actual and expected performance, causing the price of the Company's stock to be artificially inflated. The federal complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934; the state complaint alleges claims under California's securities statutes. Neither complaint specifies the amount of damages sought. The Company and the other defendants deny all allegations of wrongdoing.
In December 1998, the state court granted in part and denied in part defendants' motion to dismiss plaintiff's amended complaint. Discovery is in progress in the state case. There can be no assurance that the Company will prevail in the state case. In July 1999, plaintiff voluntarily dismissed the federal case.
Third-Party Reimbursement. Third-party payers, such as governmental programs and private insurance plans, can indirectly affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement that they will provide for the taking, storing and interpretation of medical images. In recent years, healthcare costs have risen substantially, and third-party payers have come under increasing pressure to reduce such costs. In this regard, extensive studies undertaken by the Clinton Administration, even though not successfully translated into regulatory action, have stimulated widespread analysis and reaction in the private sector focused on healthcare cost reductions, which may involve reductions in reimbursement rates in radiology. A decrease in the reimbursement amounts for radiological procedures may decrease the amount which physicians, clinics and hospitals are able to charge patients for such services. As a result, adoption of teleradiology, PACS and mini-PACS may slow as capital investment budgets are reduced, and the demand for the Company's products could be significantly reduced.
Product Liability and Insurance. The manufacture and sale of medical products entails significant risk of product liability claims. While the Company believes that its current insurance coverage is appropriate, there can be no assurance that such coverage is adequate to protect the Company from any liabilities it might incur in connection with the sale of the Company's products. In addition, the Company may require increased product liability coverage as additional products are commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business and results of operations.
Volatility of Stock Prices. The market price of the Company's Common Stock has been and may continue to be volatile. This volatility may result from a number of factors, including fluctuations in the Company's quarterly revenues and net income, announcements of technical innovations or new commercial products by the Company or its competitors, and conditions in the market for medical image digitizers and the teleradiology and health care industry and for PACS and teleradiology products and healthcare information systems and services. Also, the stock market has experienced and continues to experience extreme price and volume fluctuations which have affected the market prices of securities, particularly those of medical technology companies, and which often have been unrelated to the operating performance of the companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Stock in future periods.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains a short-term investment portfolio consisting mainly of income securities with an average maturity of less 180 days. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels at September 30, 1999, the fair value of the Company's portfolio would decline by an immaterial amount. The Company has the ability to hold its fixed income investments until maturity, and therefore the Company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its securities portfolio.
From time to time, Lumisys makes certain capital equipment or other purchases denominated in foreign currencies. As a result, Lumisys' cash flows and earnings are exposed to fluctuations in interest rates and foreign currency exchange rates. Lumisys attempts to limit these exposures through operational strategies and generally has not hedged currency exposures. At September 30, 1999, the Company had no purchase commitments denominated in foreign currencies.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a). Exhibits furnished: |
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Description of Document |
21.1 |
Subsidiaries of the Company |
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27.1 |
Financial Data Schedule |
(b). Reports on Form 8-K: |
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The Company filed no Current Reports on Form 8-K during the three months ended September 30, 1999. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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LUMISYS INCORPORATED |
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Dated |
November 12, 1999 |
By: |
/s/ Phillip Berman |
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Phillip Berman, M.D. |
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Chief Executive Officer |
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November 12, 1999 |
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/s/ Dean MacIntosh |
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Dean MacIntosh |
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Vice President and Chief Financial |
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Officer (Principal Financial and |
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Accounting Officer) |