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, 1996 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 8, 1996, 6,392,720 shares of the registrant's Common Stock, $.001 par value, were outstanding. Lumisys Incorporated Index Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated balance sheets at September 30, 1996 and December 31, 1995 3 		 Consolidated statements of income for the three and nine months ended September 30, 1996 and 1995 4 Consolidated statements of cash flows for the nine months ended September 30, 1996 and 1995 5 Notes to financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 9 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 9 SIGNATURES 10 			 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Lumisys Incorporated Consolidated Balance Sheets (Unaudited) Sept. 30, December 31, 1996 1995 --------- ------------ (In thousands) ASSETS Current assets: Cash and cash equivalents $ 17,430 $ 11,426 Short-term investments --- 3,934 Accounts receivable, net of allowances of $280 and $249 3,118 2,410 Inventories 3,650 3,003 Deferred tax assets 632 1,114 Other current assets 178 294 --------- ------------ Total current assets 25,008 22,181 Property and equipment, net 141 162 Other assets 196 400 --------- ------------ $ 25,345 $ 22,743 ========= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 959 $ 1,525 Accrued expenses 1,910 1,468 --------- ------------ Total current liabilities 2,869 2,993 --------- ------------ Stockholders' equity Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding --- --- Common stock, $0.001 par value; 25,000 shares authorized; 6,366 and 6,240 shares issued and outstanding 6 6 Additional paid-in capital 22,788 22,702 Accumulated deficit (87) (2,521) Notes receivable from stockholders (120) (297) Deferred compensation related to stock options (111) (140) --------- ------------ Total stockholders' equity 22,476 19,750 --------- ------------ $ 25,345 $ 22,743 ========= ============ The accompanying notes are an integral part of these financial statements. 3 Lumisys Incorporated Consolidated Statements of Income (Unaudited) Three months ended Nine months ended ------------------- ------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1996 1995 1996 1995 ------- -------- -------- ------- (In thousands) (In thousands) Sales $5,933 $5,013 $16,915 $12,091 Cost of sales 2,684 2,322 7,795 5,581 ------ -------- -------- ------- Gross profit 3,249 2,691 9,120 6,510 ------ -------- -------- ------- Operating expenses: Sales and marketing 463 412 1,408 1,112 Research and development 1,064 821 3,099 2,042 General and administrative 621 540 1,828 1,322 Acquired in-process research and development --- --- --- 1,442 ------ -------- -------- ------- Total operating expenses 2,148 1,773 6,335 5,918 ------ -------- -------- ------- Income (loss) from operations 1,101 918 2,785 592 Interest income 238 32 668 110 ------ -------- -------- ------- Income (loss) before income taxes 1,339 950 3,453 702 Provision (benefit) for income taxes 522 (47) 1,019 (724) ------ -------- -------- ------- Net income $ 817 $ 997 $ 2,434 $ 1,426 ====== ======== ======== ======= Net income per share $ 0.12 $ 0.20 $ 0.36 $ 0.28	 ====== ======== ======== ====== Shares used to compute net income per share 6,805 5,096 6,829 5,104 ====== ======== ======== ====== The accompanying notes are an integral part of these financial statements. 4 Lumisys Incorporated Consolidated Statements of Cash Flows (Unaudited) Nine months ended ------------------------ Sept. 30, December 31, 1996 1995 --------- ------------ (In thousands) Cash flows from operating activities: Net income $2,434 $1,426 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 145 122 Deferred income taxes 482 (963) Interest on notes receivable from stockholders (7) (10) Deferred compensation related to stock options 29 22 Acquired research and development in-process --- 1,442 Changes in assets and liabilities (net of effects of Imagraph and XRS acquisitions): Accounts receivable (708) 58 Inventories (647) (1,655) Other assets 320 (288) Accounts payable (566) 832 Accrued expenses 442 363 ------ ------ Net cash provided by operating activities 1,924 1,349 ------ ------ Cash flows from investing activities: Proceeds from sale of short-term investments 3,934 --- Purchases of property and equipment (124) (42) Purchase of Imagraph --- (1,800) Purchase of XRS --- (200) ------ ------ Net cash provided (used) in investing activities 3,810 (2,042) ------ ------ Cash flows from financing activities: Proceeds from sale of common stock, net 86 40 Payment on notes receivable from stockholders 184 --- ------ ------ Net cash provided by financing activities 270 40 ------ ------ Net increase (decrease) in cash and cash equivalents 6,004 (653) Cash and cash equivalents at beginning of period 11,426 3,633 ------ ------ Cash and cash equivalents at end of period $17,430 $2,980 ====== ====== Supplemental disclosure of cash flow information: Cash paid for income taxes $ 620 $ 79 Supplemental schedule of noncash investing and financing activities: Common stock issued for purchase of XRS and to consultant --- $ 33	 Series C mandatorily redeemable convertible preferred stock issued for purchase of Imagraph --- 200 The accompanying notes are an integral part of these financial statements. 5 Lumisys Incorporated Notes to Consolidated Financial Statements Note 1 - Basis of Presentation The 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, 1995, included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The consolidated balance sheet as of September 30, 1996, and the consolidated statements of income for the three and nine months ended September 30, 1996 and 1995, and the consolidated statements of cash flows for the nine months ended September 30, 1996 and 1995, are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair statement of the results for these interim periods. The results of operations for the three and nine months ended September 30, 1996, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 1996. Note 2 - Composition of Certain Financial Statement Amounts Sept. 30, December 31, 1996 1995 -------- ------------ (In thousands) Inventories: Raw materials $3,094 $2,283 Work-in-process 695 774 Finished goods 578 779 -------- ------------ 4,367 3,836 Less: inventory reserves (717) (833) -------- ------------ $3,650 $3,003 ======== ============ 	 Accrued expenses: Payroll and related benefits $ 839 $ 538 Warranty 651 533 Accrued income taxes --- 173 Other 420 224 -------- ------------ $1,910 $1,468 ======== ============ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Lumisys develops, manufactures and markets a broad product line of laser-based very high resolution medical film digitizers, CCD- based film scanners and video digitizer products necessary for converting analog medical images into diagnostic quality digital formats. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. 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 1995 Annual Report on Form 10-K and other documents filed by the Company with the Securities and Exchange Commission. Results of Operations Total sales for the three months ended September 30, 1996 increased 18.4% to $5.9 million from $5.0 million for the three months ended September 30, 1995. Total sales for the nine months ended September 30, 1996 increased 39.9% to $16.9 million from $12.1 million for the nine months ended September 30, 1995. The increase for the nine month period was due in part to the acquisitions of Imagraph and XRS in March of 1995 as well as an increase in system sales. The percentage increase in sales of systems, including film digitizers and computed radiography readers, was 39.1%, primarily as a result of growth in demand for teleradiology. Gross profit for the three months ended September 30, 1996 increased 20.7% to $3.2 million from $2.7 million for the corresponding period of 1995. Gross margin increased in the three month period ended September 30, 1996 to 54.8% from 53.7% in the same period of 1995 primarily due to a more favorable product mix. Gross profit for the nine months ended September 30, 1996 increased 40.1% to $9.1 million from $6.5 million for the nine months ended September 30, 1995. Gross margin increased in the nine month period to 53.9% from 53.8%. Sales and marketing expenses increased 12.4% in the three months ended September 30, 1996 to $463,000 from $412,000 in the same period of 1995. As a percentage of sales, these expenses declined to 7.8% in the three months ended September 30, 1996 from 8.2% in the same period of 1995. Sales and marketing expenses increased 26.6% to $1,408,000 for the nine months ended September 30, 1996 from $1,112,000 for the same period of 1995. As a percentage of 7 sales, these expenses decreased to 8.3% in the nine months ended September 30, 1996 from 9.2% in the same period of 1995. The increase in absolute dollars for the nine month period was primarily due to the increase in the Company's sales and marketing personnel as a result of acquisitions. The Company expects sales and marketing expenses to increase in absolute dollars as the Company grows. Research and development expenses increased 29.6% in the three months ended September 30, 1996 to $1,064,000 from $821,000 in the same quarter of 1995. As a percentage of sales, research and development expenses increased to 17.9% in the three months ended September 30, 1996 from 16.4% in the same quarter of 1995. For the nine months ended September 30, 1996, research and development expenses increased 51.8% to $3,099,000 from $2,042,000 for the nine months ended September 30, 1995. As a percentage of sales, research and development expenses increased to 18.3% in the nine months ended September 30, 1996 from 16.9% in the same period of 1995. The increases for both the three and nine month periods were primarily due to increased engineering personnel expenses as a result of acquisitions. The Company believes that continuing product development is a key element in the success of its business and expects to continue to increase its research and development expenditures in absolute dollar amounts. General and administrative expenses increased 15.0% in the three months ended September 30, 1996 to $621,000 from $540,000 in the same quarter of 1995. As a percentage of sales, these expenses decreased in the three months ended September 30, 1996 to 10.5% from 10.8% in the same quarter of 1995. General and administrative expenses increased 38.3% in the nine months ended September 30, 1996 to $1,828,000 from $1,322,000 in the same period of 1995. As a percentage of sales, general and administrative expenses decreased to 10.8% in the nine months ended September 30, 1996 from 10.9% in the same quarter of 1995. The increase in absolute dollars for the nine month period was due to the ongoing costs associated with increased personnel expenses as a result of acquisitions and the expenses of complying with the responsibilities of being a public company. The Company expects that its general and administrative expenses will increase in absolute dollars in the future as the Company continues to grow. Acquired in-process research and development expenses represent a non-recurring charge in the first quarter of 1995 of $1.4 million relating to products being developed by Imagraph and XRS at the time of the acquisitions. The Company recognized a provision for income taxes of $522,000 in the three months ended September 30, 1996. In the same period of 1995, the Company recognized a provision for income taxes of $95,000, which was more than offset by the recognition of $142,000 of deferred tax assets, resulting in a net benefit for income taxes of $47,000. The Company recognized a provision for income 8 taxes of $1,334,000 in the nine months ended September 30, 1996, which was partially offset by the recognition of $315,000 of deferred tax assets, resulting in a net provision for income taxes of $1,019,000. In the same period of 1995, the Company recognized a provision for income taxes of $239,000, which was more than offset by the recognition of $963,000 of deferred tax assets, resulting in a net benefit for income taxes of $724,000. The Company's recognition of deferred tax assets was based on the Company's assessment that it is more likely than not that this portion of the deferred tax assets will be realized. The Company became subject to an effective tax rate of approximately 39% beginning in the quarter ended September 30, 1996. Liquidity and Capital Resources The Company has financed its activities primarily from net cash provided by operations and the issuance of securities. At September 30, 1996, the Company's working capital was $22.1 million. The Company's cash, cash equivalents and short-term investments increased by $2.0 million in the nine months ended September 30, 1996 to $17.4 million at September 30, 1996 compared with $15.4 million of cash, cash equivalents and short-term investments at December 31, 1995. The increase is primarily due to net income for the period which was partially offset by increases in the Company's inventories and accounts receivable and decreases in accounts payable. The increase in inventories is primarily due to increasing sales. The Company does not currently have any significant capital commitments and believes that existing sources of liquidity and funds expected to be generated from operations will provide adequate cash to fund the Company's anticipated working capital and other cash needs for the foreseeable future. Part 2 - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a) Exhibits furnished: Exhibit Number Description of Document -------	 ----------------------- 27	 Financial Data Schedule b) Reports on Form 8-K: none. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 	LUMISYS INCORPORATED Dated: November 13, 1996 By:/s/ Stephen J. Weiss ----------------- -------------------------- Stephen J. Weiss President, Chief Executive Officer	 	 November 13, 1996 /s/ Craig L. Klosterman ----------------- -------------------------- Craig L. Klosterman Chief Operating and Chief Financial Officer 		 	 10