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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, 2000
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 9, 2000 9,275,014 shares of the registrant's Common Stock,
$.001 par value, were outstanding. *
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Lumisys Incorporated
Index
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 2000 (unaudited) and December 31, 1999......... 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999 4
(unaudited)..................................................
Condensed Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 2000 and 1999 (unaudited).... 5
Notes to Condensed Consolidated Financial Statements 6
(unaudited)..................................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 19
Item 2. Changes in Securities and Use of Proceeds.................... 19
Item 3. Defaults Upon Senior Securities.............................. 19
Item 4. Other Information............................................ 20
Item 5. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES......................................................................... 21
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lumisys Incorporated
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2000 1999
----------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,732 $ 6,393
Short-term investments 4,573 9,965
Accounts receivable, net of allowances of
$807 and $1,871,respectively 2,376 2,068
Inventories 3,462 2,585
Deferred tax assets 1,453 1,453
Other current assets 1,061 994
----------- -----------
Total current assets 22,657 23,458
Property and equipment, net 623 569
----------- -----------
$ 23,280 $ 24,027
=========== ===========
LIABILITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 479 $ 510
Accrued expenses 3,845 3,151
Merger and related costs 531 542
----------- -----------
Total current liabilities 4,855 4,203
Note payable to related party 180 164
----------- -----------
Total Liabilities 5,035 4,367
----------- -----------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares
authorized; no shares issued or outstanding --- ---
Common stock, $0.001 par value; 25,000 shares
authorized; 9,275 and 9,240 shares issued and
outstanding, respectively 9 9
Additional paid-in capital 27,697 27,675
Accumulated deficit (9,461) (8,024)
----------- -----------
Total stockholders' equity 18,245 19,660
----------- -----------
$ 23,280 $ 24,027
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Lumisys Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Sales $ 4,473 $ 3,875 $ 14,755 $ 14,811
Cost of sales 2,348 2,532 7,912 8,269
------------ ------------- ------------ -------------
Gross profit 2,125 1,343 6,843 6,542
------------ ------------- ------------ -------------
Operating expenses:
Sales, marketing and customer support 1,294 1,089 3,833 2,598
Research and development 684 606 1,980 1,864
General and administrative 699 583 2,066 1,990
Production, content and other website costs 353 122 1,015 122
------------ ------------- ------------ -------------
Total operating expenses 3,030 2,400 8,894 6,574
------------ ------------- ------------ -------------
Loss from operations (905) (1,057) (2,051) (32)
Interest income, net 161 202 617 579
------------ ------------- ------------ -------------
Income (loss) from continuing operations before income taxes (744) (855) 547
Provision (benefit) for income taxes --- (333) --- 218
------------ ------------- ------------ -------------
Net income (loss) from continuing operations (744) (522) (1,434) 329
------------ ------------- ------------ -------------
Discontinued operations, net of income taxes --- 259 --- (4,168)
------------ ------------- ------------ -------------
Net loss $ (744) $ (263) $ (1,434) $ (3,839)
============ ============= ============ =============
Net income (loss) from continuing operations per share:
Basic $ (0.08) $ (0.06) $ (0.16) $ 0.03
============ ============= ============ =============
Diluted $ (0.08) $ (0.06) $ (0.16) $ 0.03
============ ============= ============ =============
Net loss per share:
Basic $ (0.08) $ (0.03) $ (0.16) $ (0.40)
============ ============= ============ =============
Diluted $ (0.08) $ (0.03) $ (0.16) $ (0.40)
============ ============= ============ =============
Shares used to compute net income (loss) from continuing
operations per share:
Basic 9,275 9,354 9,258 9,493
============ ============ ============ =============
Diluted 9,275 9,354 9,258 9,493
============ ============ ============ =============
Shares used to compute net loss per share:
Basic 9,275 9,354 9,258 9,493
============ ============ ============ =============
Diluted 9,275 9,354 9,258 9,493
============ ============ ============ =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Lumisys Incorporated
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
Nine Months Ended
---------------------------------
September September
30, 30,
2000 1999
------------ ---------------
Cash flow from operating activities:
Net loss $ (1,434) $ (3,839)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 443 533
Non-cash charge related to discontinued operations --- 3,550
Other (3) 13
Changes in assets and liabilities:
Accounts receivable (308) 1,391
Inventories (877) (879)
Other current assets (67) (1)
Accounts payable (31) (502)
Accrued expenses 694 (496)
Merger and related costs (11) (91)
Notes payable to related party 16 ---
----------- -----------
Net cash used in operating activities (1,578) (321)
----------- -----------
Cash flows from investing activities:
Sales of short-term investments, net 5,392 1,231
Proceeds from sale of discontinued operations --- 250
Purchases of property and equipment (497) (404)
----------- -----------
Net cash provided by investing activities 4,895 1,077
----------- -----------
Cash flows from financing activities:
Sales (purchases) of common stock, net 22 (1,222)
----------- -----------
Net cash provided by (used in) financing activities 22 (1,222)
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,339 (466)
Cash and cash equivalents at beginning of period 6,393 10,651
----------- -----------
Cash and cash equivalents at end of period $ 9,732 $ 10,185
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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 by the Company, without audit,
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, 1999, included in
the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
The condensed consolidated balance sheets as of September 30, 2000 and December
31, 1999, the condensed consolidated statements of operations for the three and
nine months ended September 30, 2000 and 1999, and the condensed consolidated
statements of cash flow for the nine months ended September 30, 2000 and 1999
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 results of operations for the three and nine months ended September 30,
2000, are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 2000 or any future period.
Note 2 - Net Income (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) 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 into common shares such as
stock options and warrants.
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
------------------ -----------------
September September September September
30, 30, 30, 30,
2000 1999 2000 1999
------------- ------------ ------------ ------------
Net income (loss) from continuing operations $ (744) $ (522) $ (1,434) $ 329
============ =========== =========== ===========
Net loss $ (744) $ (263) $ (1,434) $ (3,839)
============ =========== =========== ===========
Shares used to compute net income (loss) from continuing
operations per share:
Weighted average shares outstanding - basic 9,275 9,354 9,258 9,493
Effect of dilutive securities:
Potential common stock: stock options and warrants --- --- --- ---
------------ ----------- ----------- -----------
Weighted average shares outstanding - diluted 9,275 9,354 9,258 9,493
============ =========== =========== ===========
Shares used to compute net loss per share:
Weighted average shares outstanding - basic 9,275 9,354 9,258 9,493
Effect of dilutive securities:
Potential common stock: stock options and warrants --- --- --- ---
------------ ----------- ----------- -----------
Weighted average shares outstanding - diluted 9,275 9,354 9,258 9,493
============ =========== =========== ===========
For the three months ended September 30, 1999, 1,605,000 shares and for the nine
months ended September 30, 1999, 1,617,000 shares of potential common stock are
considered anti-dilutive using the treasury stock method and are excluded from
the calculation of diluted net income from continuing operations per share. Due
to the loss from
6
continuing operations in the three and nine months ended September 30, 2000, and
the net loss for the three and nine months ended September 30, 2000 and 1999,
all potential common stock outstanding is considered anti-dilutive and is
excluded from the calculation of net loss from continuing operations and net
loss per share.
Note 3 - Comprehensive Income
Comprehensive income is comprised of net income (loss) 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
September December
30, 31,
2000 1999
------------- ------------
Inventories:
Raw materials $ 2,669 $ 3,319
Work-in-process 610 700
Finished goods 1,532 757
------------- ------------
4,811 4,776
------------- ------------
Less: inventory reserves (1,349) (2,191)
------------- ------------
$ 3,462 $ 2,585
============= ============
Accrued expenses:
Payroll and related benefits $ 1,461 $ 1,308
Warranty 289 334
Professional fees 513 202
Unearned revenue 428 169
Related to discontinued operations 490 379
Income taxes 261 274
Marketing expenses 262 292
Other 141 193
------------- ------------
$ 3,845 $ 3,151
============= ============
7
Note 5- Segment Information
Since July of 1999, the Company has organized its continuing 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. The AuntMinnie.com
division includes an Internet portal, intended to be the most comprehensive
Internet site for radiologists and professionals in the medical imaging
industry, and software that enables healthcare clinicians to access medical
images and clinical information at any point of care.
The Company's chief operating decision makers evaluate performance for each
segment based on net income (loss) before income taxes. Lumisys' total assets
include the initial investment in AuntMinnie.com and amounts receivable from
AuntMinnie.com, which are eliminated on consolidation.
8
Elimination of
Intercompany
Lumisys AuntMinnie.com Transactions Consolidated
------- -------------- ------------ ------------
Three months ended September 30, 2000:
Revenues $ 4,261 $ 212 $ --- $ 4,473
Loss from operations $ (295) $ (610) $ --- $ (905)
Nine months ended September 30, 2000
Revenues $ 14,417 $ 338 $ --- $ 14,755
Income (loss) from operations $ 557 $ (2,608) $ --- $ (2,051)
Total assets $ 32,175 $ 1,148 $ (10,043) $ 23,280
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. All remaining operations of Imagraph were terminated. The
principals of Foresight were all employees of Imagraph, one of which was an
officer of the Company until the execution of the technology transfer agreement.
Operating losses through June 3, 1999 and the estimated loss on terminating the
Imagraph business, totaled $4.4 million (net of tax) and consisted primarily of
write-downs of certain assets and accrual of costs related to an unfavorable
sub-lease of the Imagraph facility. Foresight also purchased certain other
assets, consisting primarily of inventory and fixed assets, in exchange for
approximately $250,000, which was included in accounts receivable at June 30,
1999.
Note 7- Subsequent Event
On November 9, 2000, the Company announced that Eastman Kodak Company,
("Kodak"), had entered into an agreement to acquire the Company. As part of the
agreement, Kodak will also acquire the Company's subsidiary, AuntMinnie.com.
The terms of the Agreement and Plan of Merger, dated as of November 9, 2000 (the
"Merger Agreement"), by and among the Company, Kodak and Sunfish Acquisition
Corp, a wholly-owned subsidiary of Kodak ("Sunfish"), provide that Sunfish will
merge with and into the Company (the "Merger"). If the Merger is consummated,
Kodak will acquire all of the capital stock of the Company in exchange for $4.05
in cash for each share, for a total purchase price of approximately $39 million.
The Company will become a subsidiary of Kodak; AuntMinnie.com will remain a
subsidiary of the Company. The Merger is subject to customary closing
conditions, including the approval of the Merger by the Company's stockholders,
as discussed in Part II- Other Information, Item 4 (b).
Note 8. Recent Accounting Pronouncements, SAB 101
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," ("SAB 101") which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. In June 2000, the SEC issued SAB101B, "Second Amendment:
Revenue Recognition in Financial Statements ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company has evaluated SAB
101 and believes that its current revenue recognition is in compliance with the
requirements of SAB101.
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 1999 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 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 more than 6,000 Lumiscan units since its first product was
introduced in 1990.
In 1999, the Company substantially completed its restructuring plan resulting
from the 1997 merger with CompuRAD, a leading provider of software that enables
healthcare clinicians to access medical images and clinical information at any
point of care. The Company currently sells its software products exclusively to
its existing OEM and VAR customers or bundled with its family of laser and CCD
film digitizers and its DesktopCR(TM) products. Utilizing the core technological
competencies and market expertise of the software design and marketing groups,
the Company developed AuntMinnie.com, a comprehensive Internet portal for
radiologists and professionals in the medical imaging industry. AuntMinnie.com
provides 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 has 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. AuntMinnie.com generates revenue
through the sale of corporate sponsorships and advertising on the various web
pages and intends to earn commissions on e-commerce and used equipment
transactions. Currently, all development and marketing expenses are funded by
the Company.
In 1998, the Company introduced its first CR system for use in the medical
market, the ACR-2000 DesktopCR(TM). The DesktopCR(TM) system utilized many of
the design features of the CR system the Company developed for use in the
industrial inspection market in 1996. The DesktopCR(TM) system reads medical or
industrial images from reusable phosphor plates, which replaces the need for
film and film processing. This was followed in 1999 by the second generation
model, the ACR-2000i DesktopCR(TM) with an integrated eraser, allowing users to
automatically erase phosphor plates without removing them from the system. Also
in 1999, the Company introduced the iLuminator, a unique image management system
based upon the ACR-2000i DesktopCR(TM) , providing digital x-ray acquisition
with computed radiography, image viewing, permanent storage of the digital
images, and if required, transmission of these images to local and/or remote
sites. The iLuminator is a self-contained, fully integrated system that allows
the user to completely replace film and chemistry and all their attendant costs
and problems. The Company's CR systems are low-cost, small systems and
particularly suited for low volume environments.
9
In 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. The remaining
operations of Imagraph were discontinued.
On November 9, 2000 EastMan Kodak ("Kodak") Company and Lumisys Incorporated
("Lumisys") entered into an agreement for Kodak to acquire Lumisys. Lumisys will
become a subsidiary of Kodak. AuntMinnie.com, Inc. ("AuntMinnie.com") will
remain a subsidiary of Lumisys. Under the terms of the agreement, Kodak will
acquire all of the Capital stock of Lumisys in exchange for $4.05 per share, or
approximately $39 million in cash. The agreement is subject to regulatory
approvals and to approval by the Lumisys Stockholders.
Results of Operations - Three and nine months ended September 30, 2000 and 1999
Total revenue for the three months ended September 30, 2000 increased 15.4% to
$4.5million from $3.9 million for the three months ended September 30, 1999. The
Desktop CR(TM) units are sold at a higher average sale price than the Digitizer
products. Lumisys sells Desktop CR(TM) products without outside distributors,
which has reduced sales discounts. Desktop CR(TM) accounted for 32.4% of the
products sold during the three months ended September 30, 2000, compared with
24.1% of sales for the three months ended September 30, 1999. Total sales for
the nine months ended September 30, 2000 and 1999 decreased slightly to $14.76
million from $14.81 million. AuntMinnie.com contributed $212,000 and $338,000 to
revenue for the three and nine months ended September 30, 2000. AuntMinnie.com
did not have any revenues in the three or nine months ended September 30, 1999.
Gross profit for the three months ended September 30, 2000 increased to $2.1
million from $1.3 million compared to the same period in 1999. Gross profit
increased for the nine months ended September 30, 2000 to $6.8 million from $6.5
million for the same period in 1999. Gross margin percentage increased to 47.5%
for the three months ended September 30, 2000 from 34.7% for the same period in
1999 and increased to 46.4% for the nine months ended September 30, 2000 from
44.2% for the same period in 1999.
Costs associated with AuntMinnie.com revenue are reported as operating expenses,
which do not affect Gross Profit.
The increase in gross margin for the three and nine month periods ended
September 30, 2000 is primarily due to a change in product mix compared to the
same periods in 1999. Sales of the Desktop CR(TM) units were higher in the
three months ended September 30, 2000 than in the three months ended September
30, 1999. The Desktop CR(TM) units were direct sales with a higher average sales
price than the digitizer units. If sales volume of the Desktop CR(TM) products
continue to increase in the future, the Company believes its gross margins
should continue to improve.
10
Sales, marketing and customer support expenses for the three and nine months
ended September 30, 2000 increased 18.8% and 47.5% to $1.3 million and $3.8
million, respectively, from $1.1 million and $2.6 million for the three and nine
months ended September 30, 1999, respectively. The increase was due primarily to
increased marketing costs of $340,000 and $1.202 million for the nine months
ended September 30, 2000. AuntMinnie.com was developed and launched in the
second half of 1999 and reported only $281,000 of marketing costs through
September 30, 1999. The Company expects its sales and marketing expenses to
increase to further develop and support the CR distribution channel plus
sponsorship and e-commerce revenue for AuntMinnie.com. As a percentage of sales
for the three and nine months ended September 30, 2000, these expenses increased
to 29.0% and 26.0%, respectively, from 28.1% and 17.5% for the three and nine
months ended September 30, 1999, respectively.
Research and development expenses for the three months ended September 30, 2000
increased 12.9% to $684,000 from $606,000 for the three months ended September
30, 1999. Research and development expenses for the nine months ended September
30, 2000 increased 6.2% from the same period in 1999. The increase in the three
month period and nine month periods ended September 30, 2000 is a result of
normal quarterly fluctuations in development expenses for items such as
prototype material and contract labor; in preparation for trade shows
traditionally held in the fourth quarter.
General and administrative expenses increased in the three months ended
September 30, 2000 19.9% to $699,000 from $583,000 for the same period in 1999.
As a percentage of sales, general and administrative expenses increased slightly
to 15.6% from 15.0% for the three months ended September 30, 2000 compared to
1999. For the nine months ended September 30, 2000 and 1999, general and
administrative expenses were $2.1 and $2.0 million respectively. For the nine
months ended September 30, 2000, AuntMinnie.Com general and administrative
expenses were $637,000 more than the same period in 1999. As a percentage of
sales for the nine months ended September 30, 2000, these expenses increased to
14.0% from 13.4% for the same period in the prior year.
Production, content and other website costs for the three and nine months
ended September 30, 2000 were $353,000 and $1,015,000 respectively,
representing 7.9% and 6.8% of total revenues, respectively. These expenses
relate to the AuntMinnie.com internet portal which was developed in the second
half of 1999 and include editorial staff, consultants, engineering and
development expenses. Production, content and other website costs of $122,000
for the three and nine months ended September 30, 1999 were originally
reported in those periods as research and development expense. The Company
expects these expenses to increase in the future as it expands the
functionality of AuntMinnie.com.
The provision for income taxes for continuing operations for the nine months
ended September 30, 1999 was $218,000. The provision for income taxes was
reduced by $333,000 in the three months ended September 30, 1999 to reflect a
loss from operations. No tax provision or benefit was recognized for the three
and nine months ended September 30, 2000 due to the net loss from continuing
operations. The Company has provided a partial valuation allowance against the
balance of its deferred tax assets remaining as of September 30, 2000. If the
Company generates income from continuing operations for the year ending December
31, 2000, the Company expects continuing operations to be subject to an
effective tax rate of approximately 11%.
For the three and nine months ended September 30, 1999, the Company recognized
income of $259,000 net of tax and loss of $4.2 million, respectively. These
primarily non-cash results, related to discontinued operations of the Imagraph
subsidiary. The net of tax loss consisted of operating losses through September
3, 1999, the date of the technology transfer agreement, and the estimated loss
on terminating the Imagraph business, primarily the write-down of certain assets
and accrual of costs related to an unfavorable sub-lease of the Imagraph
facility. This was partially offset by payments received under the technology
transfer agreement with Foresight. The Company expects to recognize income from
the discontinued operations related to royalty payments to be paid by Foresight.
11
Liquidity and Capital Resources
At September 30, 2000, the Company's working capital was $17.8 million. The
Company had cash, cash equivalents and short-term investments of approximately
$14.3 million at September 30, 2000, compared with $16.4 million at December 31,
1999. The decrease is primarily due to operating expenditures and capital
equipment purchases for the AuntMinnie.com Internet portal.
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 December 2001 or later. Thereafter, if cash
generated from operations is insufficient to satisfy the Company's projected
requirements, the Company 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 will be able to sell such securities or obtain such credit
facilities on acceptable terms in the future. The sale of additional equity or
debt securities could result in additional dilution to the Company's
stockholders.
Risk Factors
Significant Fluctuations in Operating Results. The Company reported a loss from
continuing operations for the nine months ended September 30, 2000. There can be
no assurances 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, the incurrence of costs associated with discontinued operations of
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 Communication 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, Software and Internet 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, teleradiology software and Internet products and services for
radiology is uncertain. Current and future competitors are likely to introduce
competing hardware, software and Internet products for radiology, 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 Internet products, 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
CR hardware through the OEM, System Integrator sales channels and direct sales
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. Additionally, the Company has limited experience in marketing,
installing and supporting its software and CR hardware through these sales
channels and direct sales, and there can be no assurance that the Company can
obtain
12
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 Company has limited experience in Internet products and services and there
can be no assurance that AuntMinnie.com will generate significant revenue.
AuntMinnie.com will rely heavily on revenues derived from Internet advertising
and sponsorships under short-term contracts, which are difficult to forecast
accurately and which may prove to be an ineffective means of advertising for our
current and potential customers. AuntMinnie.com's business services, while
costly to develop, may fail to gain market acceptance. The Company has invested
a significant amount of money and resources in the creation of business
services, such as facilitating used imaging equipment sales, but such services
are unproven and may fail to gain market acceptance. Because the market for
these business services is new and evolving, it is difficult to predict the size
of this market and its rate of growth, if any. If the market fails to develop,
develops more slowly than expected or becomes more competitive than is currently
expected, the Company's business, financial condition and results of operations
would be materially adversely affected.
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 hardware and software 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
13
failure could have a material adverse effect on the Company's business and
results of operations. AuntMinnie.com may have difficulty scaling and adapting
existing architecture and infrastructure to accommodate increased traffic and
technology advances. In the future, AuntMinnie.com may be required to make
significant changes to architecture including moving to a completely new
architecture. If AuntMinnie.com is required to switch architectures, the Company
would incur substantial costs and users may experience delays or interruptions
in service. Delays or interruptions in service may cause users to become
dissatisfied with AuntMinnie.com and move to competing providers of online
services. Further, to the extent that demand for AuntMinnie.com's services
increase, the Company will need to expand its infrastructure, including the
capacity of its hardware servers and the sophistication of its software. This
expansion is likely to be expensive and complex and require additional technical
expertise. Any loss of traffic, increased costs, inefficiencies or failures to
adapt to new technologies and the associated adjustments to AuntMinnie.com's
architecture would 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.
Risks Associated With the Internet. The Internet may not prove to be a viable
commercial marketplace for a number of reasons, including the lack of acceptable
security technologies, potentially inadequate development of the necessary
infrastructure, or the lack of timely development and commercialization of
performance improvements.
AuntMinnie.com's operations could be significantly hindered by the occurrence of
a natural disaster or other catastrophic event. AuntMinnie.com's operations are
susceptible to outages due to fire, floods, power loss, telecommunications
failures, break-ins and similar events. In addition, substantially all of
AuntMinnie.com's network infrastructure is located in Tucson, Arizona. The
Company does not have multiple site capacity in the event of any such
occurrence. Despite the Company's implementation of network security measures,
its servers are vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering with the Company's computer systems. The
Company's business interruption insurance may not be sufficient to compensate
the Company for losses that may occur as a result of any of these events. Such
events could have a material adverse effect on the Company's business and
results of operations.
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, 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 and Digident plan 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 affect
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
14
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 the Company 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. However, 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. The Company 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 the Company's competitors will not develop enhancements to, or future
generations of, competitive products that will offer superior price or
performance features that render the Company's 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 the Company's products, and some of
them have in the past produced and marketed such products. While many of these
companies currently purchase products from the Company, the Company 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 the Company. All of these companies
have significantly greater financial, marketing and manufacturing resources than
the Company and would be significant competitors if they decide 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 but 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 Emed Technologies
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 brings
additional value to the Company's CR and digitizer products.
Competition in the Internet portal business is intense and includes other
vertical Internet portals focused on the radiology community such as
Radiology.com, as well as companies offering e-commerce products using the
Internet, such as Neoforma and companies offering content, products and services
to a broader medical market, such as WebMD. 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
15
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, 2000, no customers represented 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, 2000. 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 assurances that
such inventory 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.
Third Party Content. The future success of AuntMinnie.com depends in part on its
ability to aggregate compelling content and deliver that content through its
online properties. Much of the content that attracts users to AuntMinnie.com,
such as news items, continuing medical education ("CME"), industry standards and
regulations, stock quotes and weather reports is licensed from third parties
such as Massachusetts General Physicians Organization, Reuters and The Weather
Channel. Many of AuntMinnie.com's content licenses with third parties are
non-exclusive and extend for a period of less than two years. There can be no
guarantee that such licenses will be renewed upon their expirations or that
other radiology Internet portals will not be able to offer similar or identical
content. If AuntMinnie.com is unable to license or acquire compelling content
for its Internet site from third parties, or if other companies are able to
broadcast content that is similar to or the same as that provided by
AuntMinnie.com, the number of users on AuntMinnie.com may not grow at all or at
a slower rate than anticipated or may decrease, which would decrease advertising
and e-commerce revenue and would have a material adverse effect on the Company's
business 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.
16
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.
Government Regulation. The manufacturing and marketing of the Company's
digitizers, CR products 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 Company's
Sunnyvale facility 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 Company's Tucson facility 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 in the future could have a material
adverse effect on the Company's business, financial condition and results of
operations.
AuntMinnie.com is subject to U.S. and foreign government regulation of the
Internet, the impact of which is difficult to predict. There are currently few
laws or regulations directly applicable to the Internet. The application of
existing laws and regulations to AuntMinnie.com relating to issues such as user
privacy, defamation, pricing, advertising, taxation, sweepstakes, promotions,
content regulation, quality of products and services, and intellectual property
ownership and infringement can be unclear. In addition, AuntMinnie.com will also
be subject to new laws and regulations directly applicable to AuntMinnie.com's
activities. Any existing or new legislation applicable to AuntMinnie.com could
expose the Company to substantial liability, including significant expenses
necessary to comply with such laws and regulations, and dampen the growth in use
of the Internet.
17
AuntMinnie.com posts privacy policies concerning the use and disclosure of user
data. Any failure by the Company to comply with the posted privacy policies
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Due to the global nature of the Internet, it is possible that the governments of
other states and foreign countries might attempt to regulate its transmissions
or prosecute AuntMinnie.com for violations of their laws. AuntMinnie.com might
unintentionally violate such laws, such laws may be modified and new laws may be
enacted in the future. Any such developments could have a material adverse
effect on the Company's business, financial condition and results of operations.
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.
The Company periodically enters into arrangements to offer third-party products,
services or content under the AuntMinnie.com brand or via distribution on
AuntMinnie.com, including stock quotes and trading information. AuntMinnie.com
may be subject to claims concerning these products, services or content by
virtue of AuntMinnie.com's involvement in marketing, branding, broadcasting or
providing access to them, even if AuntMinnie.com does not host, operate,
provide, or provide access to these products, services or content. While the
agreements with these parties often provide that AuntMinnie.com will be
indemnified against such liabilities, such indemnification may not be adequate.
It is also possible that, if any information provided directly by AuntMinnie.com
contains errors or is otherwise negligently provided to users, third parties
could make claims against the Company. Investigating and defending any of these
types of claims is expensive, even to the extent that the claims do not result
in liability.
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 the teleradiology
and health care industry, for PACS and teleradiology products, healthcare
information systems and Internet products and services for the radiology
community. 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.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. 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 fixed income securities with an average maturity
of less than 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, 2000, the fair value of the Company's investment
portfolio would decline by an immaterial amount. The Company has the ability to
hold its fixed income securities until maturity. The Company does not therefore
expect that a sudden change in market interest rates would have any significant
effect on its operating results or cash flows.
Exchange Rate Sensitivity. 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 foreign currency
exchange rates. Lumisys attempts to limit these exposures through operational
strategies and generally has not hedged its foreign currency exposures. At
September 30, 2000, the Company has no purchase commitments denominated in
foreign currencies.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Other Information
(a). Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 2001 Annual Meeting of
Stockholders must provide specified information to the Company between March 10,
2001 and April 9, 2001 (unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended).
(b). On November 9, 2000, the Company filed a report on Form 8-K, pursuant to
Item 5 of such form, and a proxy statement on Schedule 14A, pursuant to Rule
14a-12 of the Exchange Act, each attaching the transaction commencement press
release announcing that Eastman Kodak Company, a New Jersey corporation
("Kodak"), had entered into an agreement to acquire the Company. As part of the
agreement, Kodak will also acquire the Company's subsidiary AuntMinnie.com, a
Delaware corporation. The terms of the Agreement and Plan of Merger, dated as of
November 9, 2000 (the "Merger Agreement"), by and among the Company, Kodak and
Sunfish Acquisition Corp., a newly formed Delaware corporation and wholly-owned
subsidiary of Kodak ("Sunfish"), provide that Sunfish will merge with and into
the Company (the "Merger"). If the Merger is consummated, Kodak will acquire all
of the capital stock of the Company in exchange for $4.05 in cash
19
for each share, for a total purchase price of approximately $39 million. The
Company will become a subsidiary of Kodak and AuntMinnie.com will remain a
subsidiary of the Company. The Merger is subject to customary closing
conditions, including regulatory consents and the approval of the Merger by the
Company's stockholders.
20
In addition, Bala Manian, Ph.D, acting Chief Executive Officer and
Chairman of the Board of the Company ("Manian"), and Phillip Berman, M.D., a
director of the Company ("Berman") have entered into a Stockholder Agreement
with the Company, Kodak and Sunfish, dated as of November 9, 2000 (the
"Stockholder Agreement"). Pursuant to the Stockholder Agreement, Manian (who
owns [5.86%] of the outstanding shares of the Company's common stock),
individually and as trustee of the Manian Revocable Trust and as a general
partner of Saraswati Partners and Berman (who owns [5.02%] of the outstanding
shares of the Company's common stock), individually and as managing member of
the P. Berman Family LLC, which is the general partner of Sequoia Investments
Limited Partnership, have agreed, among other things, to vote their shares of
the Company's common stock to approve the Merger Agreement, the Merger and
related agreements. Their respective obligations to vote in this manner will
terminate upon termination of the Merger Agreement.
There can be no assurances that the necessary regulatory or stockholder
consents will be obtained for the Merger. It is also possible that even if the
consents are obtained the Merger might not occur. If the Merger does occur, it
could be on terms different from those described.
The foregoing description is qualified in its entirety by reference to
(a) the complete text of the Merger Agreement, a copy of which is filed as
Exhibit 2.1 to this Form 10Q and is incorporated by reference herein in its
entirety and (b) the complete text of the Stockholders' Agreement, a copy of
which is filed as Exhibit 9.1 to this Form 10Q and is incorporated by reference
herein in its entirety.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits furnished:
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Merger, dated as
of November 9, 2000, by and among
Lumisys Incorporated, Eastman Kodak
Company and Sunfish Acquisition Corp.
9.1 Stockholder Agreement, dated as of
November 9, 2000, by and among Eastman
Kodak Company, Sunfish Acquisition
Corp., Lumisys Incorporated, Bala S.
Manian., Ph.D., and Phillip Berman, M.D.
99.1 Compensation Agreement, dated April 27,
2000, between Phillip Berman, M.D.,
Lumisys Incorporated and AuntMinnie.com,
Inc.
99.2 Compensation Arrangement, dated May 1,
2000, between Lumisys Incorporated and
Dean MacIntosh
99.3 Compensation Arrangement, dated May 1,
2000, between Lumisys Incorporated and
Duncan Moffat
99.4 Compensation Arrangement, dated May 1,
2000, between Lumisys Incorporated and
John M. Burgess
(b). Reports on Form 8-K:
Filed November 9, 2000 by the Company.
The Company filed no Current Reports on Form 8-K during the
three months ended September 30, 2000.
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.
LUMISYS INCORPORATED
Dated November 14, 2000 By: /s/ Bala S. Manian
--------------------------------------
Dr. Bala S. Manian
Chief Executive Officer
November 14, 2000 /s/ Dean MacIntosh
--------------------------------------
Dean MacIntosh
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
21
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Description
- -------------- -------------------
2.1 Agreement and Plan of Merger, dated as of
November 9, 2000, by and among Lumisys
Incorporated, Eastman Kodak Company and
Sunfish Acquisition Corp.
9.1 Stockholder Agreement, dated as of November
9, 2000, by and among Eastman Kodak Company,
Sunfish Acquisition Corp., Lumisys
Incorporated, Bala S. Manian., Ph.D., and
Phillip Berman, M.D.
27.1 Financial Data Schedule
99.1 Compensation Agreement, dated April 27, 2000,
between Phillip Berman, M.D., Lumisys
Incorporated and AuntMinnie.com, Inc.
99.2 Compensation Arrangement, dated May 1, 2000,
between Lumisys Incorporated and Dean MacIntosh
99.3 Compensation Arrangement, dated May 1, 2000,
between Lumisys Incorporated and Duncan Moffat
99.4 Compensation Arrangement, dated May 1, 2000,
between Lumisys Incorporated and John M. Burgess
22