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 June 30, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 0-26832
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 August 10, 1998, 9,662,894 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 June 30, 1998
and December 31, 1997 3
Consolidated statements of income for the three
and six months ended June 30, 1998 and 1997 4
Consolidated statements of cash flows for the six
months ended June 30, 1998 and 1997 5
Notes to financial statements 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lumisys Incorporated
Consolidated Balance Sheets
(Unaudited)
(In thousands)
June 30, December 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 5,763 $ 7,522
Short-term investments 15,465 17,007
Accounts receivable, net of allowances
of $687 and $657 3,890 4,622
Inventories 3,450 2,892
Deferred tax assets 1,453 1,453
Other current assets 398 316
-------- ----------
Total current assets 30,419 33,812
Property and equipment, net 513 606
-------- --------
$ 30,932 $ 34,418
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,093 $ 1,355
Accrued expenses 2,007 2,967
Merger and related costs 1,182 2,117
-------- --------
Total current liabilities 4,282 6,439
-------- --------
Note payable to related party 138 130
Commitments and contingencies
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; 10,048 and 10,370 shares issued
and outstanding 10 10
Additional paid-in capital 30,623 32,265
Accumulated deficit (4,110) (4,407)
Deferred compensation related to stock options (11) (19)
-------- --------
Total stockholders' equity 26,512 27,849
-------- --------
$ 30,932 $ 34,418
======== ========
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three months ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
Sales $ 5,425 $ 7,180 $ 11,895 $ 14,994
Cost of sales 2,483 3,267 5,367 6,611
-------- -------- -------- --------
Gross profit 2,942 3,913 6,528 8,383
-------- -------- -------- --------
Operating expenses:
Sales and marketing 678 1,240 1,592 2,376
Research and development 1,583 1,757 3,184 3,324
General and administrative 835 1,000 1,785 1,904
-------- -------- -------- --------
Total operating expenses 3,096 3,997 6,561 7,604
-------- -------- -------- --------
Income (loss) from operations (154) (84) (33) 779
Interest income 256 270 518 564
-------- -------- -------- --------
Income (loss) before income taxes 102 186 482 1,343
Provision for income taxes 40 327 188 830
-------- -------- -------- --------
Net income (loss) $ 62 $ (141) $ 297 $ 513
======== ======== ======== ========
Net income (loss) per share
Basic $ 0.01 $ (0.01) $ 0.03 $ 0.05
======== ======== ======== ========
Diluted $ 0.01 $ (0.01) $ 0.03 $ 0.05
======== ======== ======== ========
Weighted average shares
used to compute net
income (loss) per share
Basic 10,083 10,024 10,153 10,031
======== ======== ======== ========
Diluted 10,317 10,024 10,360 10,418
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six months ended
---------------------
June 30, June 30,
1998 1997
-------- -------
Cash flows from operating activities:
Net income $ 297 $ 513
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 159 225
Changes in assets and liabilities:
Accounts receivable, net 732 (1,574)
Inventories (558) (780)
Other assets (82) 126
Accounts payable (262) 614
Accrued expenses (952) 525
Merger and related costs (935) ---
-------- -------
Net cash used by operating activities (1,601) (351)
-------- -------
Cash flows from investing activities:
Proceeds from sale of short-term investments 1,542 ---
Purchases of property and equipment (58) (326)
-------- -------
Net cash provided (used) in investing activities 1,484 (326)
-------- -------
Cash flows from financing activities:
Sale (purchase) of common stock, net (1,642) (402)
Payment on notes receivable from stockholders --- 114
-------- -------
Net cash used by financing activities (1,642) (288)
-------- -------
Net decrease in cash and cash equivalents (1,759) (965)
Cash and cash equivalents at beginning of period 7,522 22,490
-------- -------
Cash and cash equivalents at end of period $ 5,763 $21,525
======== =======
The accompanying notes are an integral part of these financial statements.
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, 1997, 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 June 30, 1998, and the consolidated
statements of income for the three and six months ended June 30, 1998 and
1997, and the consolidated statements of cash flows for the six months ended
June 30, 1998 and 1997, 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 six months ended June 30, 1998,
are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 1998.
Note 2 - Net Income Per Share
The Company adopted SFAS No. 128 ("SFAS 128"), "Earnings Per Share." SFAS 128
requires the presentation of basic and diluted earnings per share for
companies with potentially dilutive securities, such as options. All
historical earnings per share information has been restated as required by
SFAS 128.
Basic earnings per share is computed by dividing income available to common
shareholders 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 per share calculations for the periods presented below (in
thousands):
Three months ended Six months ended
June 30, June 30,
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
Net income (loss) $ 62 $ (141) $ 297 $ 513
====== ====== ====== ======
Weighted average shares outstanding - basic 10,083 10,024 10,153 10,031
Effect of dilutive securities:
Potential common stock
Stock options and warrants 234 --- 207 387
------ ------ ------ ------
Weighted average shares outstanding
- diluted 10,317 10,024 10,360 10,418
====== ====== ====== ======
Note 3 - Comprehensive Income
Effective January 1, 1998, the Company has adopted the pro forma disclosure
requirements of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for the reporting of comprehensive income and its components in a full set of
general-purpose financial statements. 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
June 30, Dec 31,
1998 1997
------- -------
(In thousands)
Inventories:
Raw materials $ 2,644 $ 2,363
Work-in-process 739 586
Finished goods 1,107 1,093
------- -------
4,490 4,042
Less: inventory reserves (1,040) (1,150)
------- -------
$ 3,450 $ 2,892
======= =======
Accrued expenses:
Payroll and related benefits $ 754 $ 1,122
Warranty 464 465
Accrued professional fees 112 401
Unearned revenue 422 979
Other 255 ---
------- -------
$ 2,007 $ 2,967
======= =======
Note 5 - Revenue Recognition
In March 1998, the AICPA issued Statement of Position No. 98-4 ("SOP 98-4")
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition". SOP 98-4 defers, for one year, the application of certain
passages in SOP 97-2 which limit what is considered vendor-specific objective
evidence ("VSOE") necessary to recognize revenue for software licenses on
multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred
provision of SOP 97-2. The Company will determine the impact, if any, the
further guidance will have on current revenue recognition practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a
material impact on revenue recognition during the first half of 1998.
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 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 1997 Annual Report on Form 10-K
and other documents filed by the Company with the Securities and Exchange
Commission.
Overview
Lumisys develops, manufactures and markets a broad product line of laser-based
very high resolution medical film digitizers, charge-coupled device-based
("CCD")film scanners and video digitizer products necessary for converting
analog medical images into diagnostic quality digital formats.
Results of Operations
Total sales for the three months ended June 30, 1998 decreased 24.4% to $5.4
million from $7.2 million for the three months ended June 30, 1997. Total
sales for the six months ended June 30, 1998 decreased 20.7% to $11.9 million
from $15.0 million for the six months ended June 30, 1997. This decrease was
primarily due to lower software sales in 1998 as a result of the Company's
software product strategy change. In November 1997, the Company decided to
sell software products to OEM and VAR customers only, whereas previously the
Company sold software to direct end-user customers as well. OEM and VAR sales
have a longer sales cycle compared to the sales cycle for direct end-user
customers and therefore sales decreased after the change in strategy.
Gross profit for the three months ended June 30, 1998 decreased 24.8% to $2.9
million from $3.9 million for the corresponding period of 1997. Gross margin
decreased in the three month period ended June 30, 1998 to 54.2% from 54.5% in
the same period of 1997. Gross profit for the six months ended June 30, 1998
decreased 22.1% to $6.5 million from $8.4 million for the six months ended
June 30, 1997. Gross margin decreased in the six month period to 54.9% from
55.9%, primarily due to lower software sales for the first two quarters of
1998 compared to the first two quarters of 1997.
Sales and marketing expenses decreased 45.3% in the three months ended June
30, 1998 to $678,000 from $1,240,000 in 1997. As a percentage of sales, these
expenses decreased to 12.5% in 1998 from 17.3% in 1997. Sales and marketing
expenses decreased 33.0% to $1,592,000 for the six months ended June 30, 1998
from $2,376,000 for the same period of 1997. As a percentage of sales, these
expenses decreased to 13.4% in the six months ended June 30, 1998 from 15.9%
in 1997. The decrease for the three and six month periods was primarily due
to the decrease in the Company's sales and marketing personnel as a result of
the strategic change in software product sales.
Research and development expenses decreased 9.9% in the three months ended
June 30, 1998 to $1,583,000 from $1,757,000 in the same quarter of 1997. The
decrease is primarily due to lower software development costs in 1998 compared
to 1997. As a percentage of sales, research and development expenses
increased to 29.2% in the three months ended June 30, 1998 from 24.5% in the
same quarter of 1997. For the six months ended June 30, 1998, research and
development expenses decreased 4.2% to $3,184,000 from $3,324,000 for the six
months ended June 30, 1997. As a percentage of sales, research and
development expenses increased to 26.8% in the six months ended June 30, 1998
from 22.2% in 1997 due to lower sales in 1998 compared to 1997.
General and administrative expenses decreased 16.5% in the three months ended
June 30, 1998 to $835,000 from $1,000,000 in the same quarter of 1997. The
decrease is primarily due to the decrease in the Company's accounting and
administration personnel resulting from combining the digitizer and software
groups' accounting functions. As a percentage of sales, these expenses
increased to 15.4% from 13.9%. General and administrative expenses decreased
6.3% in the six months ended June 30, 1998 to $1,785,000 from $1,904,000 in
the same period of 1997. As a percentage of sales, general and administrative
expenses increased to 15.0% for the six months ended June 30, 1998 from 12.7%
in the six month period ended June 30, 1997. The increase as a percentage of
sales is due to lower sales in 1998 compared to 1997.
The Company recognized a provision for income taxes of $40,000 in the three
months ended June 30, 1998 compared to a provision for income taxes of
$327,000 in the same period of 1997. The Company recognized a provision for
income taxes of $188,000 in the six months ended June 30, 1998 compared to a
provision for income taxes of $830,000 in the same period of 1997. The
Company has provided a partial valuation allowance against the balance of the
deferred tax assets remaining as of June 30, 1998. The Company expects to
continue to be subject to an effective tax rate of approximately 39% for the
remainder of 1998.
Liquidity and Capital Resources
The Company financed its cash used in operating activities of $1.6 million
primarily from the proceeds of the sale of short-term investments which
contributed $1.5 million in the first half of 1998. The use of cash in
operating activities principally resulted from the payment of prior period
accruals.
At June 30, 1998, the Company's working capital was $25.9 million. The
Company cash, cash equivalents and short-term investments of approximately
$21.2 million at June 30, 1998 compared with $24.5 million of cash, cash
equivalents and short-term investments at December 31, 1997. The decrease is
primarily due to the purchase by the Company of 429,400 shares of its Common
Stock.
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.
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 is currently taking steps to address the
impact, if any, of the Year 2000 issue on the operations of the Company.
There can be no assurances that such a review will detect 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 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 is
taking 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. The Company may see increasing customer satisfaction
costs related to these actions over the next few years. The potential impact
on the Company's business, financial condition and results of operations is
not known at this time.
Risk Factors That Could Effect Results of Operations
Significant Fluctuations in Operating Results. 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, shifts in product mix, the incurrence of
acquisition-related costs and general conditions in the healthcare industry
which have reduced capital equipment budgets and delayed or reduced the
adoption of teleradiology, and 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 90 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.
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. In addition, 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. 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 and PACS may slow as capital investment budgets are
reduced, thereby significantly reducing the demand for the Company's products.
New Product Development in Software Products; Uncertainty of Market
Acceptance. The market for PACS and teleradiology software is uncertain.
Current and future competitors are likely to introduce competing 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 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 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 through these new channels.
Additionally, the Company has limited experience in marketing, installing and
supporting its software 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 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
acquisitions 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 in Image Digitizers; Rapid Technological Change;
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 could cause a decline in sales or loss of market acceptance
of the Company's products. In particular, computed radiography ("CR") systems
are currently available and have been sold for medical applications for over
ten years with limited acceptance. In addition, 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 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.
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's business,
financial condition and results of operations. 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 PACS and
teleradiology systems 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, 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
six months, and the time from purchase order to delivery and recognition of
revenue typically ranges from one to six 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 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. To
date, the Company is unaware of any sales made by CLS. 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.
In addition, General Scanning Inc. is expected to introduce a laser-based film
digitizer during 1998. The markets for medical film digitizers incorporating
charge-coupled devices ("CCDs") are highly competitive. The Company faces
competition from companies such as Vidar Systems Inc., Canon Inc., Vision Ten
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 domestic companies, such as Kodak, Imation, Sterling
Diagnostics ("Sterling", formerly the medical group of E.I. DuPont de Nemours
and Company) and General Electric Co. ("GE"), and European companies, such as
Siemens, Philips Electronics N.V. ("Philips") and Agfa, have the technical and
financial ability to design and market digitizer products competitive with the
Company's products, and some of them have in the past produced and marketed
such products. While most 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 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 decided to enter this market.
The markets for medical video image digitizers are also highly competitive.
Competitors in the video digitizer market are Precision Digital Images Corp.,
Epix, Inc. and Matrox Electronic Systems Ltd.
Competition in the OEM markets for PACS and teleradiology software products
and services is also intense and is expected to increase. The Company's
principal competitors in the PACS and teleradiology software market are ISG,
Applicare Medical Imaging B.V., Mitra Imaging Inc., and Access Radiology
Corporation. Furthermore, other major healthcare information and equipment
companies not presently offering competing products may enter the Company's
markets. 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
Internet/Intranet clinical information systems 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.
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 software
industry, and the Company expects that software 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. Although no company currently
represents more than 10% of the Company's revenues, a significant portion of
the Company's net sales is derived from a small number of customers. Large
customers also accounted for a significant portion of the Company's backlog at
June 30, 1998. 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, 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 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
GMP, 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 has taken corrective
action on the FDA's observations and has invited the FDA back for another
inspection. The FDA has not yet re-inspected the Tucson facility.
The Company also relies on 510(k) pre-market notification for its current
internally developed products. Additionally, the Company relies on 510(k)
clearance and the finding by the FDA of substantial equivalence for the Image
Management System (now marketed as IA-2000) technology acquired from Star
Technologies, Inc. in July 1997. The Company believes that its success
depends upon commercial sales of new versions of its PACS and teleradiology
software which may be subject to clearance or approval from the FDA and its
foreign counterparts. There can be no assurance that a similar 510(k)
clearance for any future product or enhancement of an existing product will be
granted or that the process will not be lengthy. If the Company cannot
establish that a product is "substantially equivalent" to certain legally
marketed devices, the 510(k) clearance procedure may be unavailable and the
Company may be required to utilize the longer and more expensive PMA process.
Failure to receive or delays in receipt of FDA clearances or approvals,
including the need for additional data as a prerequisite to clearance or
approval, could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 will be required to obtain certifications necessary
to enable the "CE" mark to be affixed to the Company's products by mid 1998 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 medical device 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. On January 9, 1998, the court
dismissed the state court complaint with leave to amend. On March 31, 1998,
the court dismissed the federal complaint with leave to amend. On May 26,
1998, the state court dismissed plaintiff's first amended complaint with leave
to amend. Plaintiffs have filed a first amended complaint in the federal
action, and a second amended complaint in the state action. Defendants have
filed motions to dismiss both of these complaints. There can be no assurance
that the Company will prevail in this action or that the plaintiffs will not
recover damages.
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 and 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.
Market Risk Disclosure. Lumisys has an investment portfolio of fixed income
that are classified as "available-for-sale securities". These securities,
like all fixed income instruments, are subject to interest rate risk and will
fall in value if market interest rates increase. Lumisys attempts to limit
this exposure by investing primarily in short-term securities.
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.
Year 2000 Issue. 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 is currently
taking steps to address the impact, if any, of the Year 2000 issue on the
operations of the Company. There can be no assurances that such a review will
detect 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 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 is
taking 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. The Company may see increasing customer satisfaction
costs related to these actions over the next few years. The potential impact
on the Company's business, financial condition and results of operations is
not known at this time.
Part 2 - OTHER INFORMATION
Item 1. Legal Proceedings
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. On January 9, 1998, the court
dismissed the state court complaint with leave to amend. On March 31, 1998,
the court dismissed the federal complaint with leave to amend. On May 26,
1998, the state court dismissed plaintiff's first amended complaint with leave
to amend. Plaintiffs have filed a first amended complaint in the federal
action, and a second amended complaint in the state action. Defendants have
filed motions to dismiss both of these complaints. There can be no assurance
that the Company will prevail in this action or that the plaintiffs will not
recover damages.
On July 18, 1997, a third-party filed a complaint in Santa Clara Superior
Court against the Company and one of its officers. The complaint contains
causes of action for liable, defamation, negligent infliction of emotional
distress and punitive damages. The Company and the other defendant vigorously
deny all allegations of wrongdoing and intend to defend themselves
aggressively.
Item 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Stockholders ("Annual Meeting") of the Company was
held on June 9, 1998. The total number of shares of the Company's common
stock, $.001 par value per share, outstanding as of April 20, 1998, the record
date of the Annual Meeting, was 10,107,531. Management of the Company
solicited proxies pursuant to Section 14 of the Securities Exchange Act of
1934, as amended, and Regulation 14A promulgated thereunder for the Annual
Meeting. At the meeting the following proposals were voted upon by the
stockholders as indicated below:
1. To elect two directors to serve until the 2001 annual meeting.
Directors Voted For Withheld
----------------------- --------- --------
Douglas G. DeVivo, Ph.D. 8,049,869 153,711
Matthew D. Miller, Ph.D. 8,042,679 160,901
2. To approve an amendment to the Company's 1995 Stock Option Plan.
Voted For Voted Against Abstained
--------- ------------- ---------
7,535,105 648,585 19,890
3. To approve the Company's 1995 Non-Employee Directors' Stock Option Plan.
Voted For Voted Against Abstained
--------- ------------- ---------
7,533,709 636,037 33,834
4. To ratify the selection of Price Waterhouse LLP as independent
accountants.
Voted For Voted Against Abstained
--------- ------------- ---------
8,029,703 156,735 17,142
Item 5. Other Information
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 Annual Meeting of Stock-
holders must provide specified information to the Company betwee March 10,
1999 and April 9, 1999 (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).
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.
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: August 14, 1998 By: /s/ Douglas G. DeVivo
--------------- ----------------------
Douglas G. DeVivo
Chief Executive Officer
August 14, 1998 /s/ Craig L. Klosterman
--------------- -----------------------
Craig L. Klosterman
Chief Operating and Chief
Financial Officer
17
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LUMISYS
INCORPORATED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1998 AND CONSOLIDATED
STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 DEC-31-1997
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<SECURITIES> 15465 17007
<RECEIVABLES> 4577 5279
<ALLOWANCES> 687 657
<INVENTORY> 3450 2892
<CURRENT-ASSETS> 1851 1769
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<TOTAL-ASSETS> 30932 34418
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<SALES> 5425 11895
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