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 March 31, 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 May 13, 1998, 10,123,203 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 March 31,
1998 and December 31, 1997 3
Consolidated statements of income for the
three months ended March 31, 1998 and 1997 4
Consolidated statements of cash flow for the
three months ended March 31, 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 17 - 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lumisys Incorporated
Consolidated Balance Sheets
(Unaudited)
(In thousands)
March 31, December 31,
1998 1997
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,937 $ 7,522
Short-term investments 17,027 17,007
Accounts receivable, net of allowances
of $672 and $401 3,507 4,622
Inventories 3,286 2,892
Deferred tax assets 1,453 1,453
Other current assets 333 316
------- -------
Total current assets 31,543 33,812
Property and equipment, net 694 606
------- -------
$32,237 $34,418
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,339 $ 1,355
Accrued expenses 2,433 2,967
Merger and related costs 1,654 2,117
------- -------
Total current liabilities 5,426 6,439
------- -------
Note payable to related party 134 130
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; 10,065 and 10,370 shares issued
and outstanding 10 10
Additional paid-in capital 30,852 32,265
Accumulated deficit (4,170) (4,407)
Deferred compensation related to stock options (15) (19)
------- -------
Total stockholders' equity 26,677 27,849
------- -------
$32,237 $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
-------------------------
March 31, March 31,
1998 1997
----------- -----------
Sales $ 6,472 $ 7,814
Cost of sales 2,884 3,344
----------- -----------
Gross profit 3,588 4,470
----------- -----------
Operating expenses:
Sales and marketing 914 1,136
Research and development 1,600 1,567
General and administrative 950 904
----------- -----------
Total operating expenses 3,464 3,607
----------- -----------
Income from operations 124 863
Interest income 261 294
----------- -----------
Income before income taxes 385 1,157
Provision for income taxes 148 503
----------- -----------
Net income $ 237 $ 654
=========== ===========
Net income per share
Basic $ 0.02 $ 0.07
=========== ===========
Diluted $ 0.02 $ 0.06
=========== ===========
Weighted average shares used to
compute net income per share
Basic 10,223 10,038
=========== ===========
Diluted 10,402 10,464
=========== ===========
The accompanying notes are an integral part of these financial
statements.
Lumisys Incorporated
Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
Three months ended
-------------------------
March 31, March 31,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 237 $ 654
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 80 92
Changes in assets and liabilities:
Accounts receivable 1,115 (1,355)
Inventories (394) 163
Other assets (17) 44
Accounts payable (16) (94)
Accrued expenses (530) 590
Merger and related costs (463) ---
----------- -----------
Net cash provided by operating
Activities 12 94
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (20) ---
Purchases of property and equipment (164) (187)
----------- -----------
Net cash used in investing activities (184) (187)
----------- -----------
Cash flows from financing activities:
Proceeds from sale (purchase) of
common stock, net (1,413) 32
----------- -----------
Net cash provided by financing
Activities (1,413) 32
----------- -----------
Net decrease in cash and cash
Equivalents (1,585) (61)
Cash and cash equivalents at
beginning of period 7,522 22,490
----------- -----------
Cash and cash equivalents
at end of period $ 5,937 $22,429
=========== ===========
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.
On November 25, 1997, the Company merged with CompuRAD, Inc.
("CompuRAD"). Such merger was accounted for as a pooling-of-
interests. Accordingly, the consolidated historical financial
statements for all periods presented combine the financial
results of Lumisys and CompuRAD.
The consolidated balance sheet as of March 31, 1998, and the
consolidated statements of income and of cash flows for the three
months ended March 31, 1998 and 1997 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 months ended March 31,
1998, are not necessarily indicative of the results to be
expected for the entire fiscal year ending December 31, 1998 or
any future period.
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 March 31,
1998 1997
----------- ----------
Net income $ 237 $ 654
=========== ==========
Weighted average shares
outstanding - basic 10,223 10,038
Effect of dilutive securities:
Potential common stock
Stock options and warrants 179 426
----------- ----------
Weighted average shares
outstanding - diluted 10,402 10,464
=========== ==========
For the three months ended March 31, 1998 options for 434,688 shares of common
stock is considered anti-dilutive and is excluded from the calculation of
dilutive net income per share.
Note 3 - Composition of Certain Financial Statement Amounts
March 31, December 31,
1998 1997
----------- ----------
(In thousands)
Inventories:
Raw materials $ 2,856 $ 2,363
Work-in-process 770 586
Finished goods 721 1,093
----------- ----------
4,347 4,042
Less: inventory reserves (1,061) (1,150)
----------- ----------
$ 3,286 $ 2,892
=========== ==========
Accrued expenses:
Payroll and related benefits $ 783 $ 1,122
Warranty 464 465
Accrued professional fees 413 401
Unearned revenue 290 979
Other 483 ---
----------- ----------
$ 2,433 $ 2,967
=========== ==========
Note 4 - Revenue Recognition
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Positions No. 97-2
provides guidance for recognizing revenue on software
transactions and supersedes SOP 91-1 "Software 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 bo 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 quarter of 1996.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Lumisys designs, manufactures and markets an integrated suite of
hardware and software products for digitizing, networking,
archiving, routing and displaying medical images in a PACS and
teleradiology environment. The Company offers laser and CCD x-
ray film digitizers, video frame digitizers, and software to
enable health care organizations to capture, store, distribute
and display medical images over LANs and WANs.
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.
Results of Operations
Total sales for the first quarter of 1998 decreased 17.2% to $6.5
million from $7.8 million for the first quarter of 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 first quarter of 1998 decreased 19.7% to
$3.6 million from $4.5 million for the corresponding period of
1997. Gross margin decreased to 55.4% in the first quarter of
1998 from 57.2% in the first quarter of 1997 primarily due to
lower margins in software products as a result of lower software
sales for the first quarter of 1998 compared to the first quarter
of 1997.
Sales and marketing expenses decreased 19.5% in the first quarter
of 1998 to $914,000 from $1,136,000 in the first quarter of 1997.
The decrease 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. As a percentage of sales, these
expenses decreased slightly to 14.1% in the first quarter of 1998
from 14.5% in the first quarter of 1997.
Research and development expenses increased 2.1% in the first
quarter of 1998 to $1,600,000 from $1,567,000 in the same quarter
of 1997. As a percentage of sales, research and development
expenses increased to 24.7% in the first quarter of 1998 from
20.0% in the same quarter of 1997, as a result of lower revenues.
General and administrative expenses increased 5.1% in the first
quarter of 1998 to $950,000 from $904,000 in the first quarter of
1997. As a percentage of sales, general and administrative
expenses increased to 14.7% in the first quarter of 1998 from
11.6% in the first quarter of 1997 as a result of lower revenues.
The Company recognized a provision for income taxes in the first
quarter of 1998 of $148,000 compared with a provision of $503,000
in the corresponding period of 1997. The Company has provided a
partial valuation allowance against the balance of the deferred
tax assets remaining as of March 31, 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 has financed its activities primarily from net cash
provided by operations, which contributed $12,000 in the first
quarter of 1998 and $94,000 in the same period of 1997.
At March 31, 1998, the Company's working capital was $26.1
million. The Company had cash, cash equivalents and short-term
investments of approximately $23.0 million at March 31, 1998,
compared with $24.5 million cash, cash equivalents and short-term
investments at December 31, 1997. The decrease is primarily due
to the purchase by the Company of 344,000 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.
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 effected. 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 companiess' 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, digital radiography ("DR"), 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 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. A new company, CLS
entered the market in 1996 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. A significant portion
of the Company's net sales is derived from a small number of
customers. In 1995, 1996, and 1997, there were no companies that
accounted individually for more than 10% of the Company's
revenues. Large customers accounted for a significant portion of
the Company's backlog at March 31, 1997. 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 Company was inspected by the FDA in 1996 and was
found to be compliant with the FDA's GMP regulations but has not
been inspected by CDHS to date.
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
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. In Europe, 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
not yet obtained this CE certification. The Company is currently
working towards this certification, but such approval by mid-1998
is not assured. 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 class action
complaints were filed in the Superior Court of the State of
California, County of Santa Clara, and the U.S. District Court
for the Northern District of California, respectively, 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
during the putative class period, November 15, 1995 to July 11,
1996. The complaints allege that, during the class period,
defendants made material misstatements and omitted to disclose
material information concerning the Company's actual and expected
performance and results, causing the price of the Company's
Common Stock to be artificially inflated. The federal complaint
alleges claims under Sections 10(b) and 20(a) of the Exchange
Act, and SEC Rule 10b-5 promulgated thereunder; the state
complaint alleges claims under California state law. Neither the
federal nor the state complaint specifies the amount of damages
sought. The Company and the other defendants vigorously deny all
allegations of wrongdoing, and intend to defend themselves
aggressively. On January 9, 1998, the Santa Clara Superior Court
dismissed the State complaint in part with prejudice and in part
with leave to amend. Plaintiff has filed an amended complaint in
State court and on March 23, 1998, defendants filed a demurer to
the amended complaint. On March 6, 1998, the federal court
dismissed the federal complaint with leave to amend. 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. The Company 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. The Company attempts to limit this exposure by
investing primarily in short-term securities.
From time to time, the Company makes certain capital equipment or
other purchases denominated in foreign currencies. As a result,
the Company's cash flows and earnings are exposed to fluctuations
in interest rates and foreign currency exchange rates. The
Company 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.
Part 2 - OTHER INFORMATION
Item 1. Legal Proceedings
On July 9, 1997 and July 10, 1997, two class action complaints
were filed in the Superior Court of the State of California,
County of Santa Clara, and the U.S. District Court for the
Northern District of California, respectively, 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
during the putative class period, November 15, 1995 to July 11,
1996. The complaints allege that, during the class period,
defendants made material misstatements and omitted to disclose
material information concerning the Company's actual and expected
performance and results, causing the price of the Company's
Common Stock to be artificially inflated. The federal complaint
alleges claims under Sections 10(b) and 20(a) of the Exchange
Act, and SEC Rule 10b-5 promulgated thereunder; the state
complaint alleges claims under California state law. Neither the
federal nor the state complaint specifies the amount of damages
sought. The Company and the other defendants vigorously deny all
allegations of wrongdoing, and intend to defend themselves
aggressively. On January 9, 1998, the Santa Clara Superior Court
dismissed the State complaint in part with prejudice and in part
with leave to amend. Plaintiff has filed an amended complaint in
State court and on March 23, 1998, defendants filed a demurer to
the amended complaint. On March 6, 1998, the federal court
dismissed the federal complaint with leave to amend. 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 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: May 15, 1998 By:/s/ Douglas G. DeVivo
-----------------------
Douglas G. DeVivo
Chief Executive Officer
May 15, 1998 /s/ Craig L. Klosterman
-----------------------
Craig L. Klosterman
Chief Operating and
Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LUMISYS
INCORPORATED CONSOLIDATED BALANCE SHEETS AND mARCH 31, 1998 AND CONSOLIDATED
STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5937
<SECURITIES> 17027
<RECEIVABLES> 4179
<ALLOWANCES> 672
<INVENTORY> 3286
<CURRENT-ASSETS> 1786
<PP&E> 1625
<DEPRECIATION> 931
<TOTAL-ASSETS> 32237
<CURRENT-LIABILITIES> 5426
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 26667
<TOTAL-LIABILITY-AND-EQUITY> 32237
<SALES> 6472
<TOTAL-REVENUES> 6472
<CGS> 2884
<TOTAL-COSTS> 2884
<OTHER-EXPENSES> 3464
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (261)
<INCOME-PRETAX> 385
<INCOME-TAX> 148
<INCOME-CONTINUING> 237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
