UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 9, 1998, 9,651,597 shares of the registrant's Common Stock,
$.001 par value, were outstanding.
Lumisys Incorporated
Index
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets at September 30, 1998
and December 31, 1997 3
Consolidated statements of income for the three
and nine months ended September 30, 1998 and 1997 4
Consolidated statements of cash flows for the nine
months ended September 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 - 18
Part II. OTHER INFORMATION
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, except per share amounts)
Sept. 30, Dec. 31,
1998 1997
--------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 5,697 $ 7,522
Short-term investments 14,023 17,007
Accounts receivable, net of allowances
of $703 and $657 3,818 4,622
Inventories 3,593 2,892
Deferred tax assets 1,453 1,453
Other current assets 290 316
--------- --------
Total current assets 28,874 33,812
Property and equipment, net 571 606
--------- --------
$29,445 $34,418
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,163 $ 1,355
Accrued expenses 2,077 2,967
Merger and related costs 903 2,117
--------- --------
Total current liabilities 4,143 6,439
--------- --------
Note payable to related party 142 130
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; 9,652 and 10,370 shares issued
and outstanding 10 10
Additional paid-in capital 29,093 32,265
Accumulated deficit (3,935) (4,407)
Deferred compensation related to stock options (8) (19)
--------- --------
Total stockholders' equity 25,160 27,849
--------- --------
$29,445 $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 Nine months ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Sales $ 5,756 $ 7,947 $17,651 $22,941
Cost of sales 2,599 3,477 7,966 10,088
--------- --------- --------- ---------
Gross profit 3,157 4,470 9,685 12,853
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 999 1,095 2,592 3,471
Research and development 1,361 1,615 4,545 4,939
General and administrative 724 1,440 2,509 3,344
--------- --------- --------- ---------
Total operating expenses 3,084 4,150 9,646 11,754
--------- --------- --------- ---------
Income from operations 73 320 39 1,099
Interest income 213 271 731 835
--------- --------- --------- ---------
Income before income taxes 286 591 770 1,934
Provision for income taxes 110 395 298 1,225
--------- --------- --------- ---------
Net income $ 176 $ 196 $ 472 $ 709
========= ========= ========= =========
Net income per share
Basic $ 0.02 $ 0.02 $ 0.05 $ 0.07
========= ========= ========= =========
Diluted $ 0.02 $ 0.02 $ 0.05 $ 0.07
========= ========= ========= =========
Weighted average shares
used to compute net
income per share
Basic 9,742 10,119 10,016 10,056
========== ========= ========= =========
Diluted 9,835 10,332 10,185 10,306
========== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine months ended
-------------------------
Sept. 30, Sept. 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 472 $ 711
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 239 371
Changes in assets and liabilities:
Accounts receivable, net 804 (1,036)
Inventories (701) (464)
Other assets 26 303
Accounts payable (192) 510
Accrued expenses (878) 973
Merger and related costs (1,214) (151)
----------- -----------
Net cash provided (used) by operating activities (1,444) 1,217
----------- -----------
Cash flows from investing activities:
Proceeds from sale of short-term investments 2,984 ---
Purchases of property and equipment (193) (408)
----------- -----------
Net cash provided (used) in investing activities 2,791 (408)
----------- -----------
Cash flows from financing activities:
Sale (purchase) of common stock, net (3,172) (389)
Payment on notes receivable from stockholders --- 114
----------- -----------
Net cash used by financing activities (3,172) (275)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (1,825) 534
Cash and cash equivalents at beginning of period 7,522 22,490
----------- -----------
Cash and cash equivalents at end of period $ 5,697 $23,024
=========== ===========
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 September 30, 1998, and the consolidated
statements of income for the three and nine months ended September 30, 1998
and 1997, and the consolidated statements of cash flows for the nine months
ended September 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 nine months ended September 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
stockholders by the weighted-average common shares outstanding for the period.
Diluted earnings per share reflects the weighted-average common shares
outstanding plus the potential effect of dilutive securities which are
convertible to common shares such as options, warrants, convertible debt and
preferred stock.
The following is a reconciliation between the components of the basic and
diluted net income per share calculations for the periods presented below (in
thousands):
Three months ended Nine months ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Net income $ 176 $ 196 $ 472 $ 709
========= ========= ========= =========
Weighted average shares
outstanding - basic 9,742 10,119 10,016 10,056
Effect of dilutive securities:
Stock options and warrants 93 213 169 250
--------- --------- --------- ---------
Weighted average shares
outstanding - diluted 9,835 10,332 10,185 10,306
========= ========= ========= =========
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
Sept. 30, Dec. 31,
1998 1997
--------- --------
(In thousands)
Inventories:
Raw materials $ 2,746 $ 2,363
Work-in-process 970 586
Finished goods 975 1,093
--------- --------
4,691 4,042
Less: inventory reserves (1,098) (1,150)
--------- --------
$ 3,593 $ 2,892
========= ========
Accrued expenses:
Payroll and related benefits $ 779 $ 1,122
Warranty 464 465
Accrued professional fees 6 401
Unearned revenue 422 979
Other 406 ---
--------- --------
$ 2,077 $ 2,967
========= ========
Note 5 - Revenue Recognition
In October, 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software
Revenue Recognition", which the Company adopted for transactions January 1,
1998. 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 nine months 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 September 30, 1998 decreased 27.6% to
$5.8 million from $7.9 million for the three months ended September 30, 1997.
Total sales for the nine months ended September 30, 1998 decreased 23.1% to
$17.7 million from $22.9 million for the nine months ended September 30, 1997.
These decreases were primarily due to lower software sales in 1998 as a result
of the Company's change in its software sales strategy. 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 substantially longer sales cycle compared to
those for direct end-user customers; additionally, to date the Company has not
been very successful in obtaining software sourcing agreements with OEMs.
Gross profit for the three months ended September 30, 1998 decreased 29.4% to
$3.2 million from $4.5 million for the corresponding period of 1997. Gross
margin decreased in the three month period ended September 30, 1998 to 54.8%
from 56.2% in the same period of 1997. Gross profit for the nine months ended
September 30, 1998 decreased 24.6% to $9.7 million from $12.9 million for the
nine months ended September 30, 1997. Gross margin decreased in the nine
month period to 54.9% from 56.0%, primarily due to lower software sales for
the first three quarters of 1998 compared to the first three quarters of 1997.
Sales and marketing expenses decreased 8.8% in the three months ended
September 30, 1998 to $999,000 from $1.1 million in 1997. As a percentage of
sales, these expenses increased to 17.4% in 1998 from 13.8% in 1997. Sales
and marketing expenses decreased 25.3% to $2.5 million for the nine months
ended September 30, 1998 from $3.4 million for the same period of 1997. As a
percentage of sales, these expenses decreased to 14.7% in the nine months
ended September 30, 1998 from 15.1% in 1997. The decrease for the three and
nine 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 15.7% in the three months ended
September 30, 1998 to $1.4 million from $1.6 million in the same quarter of
1997. The decrease is primarily due to lower software development costs and
lower prototype material costs in 1998 compared to 1997. As a percentage of
sales, research and development expenses increased to 23.6% in the three
months ended September 30, 1998 from 20.3% in the same quarter of 1997
primarily as a result of lower sales offset in part by the decrease in
absolute dollars. For the nine months ended September 30, 1998, research and
development expenses decreased 8.0% to $4.5 million from $4.9 million for the
nine months ended September 30, 1997. As a percentage of sales, research and
development expenses increased to 25.7% in the nine months ended September 30,
1998 from 21.5% in 1997 due primarily to lower sales in 1998 compared to 1997.
General and administrative expenses decreased 49.7% in the three months ended
September 30, 1998 to $724,000 from $1.4 million in the same quarter of 1997.
As a percentage of sales, these expenses decreased to 12.6% from 18.1%. 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. General and administrative expenses decreased
25.0% in the nine months ended September 30, 1998 to $2.5 million from $3.3
million in the same period of 1997. As a percentage of sales, general and
administrative expenses decreased to 14.2% for the nine months ended September
30, 1998 from 14.6% in the nine month period ended September 30, 1997.
The Company recognized a provision for income taxes of $110,000 in the three
months ended September 30, 1998 compared to a provision for income taxes of
$395,000 in the same period of 1997. The Company recognized a provision for
income taxes of $298,000 in the nine months ended September 30, 1998 compared
to a provision for income taxes of $1.2 million 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 September 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 $1.4 million
primarily from the proceeds of the sale of short-term investments which
contributed $3.0 million in the first three quarters of 1998. The use of cash
in operating activities principally resulted from the payment of prior period
accruals.
At September 30, 1998, the Company's working capital was $24.7 million. The
Company had cash, cash equivalents and short-term investments of approximately
$19.7 million at September 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 760,000 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.
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 is currently expending resources to review its
products and services, as well as its internal use software in order to
identify and modify those products, services and systems that are not Year
2000 compiant. The costs associated with this effort are not incremental to
the Company, but represents a reallocation of existing resources. In
addition, the Company believes any modifications deemed necessary will be made
on a timely basis and does not believe that the cost of such modifications
will have a material effect on the Company's operating results.
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. The Company is in the process of evaluating the need for
contingency plans with respect to Year 2000 requirements. The necessity of
any contingency plan must be evaluated on a case-by-case basis and will vary
considerably in nature depending on the Year 2000 issue it may need to
address.
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 Picture Archiving and Communications Systems
("PACS") may slow as capital investment budgets are reduced, thereby
significantly reducing the demand for the Company's products.
New Product Development in Hardware and Software Products; Uncertainty of
Market Acceptance. The market for PACS and teleradiology software is
uncertain. Current and future competitors are likely to introduce competing
hardware and software, making it difficult to predict the rate at which the
market will grow, if at all, or the rate at which new or increased competition
will result in market saturation. If the market for such software fails to
grow or grows more slowly than anticipated, the Company's business, financial
condition and results of operations would be materially adversely affected.
The Company expects that the sales cycle for PACS and teleradiology software
and its new computed radiography ("CR") hardware through the OEM and System
Integrator sales channels will be longer than that for its other existing
hardware products. Accordingly, the Company's quarterly revenues and
operating results may be subject to greater fluctuation as the Company begins
to market and sell PACS and teleradiology software through these new channels.
Additionally, the Company has limited experience in marketing, installing and
supporting its software and CR hardware through these sales channels, and
there can be no assurance that the Company can obtain the necessary resources
to market, install and support its PACS and teleradiology software and CR
hardware in an efficient, cost-effective and competitive manner. The failure
of PACS and teleradiology software to achieve market acceptance for any reason
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Significant Risks Associated with Acquisitions. The integration of any
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; Rapid Technological Change; Risk in Delays of Product
Development. The market for the Company's products is characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's future success will
depend upon its ability to enhance its current products, to develop and
introduce new products that keep pace with technological developments and to
respond to evolving customer requirements. Any failure by the Company to
anticipate or respond adequately to technological developments by its
competitors or to changes in customer requirements, or any significant delays
in product development or introduction, could result in a loss of
competitiveness or revenues. In the past, the Company has experienced delays
in the development and introduction of new products and product enhancements,
and there can be no assurance that the Company will not experience such delays
in the future. In addition, new product introductions or enhancements by the
Company's competitors or the use of other technologies that do not depend on
film digitization 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.
Competition in the CR market is well established and includes Fuji, Agfa and
Kodak. Furthermore, other healthcare and non-healthcare equipment companies
not presently offering competing products may enter the CR market. Increased
competition could result in price reduction, reduced gross margins and loss of
market share, any of which could materially adversely effect the Company's
business, financial condition and results of operations. In addition, many of
the Company's competitors and potential competitors have significantly greater
financial, technical, product development, marketing and other resources and
market recognition than the Company in the CR area. Many of the Company's
competitors also currently have, or may develop or acquire, substantial
installed customer bases in the healthcare industry. As a result of these
factors, the Company's competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their products
than the Company. There can be no assurances that the Company will be able to
compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a materially adverse
effect on its business, financial condition or results of operations.
Competition in the machine vision and scientific markets for frame grabbers
and software is well established and includes Matrox, Imaging Technologies and
Integral Technologies. 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 machine vision and scientific imaging areas. 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 industry, and
the Company expects that its products may be increasingly subject to third-
party infringement claims as the number of competitors in the Company's
industry segment grows and the functionality of systems overlap. Although the
Company believes that its systems and applications do not infringe upon the
proprietary rights of third-parties, there can be no assurance that third-
parties will not assert infringement claims against the Company in the future,
that the Company would prevail in any such dispute or that a license or
similar agreement will be available on reasonable terms in the event of an
unfavorable ruling on any such claim. In addition, any such claim may require
the Company to incur substantial litigation expenses or subject the Company to
significant liabilities and could have a material adverse effect on the
Company's business, financial condition and results of operations.
Customer Concentration; Reliance on OEMs. 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
September 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, CR product, video board and software products are subject to
extensive government regulation in the United States and in other countries,
and the process of obtaining and maintaining required regulatory approvals is
lengthy, expensive and uncertain. If a medical device manufacturer can
establish that a newly developed device is "substantially equivalent" to a
device that was legally marketed prior to May 1976, the date on which the
Medical Device Amendments of 1976 were enacted, or to a device the FDA found
to be substantially equivalent to a legally marketed pre-1976 device, the
manufacturer may seek marketing clearance from the FDA to market the device by
filing a 510(k) premarket notification. The 510(k) premarket notification
must be supported by appropriate data establishing the claim of substantial
equivalence to the satisfaction of the FDA. Receipt of 510(k) clearance
normally takes at least three months, but may take much longer and may require
the submission of clinical safety and efficacy data to the FDA. All of the
Company's laser-based film digitizers, the CCD-based film digitizer, CR
product and software products that are commercially available have received
510(k) clearance. There can be no assurance that 510(k) clearance for any
future product or any modification of an existing product will be granted, or
that the process will not be unduly lengthy. In the future, the FDA may
require manufacturers of certain medical devices to engage in a more thorough
and time consuming approval process than the 510(k) process, which could have
a material adverse effect on the Company's business and results of operations.
The Company is also required to register as a Class II medical device
manufacturer with the FDA and state agencies, such as the California
Department of Health Services ('CDHS'). As such, the Company may be inspected
on a routine basis by both the FDA and the CDHS for compliance with the FDA's
Good Manufacturing Practices ("GMP"), Quality Standards Regulations ("QSR")
and other applicable regulations. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner
with respect to manufacturing, reporting of product malfunctions and other
matters. If the FDA believes that a company is not in compliance with federal
regulatory requirements, it can institute proceedings to detain or seize
products, issue a recall, prohibit marketing and sales of the company's
products and assess civil and criminal penalties against the company, its
officers or its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business and results of
operations. The Sunnyvale facility of the Company was inspected by the CDHS
and the FDA in 1996 and was found to be compliant with both the CDHS's and
FDA's GMP regulations. In the second quarter of 1998 the Tucson facility of
the Company was inspected by the FDA and was found to have some items not in
compliance with the FDA's GMP regulations. The Company 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 Pre-Market
Approval ("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 has been required to obtain certifications necessary
to enable the "CE" mark to be affixed to the Company's products to continue
commercial sales in member countries of the European Union. The CE mark is an
international symbol of quality and complies with applicable European
information device equipment directives. The Company has obtained this CE
certification. Failure to comply with foreign regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Litigation. On July 9, 1997 and July 10, 1997 two securities class action
lawsuits were filed in the Superior Court of the State of California, County
of Santa Clara, and the United States District Court for the Northern District
of California against the Company, several of its current and former officers
and directors, and its underwriters. The complaints are brought on behalf of
all persons who purchased the Company's common stock between November 15, 1995
and July 11, 1996. The complaints allege that defendants made material false
statements and omitted to disclose material information concerning the
Company's actual and expected performance, causing the price of the Company's
stock to be artificially inflated. The federal complaint alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934; the state
complaint alleges claims under California's securities statutes. Neither
complaint specifies the amount of damages sought. The Company and the other
defendants deny all allegations of wrongdoing. 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
securities 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 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: November 12, 1998 By: /s/ Phillip Berman
----------------------
Phillip Berman, M.D.
President and
Chief Executive Officer
November 12, 1998 /s/ Dean MacIntosh
----------------------
Dean MacIntosh
Chief Financial Officer
And Vice President
of Finance
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LUMISYS
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STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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