UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
/ / 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 or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
______________________________
225 Humboldt Court
Sunnyvale, CA 94089
(408)-733-6565
(address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
______________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $0.001 par value
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. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X /
As of March 12, 1999, there were issued and outstanding 9,579,390 shares
of Common Stock; the aggregate market value of the shares of such stock
held by nonaffiliates of the registrant was $24,110,505 as of the same
date, assuming solely for purposes of this calculation that all
directors and executive officers of the Registrant are "affiliates".
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
Documents Incorporated By Reference
Portions of Lumisys Incorporated Proxy Statement for its Annual
Stockholders Meeting to be held on June 17, 1999 are incorporated by
reference into Part III of this report.
PART I.
Item 1 Business
General
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to the Company's future plans,
objectives, expectations and intentions. These statements may be
identified by the use of words such as "expects," "anticipates,"
"intends," "plans" and similar expressions. 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 in the sections
entitled "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and those discussed in
other reports filed with the Securities and Exchange Commission.
Lumisys Incorporated ("Lumisys" or the "Company") designs, manufactures
and markets computed radiography ("CR") systems that scan medical or
industrial images from a reusable phosphor plate and a family of
precision digitizers that convert medical images on film or video into
digital format. Once in digital form, the medical images can be stored,
transmitted, viewed, enhanced, manipulated and printed within a medical
imaging network. The Company currently offers a comprehensive family of
products for digitizing medical images under the Lumiscan label and
video images under the Imascan label. These CR and film digitizers
process images from all commercially available medical imaging
modalities, including x-ray, computed tomography ("CT"), magnetic
resonance imaging ("MRI"), ultrasound and nuclear medicine. The Company
is the leading supplier of laser-based film digitizers, with sales of
approximately 5,000 Lumiscan units since its first product was
introduced in 1990. The Company also offers high quality board-level
digitization and compression products for the capture of video images,
which have applications in medical imaging as well as in scientific and
industrial inspection and multimedia imaging.
In 1998, the Company introduced a CR system for use in the medical
market. The medical CR system utilized many of the design features of
the CR system the Company developed for use in the industrial inspection
market in 1996. The CR system reads medical or industrial images from
reusable phosphor plates, replacing the need for film and film
processing. The Company's CR system is a low cost, small system and is
particularly suited for low volume environments.
Lumisys intends to maintain and enhance its market leadership by
leveraging its reputation for high quality, reliable and cost-effective
products, broadening its product lines through internal product
development, acquiring complementary businesses or technologies and
penetrating new geographic markets. The Company sells its products
primarily to original equipment manufacturers ("OEMs") and value added
resellers ("VARs"), who then integrate the Company's products into
teleradiology and Picture Archiving and Communication Systems ("PACS")
and mini-PACS networks. Lumisys has established close working
relationships with the leading suppliers of these systems including
Access Radiology, Agfa, GE, Kodak and Philips.
In November 1997, Lumisys merged with CompuRAD, a leading provider of
software that enables healthcare clinicians to access medical images and
clinical information at any point of care. CompuRAD pioneered the use
of personal computer software in the point-to-point, on call
teleradiology market, with the introduction of its PC Teleradiology
product.
As part of a restructuring of the software group, the Company no longer
sells through a direct sales force. The Company currently sells its
software products exclusively to its existing OEM and VAR customers. In
1998, the Company began bundling digitizer software with its family of
laser and Charge Coupled Device ("CCD") film digitizers and CR software
with its new ACR-2000 product.
Industry Background
The use of medical images to diagnose and treat diseases and injuries
has been an important medical tool since the invention of x-ray
technology and the emergence of diagnostic radiology as a medical
specialty. Today, radiologists review and interpret images from a
variety of imaging modalities, including coventional, plain-film x-rays,
CT, MRI, ultrasound and nuclear medicine. These modalities are used in
a range of different applications requiring specialized equipment to
produce images on film or video displays. Medical imaging has reduced
the need for exploratory surgical procedures and has enabled clinicians
to make faster and more precise diagnoses and prescribe more targeted
courses of treatment. Medical imaging is used in all stages of the
patient management cycle, from screening to diagnosis, treatment and
post-treatment assessment.
The healthcare industry in the United States continues to change
dramatically in response to the escalating costs associated with medical
products and services. Continuing emphasis on lowering costs and
optimizing resources has encouraged the healthcare industry to evolve
toward managed regional healthcare systems. These changes in the
healthcare industry are having a profound impact on the practice of
radiology. In the past, radiologists were located in a medical facility
close to the patient where they performed examinations and interacted
face-to-face with the local clinician and the patient. As reimbursement
for radiological interpretations have declined and utilization has
increased, radiologists are under pressure to increase the number of
interpretations and compete for business over much larger geographic
areas. In addition, with the development of advanced medical imaging
technologies, radiologists have been able to sub-specialize, becoming,
for example, neuroradiologists, mammographers, orthopedic radiologists,
angiographers or pediatric radiologists. The evolution toward managed
regional healthcare systems and increasing radiologist specialization
have resulted in a need to develop equipment and systems capable of
transmitting medical and displaying images rapidly to and from remote
locations.
Concurrent with these changes in radiology, the computing and
telecommunications industries have experienced rapid growth and
technological advancements. Today, high-quality medical images can be
transmitted over broadband communications networks. Trends in the
healthcare market to lower costs and optimize resources combined with
the rapid growth of digital communications networks accelerated the
acceptance of teleradiology, the practice of radiology from remote
locations. In teleradiology, medical images at the point of care are
digitized and transmitted to central locations for interpretation,
bringing the patient's information to the radiologist faster and at
significantly lower cost than the traditional method of transporting the
patient from the point-of-care facility to the diagnostic facility.
In addition, the digitization and transmission of medical images has
enabled the formation of large scale image storage and management
networks known as PACS. PACS combine teleradiology, local area networks
and medical information systems to facilitate (i) the management of
medical images from various imaging modalities, (ii) the storage and
retrieval of the images in large electronic archives, (iii) the
manipulation and enhancement of such images for display at any time and
at any workstation in the network and (iv) the integration of
radiological information into existing patient management systems and
hospital information systems. PACS, typically found in large regional
hospitals and university research centers, minimize the risk of loss of
the master image and reduce the overall costs of providing efficient
radiology services. It is estimated that approximately 10% of all
medical films are lost and an additional 10% to 15% are misplaced or
misfiled, creating the need to take expensive duplicate images, delaying
the delivery of quality medical care and resulting in increased medical
costs.
Increased adoption of teleradiology, PACS and more recently mini-PACS
has occurred among healthcare providers in response to pressures to
create a more efficient healthcare delivery system in the United States,
Canada, Western Europe, Japan and Australia. In addition, many
countries in South America and Asia are focusing on providing better
healthcare and are investing in CT, MRI and other modern imaging
modalities. The Company believes that these countries present potential
opportunities for the implementation of teleradiology systems and
imaging networks.
Strategy
Lumisys is a leading suppler of CR systems and digitizers for medical
film and video images and has established a reputation for delivering
high-quality, reliable and cost-effective products. The Company intends
to leverage this reputation by broadening its product line, exploiting
new market opportunities and penetrating new geographic markets. The
Company's strategy includes the following key elements:
Apply Core Technological Competencies to Develop New Products. Lumisys
has developed expertise in electro-optics, image processing, circuit
design, computing, software and communications for image digitization.
The Company's strategy is to provide filmless medical imaging
appliances, consisting of PC-based hardware with standards-based
application-specific software in order to enhance its core product line
and address emerging market needs. In 1998, the Company introduced a CR
system for use in the medical market utilizing its core technical
competencies.
Acquire Complementary Products and Technology. The Company intends to
continue to identify and acquire complementary businesses, products and
technologies that offer Lumisys the ability to introduce new products
and services, add core technological competencies and leverage existing
strengths to provide better solutions for its target markets. In 1997,
the Company acquired CompuRAD to add core technical competencies in
software development and to leverage its existing strong OEM and VAR
relationships in the medical imaging market. The acquisition of
CompuRAD allowed the development of application software for the CR
system in 1998 that reduced the Company's reliance on OEMs and VARs to
provide the software component of the system. In 1995, the Company
acquired X-Ray Scanner Corporation ("XRS") to accelerate its development
of a lower cost CCD-based film digitizer line and acquired Imagraph
Corporation ("Imagraph") to add core technical competencies in video
image digitization and compression.
Exploit Market Opportunities Through Strong OEM Relationships. The
Company has established strong relationships with the key suppliers of
medical image management products and services. These relationships
provide the Company with insight into emerging customer requirements,
which allows the Company to position its current products and services
appropriately and to allocate more effectively its product development
resources. In addition, as OEM customers increasingly outsource parts
and components for their systems, Lumisys intends to take advantage of
its strong OEM relationships and its reputation for high-quality
products to remain the supplier of choice with an expanding product
line.
Penetrate New Geographic Markets. The Company believes that significant
opportunities exist for international expansion, primarily in Canada,
Western Europe, Latin America, Japan and Australia. The Company
believes that these regions present potential opportunities for the
implementation of teleradiology and mini-PACS systems. The Company
intends to identify specific market dynamics in these foreign countries
and design targeted products and systems for their medical imaging
needs. The Company's development of a lower cost CCD-based film
digitizer was the first step toward addressing some of the needs of
these markets. The Company's CR product, which is much less expensive
than other CR market offerings is also particularly well suited for the
international market.
Products and Applications
The Company designs, manufactures and markets Desktop CR systems, laser
and CCD X-ray film digitizers, video frame digitizers, and application
software to enable health care organizations to capture, store,
distribute and display medical images over LANs and WANs.
Computerized Radiography. Lumisys CR systems scan medical and industrial
images from a reusable phosphor plate and digitizers enable the
conversion of large format transparency medical films into digital
format so that they may be networked into PACS and teleradiology
systems. The scanned images and digitized film may be networked on a LAN
or transmitted over telephone line, dedicated high-speed communication
lines and may be compressed to reduce transmission time.
The Company introduced the Lumiscan 110 CR system in 1996. The CR
system was designed specifically to capture information from storage
phosphors rather than film. These digitizers are used for filmless
radiography applications in the non-destructive test ("NDT") market.
Inspection of pipes, valves, aircraft parts and other structural objects
can be accomplished without the use of conventional silver halide
emulsion radiographic films. In 1998 the Lumiscan 110 CR system was
replaced by the ACR2000.
The ACR2000 is a medical grade CR system utilizing housings common with
the light weight, tabletop x-ray film digitizers. The CR system
incorporates much of the same technology and manufacturing techniques as
the film digitizers. The ACR2000, however, digitizes images from re-
usable storage phosphor plates in order to capture a x-ray image
electronically instead of on film. The image is derived by reading the
stored image on the phosphor plate with a laser light source. The
ACR2000 is a mechanically simple system and is suited to low volume
medical imaging environments such as emergency rooms, operating rooms,
remote clinics and mobile applications. The ACR2000 is delivered to OEMs
and System Integrators with application specific software running on
Windows NT, or as a component reader.
Digitizer Products. The Lumiscan digitizer family consists of a full
line of laser-based digitizers, incorporating lasers, precision optics,
computer-controlled galvanometers and micropositioners, special purpose
light detectors and analog as well as digital electronic circuitry. The
Lumiscan digitizer product line also includes a CCD-based film digitizer
that incorporates a proprietary light source and a high quality CCD
detector. All Lumiscan systems, including the ACR2000 include
sophisticated proprietary control software, input/output and driver
software, and Windows NT application specific software.
The Lumiscan 50 and 75, introduced in 1993 and 1994, respectively,
utilize a common housing and are light weight, tabletop units. The
Lumiscan 75 is a table-top digitizer designed for diagnostic resolution
in PACS, mini-PACS and teleradiology applications. The Lumiscan 50 is a
lower resolution version of the Lumiscan 75 product that is used
primarily in non-diagnostic applications. The Lumiscan 85 is very high
resolution digitizer designed specifically to capture information from
mammograms, pediatric x-rays and in non-destructive test applications.
The Lumiscan 85 offers very high resolution allowing it to capture the
wide dynamic range and requisite image information contained in these
images, which are generally smaller and require a higher optical density
to diagnose effectively. The Lumiscan 85 is also suitable for various
Computer Assited Diagnosis applications in mammography and other
specialties.
The Lumiscan 20, introduced in 1996, is a less expensive film digitizer
designed for use in less exacting applications and environments, where
price is a more important factor than resolution and dynamic range. The
Lumiscan 20 is cost-competitive, but exhibits superior image quality
over other CCD-based products offered by the Company's competitors.
All of the table-top film digitizer models may be purchased with a
single sheet film feeder, an optional six sheet feeder or a multi-sheet
film feeder. The multi-sheet film feeder, introduced in 1998 allows the
tabletop models to offer the same increase in operator productivity that
was previously only available on the Lumiscan 200.
The Lumiscan 100, 150 and 200 models utilize larger housings than the
Lumiscan 50, 75 and 85. These models have been displaced by the smaller
and less expensive tabletop models. The Lumiscan 100 was the Company's
first product introduced in 1990. The Lumiscan 150 was introduced in
1992. The Lumiscan 200, introduced in 1991, was equipped with a film
feeder capable of automatically digitizing up to 70 sheets of film which
increased operator productivity in high-volume PACS environments.
Board Products. Lumisys develops, manufactures and markets high-
quality, board-level digitization products for the capture of video
images. These digital images can be reproduced on workstations and
displays, transmitted over networks, recorded into archives and
accurately reprinted. These products have applications in medical
imaging as well as in scientific and industrial applications. They
incorporate programmable gate-arrays, embedded signal processors,
proprietary software and surface-mounted technology. Additionally, the
Company's proprietary Auto-Sync software automatically adjusts to
accommodate the wide variety of video signals to be digitized. This
capability allows the Company's OEM and System Integrator customers to
install these products without having to develop extensive video
installation expertise or to acquire special test equipment.
The HI*DEF family of products are standard PC-compatible boards that
digitize analog video images at up to 140 MHz sampling rates with
continuous Auto-Sync locking circuitry to maintain image fidelity at
optimum signal-to-noise ratios. This product family is primarily used
to digitize gray-scale video from CT, MRI, ultrasound and nuclear
medicine cameras in medical applications as well as from high-resolution
video cameras used for industrial inspection and quality control
applications.
The Imascan family of products are monochrome and color video frame
grabbers with SVGA display capabilities on a single board. These PCI
boards have applications in medical ultrasound imaging as well as
graphic arts, desktop video and the teleconference markets.
The I-Series, are high accuracy, high performance image capture boards
with advanced capabilities targeted at demanding applications for
machine vision and scientific imaging. This family combines image
precision, high throughput and competitive pricing for video capture
boards.
Software Products. In 1998 the Company expanded its product line and
capabilities with the purchase of the HLimage++ software product.
HLimage++ is an object oriented software package targeted at the machine
vision and scientific imaging industries. HLimage++ combines three
software packages into one, featuring a graphical user interface based
application, a point & click scripting environment, and a complete
object-oriented programming interface. These three levels of
functionality allow HLimage++ to address the needs of end users, systems
integrators and OEMs in the machine vision and scientific imaging
markets. Through the 1997 acquisition of CompuRAD, Lumisys expanded its
product line to include software designed to enable healthcare
organizations to capture, store, distribute and display medical images
over LANs and WANs. The Company's products support on-call, off-site
and in-hospital applications and run on DICOM networks. The product
line includes capture products and workstation products. The capture
products are bundled with and integrate the Company's film and CR
digitizers into a PACS and teleradiology environment. The Company
offers workstation software which enable PACS and teleradiology viewing
on Windows NT and '95 PCs, ranging from commodity displays to multi-
monitor 5 Megapixel displays. In addition, the Company offers software
which integrates legacy and DICOM gamma cameras in Nuclear Medicine to
PACS and teleradiology environments and viewing software which enables
PACS and teleradiology viewing of specialized Nuclear Medicine images on
Windows NT and '95 as well as a networking and communication server for
the Nuclear Medicine environment.
Research and Development
Lumisys devotes significant resources to research and development
activities to design new products and product enhancements and identify
new applications for existing products. The Company has developed
expertise in electro-optics, image processing, circuit design,
computing, software and communications for image digitization, which the
Company believes it can leverage to introduce new products and product
enhancements. The Company's engineers work closely with its OEM and
System Integrator customers to assist in the integration of the
Company's products with those of the OEMs and System Integrators and to
identify new applications for the Company's products. Occasionally, the
Company receives funding from certain OEM and VAR customers to develop
specialized applications.
For the years 1998, 1997 and 1996, the Company's research and
development expenditures were approximately $5.8 million, $6.6 million
and $5.5 million, respectively. These amounts represented 23.7%, 22.3%
and 19.3% of total revenues in the respective periods. In 1998,
research and development resources were used primarily for the
continuing development of the CR reader for the medical market, the
redesign of the Company's video capture boards and the design and
development of new software and updates and enhancement of existing
software. The software development program is focused on improving
access to medical images and clinical information. Updates and
enhancements of its existing software include efforts to improve
connectivity, compression algorithms and user interface design.
As of December 31, 1998, the Company had 40 employees engaged in
research and development activities.
Sales and Marketing
The Company sells its CR and film digitizers primarily to OEM, VAR and
System Integrator customers who integrate these products into
teleradiology and PACS networks. The Company also sells its film
digitizers to a few end users, primarily university and medical research
groups. The Company's video image digitizers are sold to many of these
same customers as well as to dealers, distributors and resellers for
medical, multimedia, scientific and industrial applications. In 1997,
the software division sold its software directly to end users through
direct sales representatives. The Company discontinued its direct sales
efforts in 1998 and sells only indirectly through OEMs, VARs and System
Integrators.
The Company markets its products primarily through an internal sales
organization. In addition, the Company exhibits its products at major
trade shows and supports the OEMs, System Integrators, dealers,
distributors and resellers with product literature and application notes
for reference and distribution. The Company maintains a staff of
fourteen sales and marketing personnel, with three individuals
responsible for film digitizer products, three individuals responsible
for CR digitizer products and eight individuals responsible for video
image digitizers and related software. All of the sales personnel are
supported by a technical support organization and the engineering staff
is available to support the Company's customers when appropriate. The
Company devotes a substantial portion of its marketing efforts to
developing, monitoring and enhancing its relationships with existing
customers and to identifying and cultivating new customers entering the
market. The loss of one or more customers or a change in their buying
pattern could have a material effect on the Company's business and
results of operations.
The Company emphasizes customer service and support by developing
quality products, encouraging customer feedback through extensive
contacts with key OEM and System Integrators and providing customers
with telephone support. The technical support staff conducts a CR and
film digitizer service training course for OEM and System Integrators
personnel on a regular basis, providing the Company's customers with the
expertise needed to install and support the Company's products. The
Company provides a limited one-year parts and factory repair warranty to
its customers.
Manufacturing
The Company's manufacturing activities consist primarily of assembling
and testing components and subassemblies acquired from qualified vendors
as well as assembling, aligning, system testing and performing quality
assurance inspection of the end product. The Company's CR and film
digitizer facility operates under the FDA GMP and QSR guidelines and is
a registered medical device manufacturer.
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.
The Company's backlog at December 31, 1998 was approximately $3.3
million compared with $5.8 million at December 31, 1997. The Company
includes in its backlog only orders for which a customer purchase order
has been received and a delivery date within six months is anticipated.
Competition
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. The competitive factors are primarily price and product
performance. 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 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 and in 1998, General Scanning introduced a laser-based film
digitizer. To date, the Company is unaware of any sales made by CLS or
General Scanning. In addition, several Japanese competitors such as
Konica, Nishimoto Sangyo and Abe Sekkei offer competitive products on an
international basis and may decide in the future to devote additional
resources to marketing competitive products in the United States. The
markets for medical film digitizers incorporating CCD's are highly
competitive. Lumisys faces competition from companies such as Vidar
Systems Inc., Canon Inc., Hell Linotype and Howtek in the CCD-based film
digitizer market. There can be no assurance that Lumisys' competitors
will not develop enhancements to, or future generations of, competitive
products that will offer superior price or performance features that
render Lumisys' products less competitive or obsolete.
In addition, large companies, such as Kodak, Sterling, Fuji, GE,
Siemens, Philips and Agfa, have the technical and financial ability to
design and market CR and digitizer products competitive with Lumisys'
products, and some of them have in the past produced and marketed such
products. While many of these companies currently purchase products
from Lumisys, Lumisys 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 Lumisys. All of these companies have
significantly greater financial, marketing and manufacturing resources
than Lumisys and would be significant competitors if they decided to
enter this market.
The markets for medical and machine vision 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 markets for PACS and teleradiology software products
and services is intense and is expected to increase. The Company's
software products support the Company's CR and film digitizers and do
not generate significant income as stand-alone products. By bundling
software with the CR and film digitizers the Company allows its OEM and
VAR customers to utilize either the Company's software or at their
discretion, their own or competing software. The principal providers of
software in the PACS and teleradiology market are ISG, Applicare Medical
Imaging B.V., Mitra Imaging Inc., and Access Radiology Corporation. The
success of the Company's software does not have a direct impact on the
Company's financial condition or results of operations but rather adds
additional value to the Company's CR and digitizer products. 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.
As a result of the substantial investment required by an OEM or System
Integrator to integrate capital equipment into a product line, or to
integrate components and subsystems into a product design, the Company
believes that once an OEM or System Integrator has selected certain
capital equipment or certain components or subsystems from a particular
vendor, the customer generally relies upon that vendor to provide
equipment for the specific product line or product application and may
seek to rely upon that vendor to meet other component or subsystem
requirements. Accordingly, the Company may be at a competitive
advantage or disadvantage with respect to a particular customer
depending on whether that customer utilizes the Company's or a
competitor's component or subsystem.
Patents and Intellectual Property
The Company believes that the success of its business depends more on
the technical competence and creativity of its employees and successful
business execution than on patents, trademarks and copyrights. Although
the Company has obtained several patents it generally does not rely
primarily on patent protection with respect to its products. As of
January 31, 1999, the Company held or had a license to eleven United
States patents, expiring between 2010 and 2014.
Competitors in the United States and foreign countries, many of which
have substantially greater resources and have made substantial
investments in competing technologies, may have applied for or obtained,
or may in the future apply for and obtain, patents that may prevent,
limit or interfere with the Company's ability to make and sell some of
its products. Although the Company believes that its products do not
infringe the patents or other proprietary rights of third parties, there
can be no assurance that third parties will not assert infringement
claims against the Company or that such claims will not be successful.
The Company also relies upon a combination of trade secrets, copyright
and trademark laws, nondisclosure and other contractual provisions to
protect its confidential and proprietary information. The Company
routinely enters into confidentiality agreements with its employees,
consultants and customers who have access to the Company's confidential
or proprietary information. It is not clear, however, that these
agreements will provide meaningful protection of the Company's trade
secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information.
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. All of the Company's laser-based film digitizers, the CCD-
based film digitizer, the CR digitizer and software products that are
commercially available have received marketing clearance from the FDA
via a 510(k) filing.
International sales of the Company's products may be subject to
regulation in various countries. The regulatory review process varies
from country to country. In Europe, the Company is required to obtain
certifications necessary to enable the "CE" mark to be affixed to
software products sold commercially in member countries of the European
Union. The CE mark is an international symbol of quality and complies
with applicable European medical device directives. To date, the
Company's revenue has not been adversely impacted by an inability to
obtain domestic or foreign marketing clearances.
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. The
Company's software facility was inspected by the FDA in 1999 and was
found to be compliant with the FDA's GMP regulations. The Company's
believes its CR and film digitizer facility will be inspected by the FDA
in 1999.
Risk Factors
Except for the historical information contained herein, the discussion
in this Form 10-K for the year ended December 31, 1998 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 in the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and those discussed in other
documents filed by the Company with the Securities and Exchange
Commission.
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, mergers and
acquisitions by the Company's customers, shifts in product mix, the
incurrence of acquisition-related costs by the Company and general
conditions in the healthcare industry which have reduced capital
equipment budgets and delayed or reduced the adoption of teleradiology,
Picture Archiving and Communications Systems ("PACS") and mini-PACS 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 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 and hardware fails to grow or grows more slowly than
anticipated, the Company's business, financial condition and results of
operations would be materially adversely affected. The Company expects
that the sales cycle for PACS and teleradiology software and 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
and CR hardware 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 the
Company's products is lengthy. The sales cycle of the Company's
products is subject to delays associated with changes or the
anticipation of changes in the regulatory environment affecting
healthcare enterprises, changes in the customer's strategic system
initiatives, competing information systems projects within the customer
organization such as, but not limited to, the year 2000 compliance
issues, 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 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 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 and in 1998, General Scanning introduced a laser-based film
digitizer. To date, the Company is unaware of any sales made by CLS or
General Scanning. In addition, several Japanese competitors such as
Konica, Nishimoto Sangyo and Abe Sekkei offer competitive products on an
international basis and may decide in the future to devote additional
resources to marketing competitive products in the United States. The
markets for medical film digitizers incorporating CCD's are highly
competitive. Lumisys faces competition from companies such as Vidar
Systems Inc., Canon Inc., Hell Linotype and Howtek in the CCD-based film
digitizer market. There can be no assurance that Lumisys' competitors
will not develop enhancements to, or future generations of, competitive
products that will offer superior price or performance features that
render Lumisys' products less competitive or obsolete.
In addition, large companies, such as Kodak, Sterling, Fuji, GE,
Siemens, Philips and Agfa, have the technical and financial ability to
design and market CR and digitizer products competitive with Lumisys'
products, and some of them have in the past produced and marketed such
products. While many of these companies currently purchase products
from Lumisys, Lumisys 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 Lumisys. All of these companies have
significantly greater financial, marketing and manufacturing resources
than Lumisys 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 markets for PACS and teleradiology software products
and services is intense and is expected to increase. The Company's
software products support the Company's CR and film digitizers and do
not generate significant income as stand-alone products. By bundling
software with the CR and film digitizers the Company allows its OEM and
VAR customers to utilize either the Company's software or at their
discretion, their own or competing software. The principal providers of
software in the PACS and teleradiology market are ISG, Applicare Medical
Imaging B.V., Mitra Imaging Inc., and Access Radiology Corporation. The
success of the Company's software does not have a direct impact on the
Company's financial condition or results of operations but rather adds
additional value to the Company's CR and digitizer products. 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 December 31, 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 Standard
Regulations ("QSR") and other applicable regulations. These regulations
require that the Company manufacture its products and maintain its
documents in a prescribed manner with respect to manufacturing,
reporting of product malfunctions and other matters. If the FDA
believes that a company is not in compliance with federal regulatory
requirements, it can institute proceedings to detain or seize products,
issue a recall, prohibit marketing and sales of the company's products
and assess civil and criminal penalties against the company, its
officers or its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's
business and results of operations. The 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 took corrective action on the FDA's
observations and was re-inspected at the Tucson facility in the first
quarter of 1999 and found to be in compliance with the FDA's GMP
regulations.
Sales of the Company's products outside the United States are subject to
foreign regulatory requirements that vary from country to country.
Additional approvals from foreign regulatory authorities may be
required, and there can be no assurance that the Company will be able to
obtain foreign approvals on a timely basis or at all, or that it will
not be required to incur significant costs in obtaining or maintaining
its foreign regulatory approvals. Starting in mid 1998, the Company has
been required to obtain certifications necessary to enable the "CE" mark
to be affixed to the Company's products to continue commercial sales in
member countries of the European Union. The CE mark is an international
symbol of quality and complies with applicable European information
device equipment directives. The Company has obtained this CE
certification. Failure to comply with foreign regulatory requirements
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, the first in the Superior Court of the State
of California, County of Santa Clara, and the second in 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 May 26, 1998, the state court dismissed plaintiff's
first amended complaint with leave to amend. On December 2, 1998, the
state court granted in part and denied in part defendants' motion to
dismiss plaintiff's second amended complaint. The court granted the
motion as to seven of the individual defendants, and denied the motion
as to the Company and two of the individual defendants. The Company and
the two remaining individual defendants have filed an answer to the
second amended complaint. There can be no assurance that the Company
will prevail in this action or that the plaintiffs will not recover
damages.
With respect to the federal lawsuit, the court granted defendants'
motion to dismiss plaintiff's complaint with leave to amend on March 31,
1998. Plaintiff filed an amended complaint and defendants have moved to
dismiss the amended complaint. Discovery has been stayed in the federal
case until the court rules on defendants' motion. 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, PACS and mini-PACS
may slow as capital investment budgets are reduced, and the demand for
the Company's products could be significantly reduced.
Product Liability and Insurance. The manufacture and sale of medical
products entails significant risk of product liability claims. While
the Company believes that its current insurance coverage is appropriate,
there can be no assurance that such coverage is adequate to protect the
Company from any liabilities it might incur in connection with the sale
of the Company's products. In addition, the Company may require
increased product liability coverage as additional products are
commercialized. Such insurance is expensive and in the future may not
be available on acceptable terms, if at all. A successful product
liability claim or series of claims brought against the Company in
excess of its insurance coverage could have a material adverse effect on
the Company's business and results of operations.
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.
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.
Item 2. Properties
The Company's principal facilities are located in Sunnyvale, California;
Chelmsford, Massachusetts; and Tucson, Arizona. Corporate headquarters
are located in the Sunnyvale facility, an approximately 25,000 square
foot facility leased through December 2000. The Chelmsford facility,
which houses the Imagraph subsidiary, is located in an approximately
20,000 square foot building leased through June 2002. The Tucson
facility, which houses the software division, is located in an
approximately 20,000 square foot building leased through September 2001.
The Company believes that its existing facilities are adequate for its
current needs but may require more space as its business expands.
Item 3. Legal Proceedings
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 May 26, 1998, the state court dismissed plaintiff's
first amended complaint with leave to amend. On December 2, 1998, the
state court granted in part and denied in part defendants' motion to
dismiss plaintiff's second amended complaint. The court granted the
motion as to seven of the individual defendants, and denied the motion
as to the Company and two of the individual defendants. The Company and
the two remaining individual defendants have filed an answer to the
second amended complaint. There can be no assurance that the Company
will prevail in this action or that the plaintiffs will not recover
damages.
With respect to the federal lawsuit, the court granted defendants'
motion to dismiss plaintiff's complaint with leave to amend on March 31,
1998. Plaintiff filed an amended complaint and defendants have moved to
dismiss the amended complaint. Discovery has been stayed in the federal
case until the court rules on defendants' motion. There can be no
assurance that the Company will prevail in this action or that the
plaintiffs will not recover damages.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
PART II.
Item 5. Market For the Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock commenced trading on the Nasdaq National
Market on November 15, 1995, under the symbol LUMI. As of March 12,
1999, there were approximately 194 shareholders of record.
The following table sets forth for the periods indicated, the high and
low closing sale prices of the Company's Common Stock.
High Low
---- ---
Fiscal 1998 Fourth Quarter $ 4.81 $ 2.91
Third Quarter $ 4.19 $ 2.88
Second Quarter $ 5.44 $ 3.44
First Quarter $ 5.75 $ 3.78
Fiscal 1997 Fourth Quarter $ 7.63 $ 4.19
Third Quarter $ 8.25 $ 6.50
Second Quarter $ 7.88 $ 5.88
First Quarter $ 10.13 $ 6.88
Lumisys has never paid dividends on its Common Stock and does not
anticipate paying cash dividends in the future.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial
Statements and the Notes thereto included elsewhere in this report.
Year ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Sales $24,546 $29,709 $28,686 $21,337 $10,131
Cost of sales 11,468 13,206 13,032 10,717 4,807
------- ------- ------- ------- -------
Gross profit 13,078 16,503 15,654 10,620 5,324
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing 3,612 4,506 3,093 2,250 1,148
Research and development 5,824 6,620 5,545 3,713 2,029
General and administrative 3,457 4,459 3,518 2,389 859
Merger and related costs --- 4,159 --- --- ---
Acquired in-process
research and development --- --- --- 1,442 ---
------- ------- ------- ------- -------
Total operating expenses 12,893 19,744 12,156 9,794 4,036
------- ------- ------- ------- -------
Income (loss) from
operations(1) 185 (3,241) 3,498 826 1,288
Interest income, net 933 1,117 979 213 86
------- ------- ------- ------- -------
Income (loss) before
income taxes 1,118 (2,124) 4,477 1,039 1,374
Provision (benefit) for
income taxes 436 1,225 1,662 (762) 95
------- ------- ------- ------- -------
Net income (loss) (2) $ 682 $(3,349) $ 2,815 $ 1,801 $ 1,279
======= ======= ======= ======= =======
Net income (loss) per
share (2)(3):
Basic $ 0.07 $ (0.33) $ 0.29 $ 0.27 $ 0.42
Diluted $ 0.07 $ (0.33) $ 0.29 $ 0.25 $ 0.21
Weighted average shares
used to compute net
income (loss) per share (3):
Basic 9,913 10,080 9,598 6,714 3,011
Diluted 10,074 10,080 9,760 7,236 6,124
December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments $17,658 $24,529 $22,490 $15,396 $ 3,641
Working capital 22,642 27,373 28,768 18,497 4,347
Total assets 30,606 34,418 33,241 23,321 6,214
Long-term obligations 146 130 118 642 630
Mandatorily redeemable
convertible preferred stock --- --- --- --- 9,730
Accumulated deficit (3,725) (4,407) (1,058) (3,873) (5,674)
Stockholders' equity
(deficit) 25,168 27,849 29,706 18,518 (5,635)
- - --------------------------------
(1) In November 1997, the Company recorded a one-time charge of $4,159,000
related to the merger with CompuRAD and in March 1995, the Company
recorded a one-time charge of $1,442,000 related to acquired in-process
research and development.
(2) Excludes accretion of mandatorily redeemable convertible preferred stock
in 1994.
(3) See Note 1 of Notes to Consolidated Financial Statements for a
description of the shares used in calculating net income (loss) per
share.
Item 7. 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, mini-PACS and
teleradiology environment. The Company offers CR digitizers, 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.
In November 1998, the Company purchased a software product, HLimage ++,
to support the Company's video frame digitizers in the machine vision
and scientific markets. In November 1997, the Company merged with CompuRAD to
add core technical competencies in software development, in a transaction
accounted for as a pooling-of-interests. The Company recorded an
aggregate charge of $4.2 million for merger and related costs.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involved 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 in the section entitled "Business" and
especially -Risk Factors, and those discussed in the other documents
filed by the Company with the Securities and Exchange Commission.
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of sales:
Year ended December 31,
-----------------------
1998 1997 1996
----- ----- -----
Sales 100.0% 100.0% 100.0%
Cost of sales 46.7 44.5 45.4
----- ----- -----
Gross profit 53.3 55.5 54.6
----- ----- -----
Operating expenses:
Sales and marketing 14.7 15.2 10.8
Research and development 23.7 22.3 19.3
General and administrative 14.1 15.0 12.3
Merger and related costs --- 14.0 ---
----- ----- -----
Total operating expenses 52.5 66.5 42.4
----- ----- -----
Income (loss) from operations 0.8 (11.0) 12.2
Interest income, net 3.8 3.8 3.4
----- ----- -----
Income (loss) before income taxes 4.6 (7.2) 15.6
Provision for income taxes 1.8 4.1 5.8
----- ----- -----
Net income (loss) 2.8% (11.3)% 9.8%
===== ===== =====
Fiscal 1998 Compared with Fiscal 1997
Sales. Sales decreased 17.4% in 1998 to $24.5 million from $29.7
million in 1997. The decrease was due to the continued softening of the
domestic digitizer business, the consolidation among domestic OEM
customers and lower software sales as compared to 1997. This was
partially offset by an increase in international digitizer sales. In
the fourth quarter 1998, the Company began shipping a computed
radiography ("CR") system for the medical market, the ACR-2000. No
customers accounted for more than 10% of the Company's sales in either
1998 or 1997. 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. Sales and operating results therefore depend on the
volume and timing of the backlog as well as bookings received during the
period. 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 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.
Gross profit. Gross profit decreased 20.8% in 1998 to $13.1 million
from $16.5 million in 1997. Gross margin decreased to 53.3% from 55.5%
primarily due to increased manufacturing overhead costs related to the
introduction of the ACR-2000 and lower software sales which have a
higher gross profit than hardware sales.
Sales and marketing. Sales and marketing expenses decreased in 1998 to
$3.6 million from $4.5 million in 1997, primarily due to the
restructuring of the sales and marketing force following the acquisition
of CompuRAD. The Company has changed the software product strategy from
targeting both direct end-user customers as well as VAR and OEM
customers to focus on supplying software components to OEMs and system
integrators only. As a percentage of sales, these expenses decreased to
14.7% in 1998 from 15.2% in 1997.
Research and development. Research and development expenses decreased
in 1998 to $5.8 million from $6.6 million in 1997, primarily due to
restructuring following the acquisition of CompuRad. In addition, the
ACR-2000 project was completed and transferred to manufacturing. As a
percentage of sales, research and development expenses remained fairly
consistent, increasing slightly to 23.7% in 1998 from 22.3% in 1997. The
Company expects its research and development expenditures to decrease as
a percent of revenue since the initial CR and video film digitizer
development efforts are near completion and follow-on development efforts
will be less expensive than the initial development projects. The
development of a new product will require additional research and
development resources and therefore the research and development
expenses will increase when the next new product is identified.
General and administrative. General and administrative expenses
decreased in 1998 to $3.5 million from $4.5 million in 1997. As a
percentage of sales, these expenses decreased to 14.1% in 1998 from
15.0% in 1997. The decrease was primarily due to restructuring following
the acquisition of CompuRad.
Provision (benefit) for income taxes. The Company recorded a total
provision for income taxes of $436,000 and $1.2 million in 1998 and
1997, respectively. At December 31, 1998, the Company had net operating
loss carryforwards available to reduce income taxes for federal and
state income tax purposes of approximately $3.3 million and $1.3
million, respectively; such carryforwards expire through 2017 but are
substantially limited per year. See the Notes to Consolidated Financial
Statements. The Company expects to be subject to an effective tax rate
of approximately 39% in 1999, absent changes in any applicable statutory
tax rate.
Fiscal 1997 Compared with Fiscal 1996
Sales. Sales increased 3.6% in 1997 to $29.7 million from $28.7 million
in 1996. Sales of film digitizers and PACS and teleradiology software
products were essentially flat in 1997 compared to 1996 while sales
volume of the board products increased in 1997.
Gross profit. Gross profit increased 5.4% in 1997 to $16.5 million from
$15.7 million in 1996. Gross margin increased from 54.6% to 55.5%
primarily due to increased gross margin in the digitizer system
products.
Sales and marketing. Sales and marketing expenses increased in 1997 to
$4.5 million from $3.1 million in 1996, primarily due to increased
compensation associated with a larger sales force for the software
products and greater marketing and advertising expenses. As a
percentage of sales, these expenses increased to 15.2% in 1997 from
10.8% in 1996.
Research and development. Research and development expenses increased
in 1997 to $6.6 million from $5.5 million in 1996, primarily due to
increased engineering projects. As a percentage of sales, research and
development expenses increased to 22.3% in 1997 from 19.3% in 1996.
This increase is due to the increases in engineering expenses as a
result of increased software development.
General and administrative. General and administrative expenses
increased in 1997 to $4.6 million from $3.5 million in 1996. As a
percentage of sales, these expenses increased to 15.0% in 1997 from
12.3% in 1996. The increase was primarily due to the on-going costs
associated with increased personnel, legal and other professional
service expenses associated with CompuRAD's first full year as a public
company.
Provision (benefit) for income taxes. The Company recorded a current
provision for income taxes of $1.2 million in 1997. In 1996, the
Company recorded a current provision for income taxes of $2.0 million,
which was partially offset by a deferred benefit of $315,000, resulting
in a net provision of $1.7 million for the year. The recognition of
deferred tax assets was based on the Company's assessment that it is
more likely than not that this portion of the deferred tax assets will
be realized. The Company has provided a partial valuation allowance
against the balance of the deferred tax assets.
Liquidity and Capital Resources
The Company has financed its operations activities primarily from net
cash provided by operations. In 1998, one-time payments for expenses
related to the acquisition of CompuRad resulted in a reduction in cash
reserves of $1.0 million compared to positive cash operating results
of $900,000 in 1997 and $500,00 in 1996. The Company had cash
expenditures of $2.0 million related to the purchase of a software
product, HLImage ++ in 1998. In 1998 and 1997, the Company executed
a stock repurchase plan resulting in cash expenditures of $3.6 million
and $600,000 in 1998 and 1997, respectively, for the purchase of its
stock. In addition, the Company has raised $300,000, $1.9 million and
$7.2 million, in 1998, 1997, and 1996, respectively, upon the issuance
of Common Stock, including an initial public offering completed by
CompuRAD on August 28, 1996 which raised $5.1 million, net of underwriting
discounts and expenses.
At December 31, 1998, the Company had cash, cash equivalents and short-
term investments of approximately $17.7 million and working capital of
approximately $22.6 million. The Company believes that its existing
cash, cash equivalents, short-term investments and funds to be generated
by operations will satisfy the Company's cash flow requirements through
at least 1999. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's projected requirements, the
Company may be required to sell additional equity or debt securities or
obtain bank or other credit facilities. There can be no assurance that
the Company will be able to sell such securities or obtain such credit
facilities on acceptable terms in the future, if at all. The sale of
additional equity or debt securities could result in additional dilution
to the Company's stockholders.
Impact of the Year 2000
The rapid approach of Year 2000 presents significant issues for many
computer systems, since much of the software in use today may not
accurately process data beyond 1999. The Company has recently
implemented new information systems and accordingly does not anticipate
any internal Year 2000 issue from its own information systems, databases
or programs. However, the Company could be adversely impacted by Year
2000 issues faced by major distributors, suppliers, customers, vendors
and financial service organizations with which the Company interacts.
The Company is currently taking steps to address the impact, if any, of
the Year 2000 issue on the operations of the Company. There can be no
assurances that such a review will detect all potential failures of the
Company's and/or third-party's computer systems. A significant failure
of the Company's or a third-party's computer system could have a
material adverse effect on the Company's business, financial condition
and results of operations.
Certain software products currently installed at customer sites will
require upgrade or other remediation to become year 2000 compliant. The
Company believes that it is not legally responsible for costs incurred
by its customers to achieve their year 2000 compliance. However, the
Company is taking steps to identify affected customers, raise customer
awareness related to noncompliance of the Company's older products, and
assist the customer base to assess their risks. The Company may see
increasing customer satisfaction costs related to these actions over the
next few years. The potential impact on the Company's business,
financial condition and results of operations is not known at this time.
Costs to address the Company's Year 2000 Issues. Although the company will
continue to prioritize resources to address Year 2000 issues, those resources
are allocated within the normal software development and infrastructure and
facilities improvement processes of the Company. Subsequently, no complete
estimate of the expected total cost of this effort can be made at this time.
The costs related to Y2K have been immaterial to date.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements required by this item
are set forth below.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements: Page
Report of Independent Accountants 23
Consolidated Balance Sheets at December 31, 1998 and 1997 24
Consolidated Statements of Operations for the three
years ended December 31, 1998 25
Consolidated Statements of Stockholders' Equity for
the three years ended December 31, 1998 26
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998 27
Notes to Consolidated Financial Statements 28
Financial Statement Schedule for the three years
ended December 31, 1998:
Schedule II - Valuation and Qualifying Accounts 40
All other financial statement schedules are omitted because the
information called for is not present in amounts sufficient to require
submission of the schedules or because the information is shown either
in the financial statements or the notes thereto.
Report of Independent Accountants
To the Board of Directors and Stockholders of Lumisys Incorporated
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the
financial position of Lumisys Incorporated and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 28, 1999
LUMISYS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31,
-----------------
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents $10,651 $ 7,522
Short-term investments 7,007 17,007
Accounts receivable, net of allowances
of $717 and $657 4,206 4,622
Inventories 4,046 2,892
Deferred tax assets 1,453 1,453
Purchased software, net 571 316
------- -------
Total current assets 27,934 33,812
Property and equipment, net 753 606
Purchased software, net 1,919 ---
------- -------
$30,606 $34,418
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,601 $ 1,355
Accrued expenses 2,791 2,967
Merger and related costs 900 2,117
------- -------
Total current liabilities 5,292 6,439
------- -------
Note payable to related party 146 130
------- -------
Commitments and contingencies (Note 8)
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; 9,597 and 10,370 shares issued and
outstanding, respectively 10 10
Additional paid-in capital 28,887 32,265
Accumulated deficit (3,725) (4,407)
Deferred compensation (4) (19)
------- -------
Total stockholders' equity 25,168 27,849
------- -------
$30,606 $34,418
======= =======
The accompanying notes are an integral part of these financial
statements.
LUMISYS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Sales $24,546 $29,709 $28,686
Cost of sales 11,468 13,206 13,032
------- ------- -------
Gross profit 13,078 16,503 15,654
------- ------- -------
Operating expenses:
Sales and marketing 3,612 4,506 3,093
Research and development 5,824 6,620 5,545
General and administrative 3,457 4,459 3,518
Merger and related costs --- 4,159 ---
------- ------- -------
Total operating expenses 12,893 19,744 12,156
------- ------- -------
Income (loss) from operations 185 (3,241) 3,498
Interest income, net 933 1,117 979
------- ------- -------
Income (loss) before income taxes 1,118 (2,124) 4,477
Provision for income taxes 436 1,225 1,662
------- ------- -------
Net income (loss) $ 682 $(3,349) $ 2,815
======= ======= =======
Net income (loss) per share:
Basic $ 0.07 $ (0.33) $ 0.29
======= ======= =======
Diluted $ 0.07 $ (0.33) $ 0.29
======= ======= =======
Weighted average shares used to
compute net income (loss)
per share:
Basic 9,913 10,080 9,598
======= ======= =======
Diluted 10,074 10,080 9,760
======= ======= =======
The accompanying notes are an integral part of these financial
statements.
LUMISYS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Notes Total
Common Stock Additional Receivable Deferred Stock-
------------- Paid-in Accumulated From Compens- holders'
Shares Amount Capital Deficit Stockholders ation Equity
------ ------ ------- ------- ------------ ------------ -------
Balance at
December 31,
1995 8,269 $ 8 $22,820 $(3,873) $ (297) $ (140) $18,518
Exercise of
stock options 547 1 188 --- --- --- 189
Tax benefit for
disqualified
depositions and
exercise of
non-qualified
stock option --- --- 1,026 --- --- --- 1,026
Interest on notes
receivable from
stockholders --- --- --- --- (8) --- (8)
Payments on notes
receivable from
stockholders --- --- --- --- 191 --- 191
Issuance of
Common stock
under employee
stock purchase
plan 28 --- 177 --- --- --- 177
Shares canceled
in connection
with acquisition
of XRS (4) --- (16) --- --- --- (16)
Proceeds of initial
public offering
of CompuRAD 1,067 1 5,966 --- --- --- 5,967
Conversion of
Debt into
common stock 87 --- 541 --- --- --- 541
Other --- --- 200 --- --- 106 306
Net income --- --- --- 2,815 --- --- 2,815
------ ------ ------- ------- ------------ ------------ -------
Balance at
December 31,
1996 9,994 10 30,902 (1,058) (114) (34) 29,706
Exercise of
Stock options 346 --- 145 --- --- --- 145
Tax benefit for
disqualified
depositions and
exercise of
non-qualified
stock option --- --- 1,080 --- --- --- 1,080
Payments on notes
receivable from
stockholders --- --- --- --- 114 --- 114
Issuance of
Common stock
in connection
with purchase of
Star Techno-
logies, Inc. 93 --- 588 --- --- --- 588
Buy back of
common stock (90) --- (563) --- --- --- (563)
Issuance of
common stock
under employee
stock purchase
plan 27 --- 113 --- --- --- 113
Other --- --- --- --- --- 15 15
Net loss --- --- --- (3,349) --- --- (3,349)
------ ------ ------- ------- ------------ ------------ -------
Balance at
December 31,
1997 10,370 10 32,265 (4,407) --- (19) 27,849
Exercise of stock
Options 116 --- 110 --- --- --- 110
Buy back of
common stock (928) --- (3,634) --- --- --- (3,634)
Issuance of
common stock
under employee
stock purchase
plan 39 --- 146 --- --- --- 146
Other --- --- --- --- --- 15 15
Net income --- --- --- 682 --- --- 682
------ ------ ------- ------- ------------ ------------ -------
Balance at
December 31,
1998 9,597 $ 10 $28,887 $(3,725) $ --- $ (4) $25,168
====== ====== ======= ======= ============ ============ =======
The accompanying notes are an integral part of these financial
statements.
LUMISYS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
------------------------
1998 1997 1996
------- ------- ------
Cash flows from operating activities:
Net income (loss) $ 682 $(3,349) $ 2,815
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 410 244 250
Non-cash merger costs --- 360 ---
Provision for doubtful accounts 60 281 127
Provision for obsolete inventories (59) 215 102
Deferred income taxes --- (24) (315)
Amortization of deferred compensation 15 15 404
Changes in assets and liabilities:
Accounts receivable 356 (533) (2,196)
Inventories (1,095) 260 (137)
Other current assets (255) 213 (230)
Other assets --- 173 227
Accounts payable 246 226 (722)
Merger and related costs (1,217) 2,117 ---
Accrued expenses and other (160) 691 186
------- ------- -------
Net cash provided by (used in)
operating activities (1,017) 889 511
------- ------- -------
Cash flows from investing activities:
Sales (purchases) of short-term
investments, net 10,000 (17,007) 3,934
Purchases of property and equipment (476) (327) (853)
Purchase of software (2,000) --- ---
------- ------- -------
Net cash provided by (used in) investing
activities 7,524 (17,334) 3,081
------- ------- -------
Cash flows from financing activities:
Proceeds from sale of common stock 256 1,926 7,245
Purchase of treasury stock (3,634) (563) ---
Payment on notes receivable from stockholders --- 114 191
Proceeds from note payable --- --- 250
Principal payments on note payable --- --- (250)
------- ------- -------
Net cash provided by (used in) financing
Activities (3,378) 1,477 7,436
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 3,129 (14,968) 11,028
Cash and cash equivalents at beginning of
Period 7,522 22,490 11,462
------- ------- -------
Cash and cash equivalents at end of period $10,651 $ 7,522 $22,490
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 90 $ 912 $ 951
Supplemental schedule of noncash investing and financing activities:
Common stock issued for purchase of Star Tech. --- 588 ---
The accompanying notes are an integral part of these financial
statements.
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lumisys Incorporated ("Lumisys" or the "Company") designs, manufactures
and markets computed radiography ("CR") systems that scan medical or
industrial images from a reusable phosphor plate and a family of
precision digitizers that convert medical images on film or video into
digital format. Once in digital form, the medical images can be stored,
transmitted, viewed, enhanced, manipulated and printed within a medical
imaging network. The Company currently offers a comprehensive family of
products for digitizing medical images under the Lumiscan label and
video images under the Imascan label. These CR and film digitizers
process images from all commercially available medical imaging
modalities, including x-ray, computed tomography ("CT"), magnetic
resonance imaging ("MRI"), ultrasound and nuclear medicine. In November 1998,
the Company purchased a software product, HLImage++, to support the Company's
video digitizers in the machine vision and scientific market.
On November 25, 1997, the Company merged with CompuRAD, Inc.
("CompuRAD"). Such merger was accounted for as a pooling-of-interests
(see Note 3). Accordingly, the consolidated historical financial
statements for all periods prior to the merger combine the financial
results of Lumisys and CompuRAD.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of sales and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Revenue Recognition
Revenues for hardware products are recognized when products are shipped.
Revenues for software products and systems including hardware, software
and installation are recognized after shipment and acceptance by the
customer. Revenue from maintenance, service and support agreements is
recognized over the term of the agreement which in most instances is one
year. Revenue from post-contract customer support is recognized in the
period the customer support services are provided.
Cash Equivalents and Short-term Investments
The Company considers all debt instruments with maturities of three
months or less when purchased to be cash equivalents. The Company
generally invests its available cash in commercial paper and money
market funds with several financial institutions.
The Company has categorized its short-term investments as available-for-
sale. Unrealized gains or losses are recorded directly in stockholders'
equity and have been insignificant for all periods presented. As of
December 31, 1998 and 1997, short-term investments consisted of
marketable debt securities and its carrying value approximated cost.
Inventories
Inventories are stated at the lower of cost, determined using the first-
in, first-out method, or market, and reserves are provided for obsolete,
slow-moving or unsaleable inventory.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets, generally three years. Leasehold improvements are
amortized using the straight-line method over the lesser of the
remaining lease terms or the estimated useful lives of the related
assets.
Research and Development
Research and development costs are expensed as incurred.
Software Development Costs
Software development costs are included in research and development and
are expensed as incurred. Statement of Financial Accounting Standards
No. 86 ("SFAS 86") requires the capitalization of certain software
development costs once technological feasibility is established. The
capitalized cost is then amortized on a straight-line basis over the
estimated product life, or on the ratio of current sales to total
projected product sales, whichever method results in greater
amortization. To date, the period between achieving technological
feasibility, which the Company defines as the completion of a working
model, and the general availability of such software has been short and
software development costs qualifying for capitalization have been
insignificant.
The Company capitalizes purchased software for resale and performs an
ongoing assessment of the recoverability of these costs which requires
considerable judgement by management with respect to certain external
factors, including but not limited to, anticipated future gross revenue,
estimated economic life and changes in software and hardware technology.
For the year ended December 31, 1998, the Company purchased $2.0 million
in software. The purchased software is being amortized over a four year
period.
Warranty
Upon product shipment, the Company provides for the estimated cost that
may be incurred under its product warranties.
Income Taxes
A deferred income tax asset or liability is established for the expected
future consequences resulting from differences between the financial
reporting and income tax bases of assets and liabilities and from net
operating loss and tax credit carryforwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts,
based on available evidence, which are expected to be realized.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash,
cash equivalents, short-term investments and accounts receivable. The
Company limits the amount of cash invested with any one financial
institution. The Company's trade accounts receivable are derived
primarily from sales in the United States, Europe and the Far East. The
Company's credit policy is to require prepayment of 50% of the purchase
order prior to shipment on domestic sales and prepayment of 100% or a
letter of credit on foreign sales. Prepayments are generally made less
than one week prior to shipment. The Company's prepayment policy has
not resulted in significant unearned revenue balances at the reported
balance sheet dates. The Company performs ongoing credit evaluations of
its customers' financial condition and may modify its sales terms in
certain circumstances based on these reviews. The Company maintains
reserves for potential credit losses. Such losses have been
insignificant for all periods presented.
In each of the years ended December 31, 1998, 1997 and 1996, no
customers represented more than 10% of total sales of the Company.
Net Income (Loss) Per Share
Basic earnings per share is computed by dividing income (loss) 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 (loss) per share calculations for the periods
presented below (in thousands):
Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Net income (loss) $ 682 $(3,349) $ 2,815
====== ======= =======
Weighted average shares outstanding - basic 9,913 10,080 9,598
Effect of dilutive securities:
Potential common stock,
stock options and warrants 161 --- 162
------- ------- -------
Weighted average shares outstanding - diluted 10,074 10,080 9,760
====== ======= =======
In 1998 and 1996, respectively, 291,000 and 0 shares of potential Common
Stock are considered anti-dilutive and are excluded from the calculation
of dilutive net income (loss) per share. Due to the net loss in 1997,
all potential Common Stock outstanding is considered anti-dilutive and
is excluded from the calculation of dilutive net income (loss) per
share.
Comprehensive Income
Effective January 1, 1998, the Company has adopted the disclosure
requirements of SFAS 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 (loss) and other comprehensive earnings such as unrealized gains or
losses on available-for-sale short-term investments. The Company's
unrealized gains and losses on available-for-sale short-term investments
have been insignificant for all periods presented.
Segment Reporting
Effective January 1, 1998, the Company has adopted the disclosure
requirements of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," ("SFAS 131"). This statement
establishes standards for the way companies report information about
operating segments in annual financial statements for periods beginning
after December 15, 1997. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. See Note 4.
Recent Accounting Pronouncement
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. It also provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds
of computer software originally developed or obtained for internal use and
then subsequently sold to the public. The Company has not yet determined the
impact, if any, of adopting this statement. The disclosures prescribed by
SOP 98-1 will be effective for the company's consolidated financial statements
for the fiscal year ending December 31, 1999.
NOTE 2 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT AMOUNTS
December 31,
-----------------
1998 1997
------- -------
(in thousands)
Inventories:
Raw materials $ 3,649 $ 2,363
Work-in-process 1,031 586
Finished goods 457 1,093
------- -------
5,137 4,042
Less: inventory reserves (1,091) (1,150)
------- -------
$ 4,046 $ 2,892
======= =======
Property and equipment:
Machinery and equipment $ 1,846 $ 1,485
Furniture and fixture 178 64
Leasehold improvements 45 45
------- -------
2,069 1,594
Less: accumulated depreciation
and amortization (1,316) (988)
------- -------
$ 753 $ 606
======= =======
Accrued expenses:
Payroll and related benefits $ 1,066 $ 1,122
Warranty 468 465
Accrued professional fees 129 401
Unearned revenue 599 979
Income taxes 354 ---
Other 175 ---
------- -------
$ 2,791 $ 2,967
======= =======
NOTE 3 - MERGER
CompuRAD
On November 25, 1997, the Company merged with CompuRAD, a provider of
software that enables healthcare clinicians to access medical images and
clinical information at any point of care. Under the terms of the
merger agreement, CompuRAD stockholders received 0.928 of a share of the
Company's common stock for each outstanding share of CompuRAD common
stock, resulting in the Company issuing approximately 3.7 million
shares, valued at approximately $23.4 million based upon the closing
price of the Company's common stock on November 25, 1997. Additionally,
outstanding options to acquire CompuRAD common stock were replaced with
options to acquire approximately 379,000 shares of the Company's common
stock. The transaction has been accounted for using the pooling-of-
interests method of accounting and, therefore, all periods have been
restated to include the operations of CompuRAD as if the companies had
been consolidated for all periods presented.
In connection with the merger, the Company recorded merger and related
costs in 1997 totaling $4.2 million. Included in this charge were
provisions for merger transaction costs of $1.5 million, asset write-
downs of $1.3 million, employee severance and termination benefits of
$400,000, costs to combine and integrate operations of $800,000 and other
merger related costs of $200,000. Of the $2.9 million in merger and
related costs which were accrued at the time of the merger,
approximately $2.0 million has been incurred at December 31, 1998.
Revenues and net income (loss) for the separate companies through the
date of acquisition included in the Company's consolidated statements of
operations are as follows (in thousands):
Year ended
Period ended December 31,
November 25, 1997 1996
----------------- -----------
Revenues:
Lumisys Incorporated $23,927 $23,022
CompuRAD Inc. 6,886 6,914
Intercompany eliminations (1,104) (1,250)
------- -------
Total $29,709 $28,686
======= =======
Net income (loss):
Lumisys Incorporated $ 3,785 $ 3,439
CompuRAD Inc. (2,975) (624)
Merger and related costs (4,159) ---
------- -------
Total $(3,349) $ 2,815
======= =======
NOTE 4- SEGMENT INFORMATION
The Company organizes its business into two reportable segments: the
Lumisys Sunnyvale/Tucson ("Sunnyvale") division and the Imagraph
division ("Imagraph"). Sunnyvale manufactures and markets an integrated
suite of hardware and software products for digitizing medical images.
Imagraph manufactures and markets a full line of precision frame-grabber
boards and a software package for machine vision and scientific
applications.
The segments' accounting policies are the same as those described in the
summary of significant accounting policies. The Company evaluates
performance based on net income or loss before income taxes. Wholesale
prices are used to report intersegment sales. Sunnyvale's total assets
include the initial investment in Imagraph and amounts receivable from
Imagraph, which are eliminated in consolidation.
The Company's reportable business segments are strategic business units
that offer different products. Each segment is managed separately
because they require different technologies and market to distinct
classes of customers.
Elimination
Sunnyvale Imagraph of intercompany Total
--------- -------- --------------- -----
1996
Revenues $23,226 $ 5,460 --- $28,686
Income (loss) before taxes $ 4,645 $ (168) --- $ 4,477
Total assets $33,750 $ 2,159 $(2,668) $33,241
1997
Revenues $23,614 $ 6,220 $ (125) $29,709
Income (loss) before taxes $(2,331) $ 207 --- $(2,124)
Total assets $34,421 $ 2,620 $(2,623) $34,418
1998
Revenues $19,381 $ 5,383 $ (218) $24,546
Income (loss) before taxes $ 1,464 $ (346) --- $ 1,118
Total assets $30,716 $ 5,001 $(5,111) $30,606
Sales to international customers, primarily located in Europe, represented,
17%, 12% and 9% of total sales in 1998, 1997 and 1996, respectively. All
transactions are denominated in U.S. dollars.
NOTE 5 - STOCKHOLDER'S EQUITY
Accounting for Stock Issued to Employees
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for
under SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation
expense is recognized.
Stock Plans
The Company maintains five stock option plans summarized below.
Effective March 12 1998, the Company offered non-officer employees
holding outstanding options the opportunity to exchange each option
share for one option share priced at $4.16, the closing price on that
date. All other terms remained unchanged. As a result of the offer,
285,636 options were exchanged which are included in the 1998 grant
information and the table below.
The 1987 Stock Option Plan
The 1987 Stock Option Plan (the "1987 Plan") provides for the issuance
of Common Stock and granting of options for Common Stock to employees,
officers, directors and consultants of the Company. From inception of
the 1987 Plan through 1995, the Company reserved 1,375,000 shares of
Common Stock for issuance under the Plan. The 1987 Plan provides for the
grant of incentive stock options and nonstatutory stock options
(designated "Supplemental Stock"). Incentive stock options are
available for employees, officers and employee directors and are granted
at exercise prices which are not less than 100% of fair market value on
the date of the grant. Supplemental Stock is available for employees,
officers, consultants and directors and is granted at exercise prices
not less than 85% of fair market value on the date of grant. All
options are to have a term not greater than ten years from the date of
grant. The Board or its delegate shall determine the number of shares
for which an option can be granted. Options granted generally vest 25%
after one year and then ratably at 6.25% per quarter over a three year
period. In September 1995, the Board of Directors determined that no
additional options would be granted under the 1987 Plan.
The 1995 Stock Option Plan
In September 1995, the Board of Directors adopted the 1995 Stock Option
Plan (the "1995 Plan") under which an aggregate of 900,000 shares of
Common Stock have been reserved for issuance upon exercise of options
granted to employees, officers, employee directors and consultants of
the Company.
The 1995 Plan provides for the grant of both incentive stock options and
nonstatutory stock options (designated "Supplemental Stock"). The
maximum term of options granted under the 1995 Plan is ten years. The
exercise price of incentive stock options granted under the 1995 Plan
must equal at least the fair value of the Company's Common Stock on the
date of grant. The exercise price of Supplemental Stock options under
the Plan must equal at least 85% of the fair market value of the
Company's Common Stock on the date of grant. The exercise price of
options granted to any person who at the time of grant owns stock
possessing more than 10% of the total combined voting power of all
classes of stock must be at least 110% of the fair market value of such
stock on the date of grant and the terms of these options cannot exceed
five years. The Board or its delegate shall determine the number of
shares for which an option can be granted. Options granted under the
1995 Plan will generally vest 25% after one year and then ratably at 6.25%
per quarter over a three year period. The 1995 Plan will terminate in
September 2005, unless terminated earlier by the Board. In each of the
years 1998, 1997 and 1996 the Board granted options for 714,650, 42,550
and 153,225 shares of Common Stock, respectively.
1995 Non-Employee Directors Stock Option Plan
In August 1995, the Board adopted the 1995 Non-Employee Directors Stock
Option Plan (the "Directors Plan") and amended it in March 1998, which
provided for the automatic grant of options to purchase shares of Common
Stock to non-employee directors of the Company. The Directors Plan will
be administered by the Board.
The maximum number of shares of Common Stock that may be issued pursuant
to options granted under the Directors Plan is 262,500. Pursuant to the
terms of the Directors Plan, each person who is elected as a director of
the Company or a compensated Chairman of the Board (a "Non-Employee
Director") will automatically be granted an option to purchase 50,000
shares of Common Stock on the date of his or her election to the Board.
On the date of adoption of the Directors Plan, each person who was then
a Non-Employee Director of the Company and who had not received within
the one-year period prior to adoption of the Directors Plan either an
option grant or other right to purchase shares of Common Stock, was
granted an option to purchase 50,000 shares of Common Stock under the
Directors Plan. Thereafter, each Non-Employee Director will
automatically be granted an option to purchase an additional 50,000
shares of Common Stock under the Directors Plan on the date any and all
previous options or stock purchases by such person either under the
Directors Plan or otherwise become fully vested. Options granted under
the Directors Plan will vest 25% after one year and then ratably at 6.25%
per quarter thereafter over a three year period.
No options granted under the Directors Plan may be exercised later than
ten years from the date of grant. The exercise price of options under
the Directors Plan must be equal to the fair market value of the Common
Stock on the date of grant. Options granted under the Directors Plan
are generally nontransferable. The Directors Plan will terminate August
2005 unless terminated earlier by the Board. In 1998 and 1997, options
were granted under the plan for 212,892 and 56,250 shares of Common
Stock, respectively. No options were granted in 1996.
The CompuRAD Plans
In November 1997, in connection with the acquisition of CompuRAD, the
Company assumed the stock option plans of CompuRAD. The options for
shares outstanding were converted to options to purchase 379,017 shares
of Common Stock of the Company. CompuRAD had a non-qualified stock
option plan under which options for 69,600 shares of common stock were
granted in 1996. In July 1996, the Board of Directors of CompuRAD
adopted the 1996 Stock Plan ("the 1996 Plan"), reserving 371,200 shares
for issuance thereunder. Under the 1996 Plan, options for 322,429
shares of common stock were granted in 1997. No additional options will
be granted under the CompuRAD plans.
The 1998 Non-Officer Stock Option Plan
In March 1998, the Board adopted the 1998 Non-Officer Stock Option Plan
(the "1998 Plan"). The 1998 Plan provides for the grant of nonstatutory
stock options to non-officer employees and consultants of the Company.
550,000 share have been reserved for issuance under the 1998 Plan. The
maximum term of options granted under the 1998 Plan is ten years. The
exercise price of incentive stock options granted under the 1998 Plan
must equal at least 85% of the fair market value of the Company's Common
Stock on the date of grant. The Board or its delegate shall determine
the number of shares for which an option can be granted. Options
granted under the 1998 Plan will generally vest 25% after one year and
then ratably at 6.25% per quarter over a three year period. Under the
1998 Plan, options for 567,019 shares were granted in 1998.
A summary of the Company's stock option activity is presented below (in
thousands, except per share amounts):
Year Ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------ ------ ----- ------ -----
Outstanding beginning of period 784 $ 5.21 835 $3.07 1,163 $1.64
Granted 1,780 3.97 402 6.38 223 6.61
Exercised (116) 0.92 (312) 0.26 (409) 0.44
Canceled (566) 5.79 (141) 2.36 (142) 4.50
------ ------ ----- ----- ------ ----
Outstanding at period end 1,882 4.13 784 5.21 835 3.07
====== ====== ===== ===== ====== ====
Options vested at period end 574 4.08 291 3.86 303 1.22
====== ====== ===== ===== ====== ====
Weighted average grant date fair
value of such options granted
during the year $ 4.00 $4.82 $5.09
The following table summarizes information about fixed stock options
outstanding at December 31, 1998 (in thousands, except per share
amounts):
Options Outstanding Options Vested
------------------------------- -----------------------
Weighted-
Number Weighted-Average Average Weighted-
Range of Out- Remaining Exercise Number Average
Exercise Prices standing Contractual Life Price Vested Exercise Price
- - --------------- -------- ---------------- -------- ------ --------------
$0.60 to $3.25 301 8.13 years $ 2.37 104 $ 0.77
3.88 to 3.88 786 9.20 3.88 210 3.88
4.00 to 4.31 529 9.02 4.23 131 4.16
4.50 to 9.88 266 8.00 6.63 129 6.98
-------- ------
1,882 8.81 $ 4.12 574 $ 4.08
======== ======
Employee Stock Purchase Plan
In September 1995, the Company's Board of Directors approved the 1995
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000
shares of Common Stock for issuance to eligible employees. The Purchase
Plan permits eligible employees to purchase Common Stock through
periodic payroll deductions of up to 10% of their annual compensation.
Each offering period will have a duration of 12 months and shares of
Common Stock will be purchased for each participant at semi-annual
intervals during each offering period. The price at which the Common
Stock is purchased under the Purchase Plan is equal to 85% of the lower
of the fair value on the commencement date of each offering period or
the semi-annual purchase date. As of December 31, 1998, 91,157 shares
had been issued under the Purchase Plan.
Pro Forma Information
Pro forma information regarding net income and net (loss) per share is
required by FASB 123 and has been determined as if the Company had
accounted for options granted under its stock option plans, including
the Purchase Plan under the fair value method of FASB 123. The fair
value of each option is estimated on the date of grant using the Black-
Scholes option-valuation model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively:
dividend yield of 0% for all years; expected volatility of 66.0%, 66.0%
and 57.8%, risk-free interest rates of 5.20%, 6.27% and 6.01%; and
expected lives of 4, 6 and 3 years for non-officer/director and 4, 5,
and 5 years for officers and directors.
The fair value of the employees' purchase rights under the Purchase Plan
was estimated using the Black-Scholes option-valuation model with the
following assumptions for 1998, 1997 and 1996, respectively: dividend
yield of 0% for all years; an expected life of 1 year for all years;
expected volatility of 66%, 66% and 59%; and risk-free interest rates of
5.20%, 5.66% and 5.52%. The weighted-average fair value of purchase
rights granted was $3.44, $3.95, and $2.74 per share for 1998, 1997, and
1996, respectively.
Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Net income (loss)
As reported $ 682 $(3,349) $2,815
Pro forma $ (750) $(3,966) $2,573
Net income (loss) per share - basic
As reported $ 0.07 $ (0.33) $ 0.29
Pro forma $(0.08) $ (0.39) $ 0.27
Net income (loss) per share - diluted
As reported $ 0.07 $ (0.33) $ 0.29
Pro forma $(0.08) $ (0.39) $ 0.26
Warrant
Warrants for the purchase of 92,800 shares of Common Stock were
outstanding at December 31 1998, with exercise prices of $7.20 per
share. These warrants are currently exercisable, will terminate in
August 2001, and may be exercised on a net basis.
Shares reserved
The Company has reserved shares of Common Stock for potential future
issuance consisting of (i). 92,800 issuable upon exercise of warrants;
and (ii). 2,071,345 issuable upon exercise of options under the employee
stock option plans, the Director plan or the Purchase Plan.
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Current:
Federal $ 338 $1,016 $1,619
State 98 233 358
------- ------- -------
436 1,249 1,977
------- ------- -------
Deferred:
Federal --- (24) (365)
State --- --- 50
------- ------- -------
--- (24) (315)
------- ------- -------
$ 436 $1,225 $1,662
======= ======= =======
The provision (benefit) reconciles to the amount computed by multiplying
income (loss) before tax by the U.S. statutory rate (34%) as follows (in
thousands):
Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Provision (benefit) at statutory rate $376 $ (722) $1,522
Decrease in valuation allowance --- --- (62)
CompuRAD pre-acquisition net operating
Loss carryforward for 1997 --- 1,190 ---
State taxes, net of federal benefit 65 (127) 269
Nondeductible acquisition costs --- 860 ---
Nondeductible S corporation loss --- --- (66)
Other (5) 24 (1)
------- ------- -------
$436 $1,225 $ 1,662
======= ======= =======
Deferred tax assets consist of the following (in thousands):
December 31,
----------------------
1998 1997
---------- ----------
Net operating loss carryforwards $1,174 $1,248
Tax credit carryforwards 310 98
Nondeductible accruals 906 2,017
Depreciation and amortization 56 136
-------- -------
2,446 3,499
Deferred tax assets valuation allowance (993) (2,046)
-------- -------
Net deferred tax assets $1,453 $1,453
======== =======
Management believes that the available objective evidence, including the
recent acquisitions made by the Company and the necessary expenditures
for research and development and for marketing in the high technology
segment it pursues, creates uncertainty regarding the attainment of
sufficient profitability to realize the deferred tax assets and
therefore a partial valuation allowance has been recorded.
At December 31, 1998, the Company had net operating loss carry-forwards,
as the result of the acquisition of Imagraph and the merger with
CompuRAD, available to reduce income taxes for federal and state income
tax purposes of approximately $3.3 million and $1.3 million,
respectively; such carry-forwards expire through 2017. As a result of
an ownership change and consolidated return rules, the annual
utilization of such carryforwards is limited.
NOTE 7 - RELATED PARTY TRANSACTIONS
During 1995, the Company made a loan totaling $125,000 to an employee of
the Company. The loan bears interest at 7.96% per annum and is payable
at a rate of $25,000 plus accrued interest annually commencing March 1,
1996. In addition, the Company has entered into a non-competition
agreement with the same employee at a rate of $25,000 per year over a
five year period commencing March 1, 1995. In 1998, the employee was
terminated. The terms of the note and non-competition agreement remain
the same.
In November 1998, the Company loaned an officer and director of the
Company $100,000, secured by common stock of the Company. The loan bears
interest at the rate of 4.47% per annum. Principal and accrued interest
are due and payable November 1999. If employment is terminated, the
principal and accrued interest are payable immediately after such
termination.
The Company's president was, and certain of the Company's stockholders
are, stockholders of Arizona State Radiology ("ASR"). Certain
technology was transferred to CompuRAD at its inception by ASR. The
terms and amount to be paid to ASR for such technology were subject to
negotiations between the parties, which were finalized in July 1996.
The final settlement, which is reflected in the accompanying
consolidated financial statements as if it had occurred on January 1,
1993, called for CompuRAD to pay ASR a settlement consisting of common
stock, a note payable, and a deferred payment of $541,676 due either in
cash or stock. The technology was valued at $610,000, based on the
value of consideration given, and was amortized over a three-year period
beginning January 1, 1993. The technology is fully amortized in the
accompanying consolidated balance sheets. CompuRAD issued 86,749 and
32,226 shares of stock to ASR in November 1996 and September 1997 in
full settlement of the deferred payment. The note payable consists of a
$250,000 unsecured, non-interest bearing note which is payable on
December 31, 2002. Original issue discount has been recorded to
establish the effective interest rate of the note to 14% per annum.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancelable operating leases
which expire at various dates through June 30, 2002. Future minimum
lease commitments are as follows (in thousands):
Year ending
December 31,
--------------
1999 $ 843
2000 841
2001 550
2002 155
-------
$2,389
=======
Total rent expense was approximately $872,000, $608,000 and $485,000 for
1998, 1997 and 1996, respectively.
Legal Proceedings
On July 9, 1997 and July 10, 1997, two class action complaints were
filed, the first in the Superior Court of the State of California,
County of Santa Clara, and the second in 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 these actions 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.
Schedule II: Valuation and Qualifying Accounts
Balance at Balance at
Beginning end
of year Additions Deductions of year
--------- --------- ---------- ---------
Year ended December 31, 1996:
Allowance for doubtful accounts $ 249 $ 130 $ (3) $ 376
Inventory reserves $ 833 $ 434 $(332) $ 935
Year ended December 31, 1997:
Allowance for doubtful accounts $ 376 $ 580 $(299) $ 657
Inventory reserves $ 935 $ 228 $ (13) $1,150
Year ended December 31, 1998:
Allowance for doubtful accounts $ 657 $ 60 $ --- $ 717
Inventory reserves $1,150 $ 136 $(195) $1,091
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The information required by this Item concerning the Company's
directors is incorporated by reference to the Company's Proxy Statement
related to the 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the Company's
fiscal year end ( the "1999 Proxy Statement").
(b) The executive officers of the Company and their ages as of February
28, 1998 are as follows:
Name Age Position
- - --------------- --- ------------------------------------------
Phillip Berman 45 Chief Executive Officer and Director
Dean MacIntosh 40 Vice President and Chief Financial Officer
John M. Burgess 56 Vice President, Sales
Mark Mariotti 36 Vice President, General Manager, Imagraph
Duncan Moffat 38 Vice President, Operations
Phillip Berman, M.D., has served as a member of the Company's Board of
Directors and President since joining the Company in November 1997 as a
result of the acquisition of CompuRAD. In August 1998, Dr. Berman was
appointed Chief Executive Officer. Dr. Berman founded CompuRAD and
served as Chairman, President and Chief Executive Officer of CompuRAD
since 1992. After practicing medicine in New York, Dr. Berman founded
Arizona State Radiology, P.C., a radiology practice in Tucson, Arizona
in 1988. Dr. Berman served as President of ASR until 1995 and as
Chairman of Radiology of St. Mary's Hospital in Tucson through 1992.
Dean MacIntosh was appointed as Lumisys' Chief Financial Officer in
August 1998. Ms. MacIntosh has served as Vice President, Finance since
February, 1997, and joined Lumisys as Controller in August 1995. From
1987 to 1995, Ms. MacIntosh worked at SSE Telecom, Inc., a satellite
communications company where she last held the position of Vice
President, Administration and Corporate Controller.
John M. Burgess has served as the Company's Vice President of Sales
since May 1990. From 1986 to 1990, Mr. Burgess served as Vice
President, Sales and Marketing for Diasonics, a medical imaging company.
Prior to joining Diasonics, Mr. Burgess served as an Executive Vice
President of ADAC Laboratories.
Mark Mariotti has served as Vice President of Lumisys and General
Manager of the Imagraph division of Lumisys since February 1997 and as
Vice President of Finance and Operations of the Imagraph division of
Lumisys since joining Lumisys in March 1995. From July 1988 to March
1995, Mr. Mariotti held several postions at Imagraph, including Vice
President of Finance and Operations and Controller. Prior to joining
Imagraph, Mr. Mariotti held senior financial and accounting positions
with Charles River Data Systems and Honeywell.
Duncan Moffat joined the Company as Vice President of Operations in July
1998. From 1995 to 1998, Mr. Moffat served as Director of Manufacturing
for Lucas Decco, an industrial computer manufacturer. From 1993 to 1995,
Mr. Moffat served as a Project Manager for Lucas Control Systems.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to
the information under the caption "Compensation of Executive Officers"
in the Company's 1999 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to
the information under the caption "Certain Transactions" in the
Company's 1999 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(1) Financial Statements - See Item 8 of this report
(2) Financial Statement Schedules - See Item 8 of this report
(3) Index to Exhibits
Exhibit
Number Description of Document
- - ------- --------------------------
2.2 Form of Agreement and Plan of Merger and Reorganization dated
as of September 28, 1997, among Lumisys Incorporated, SAC
Acquisition Corporation and CompuRAD, Inc. (3)
3.1 Amended and Restated Certificate of Incorporation of Lumisys
Delaware (2)
3.2 Certificate of Incorporation of the Company, filed with the
Delaware Secretary of State on November 17, 1995 (2)
3.3 Bylaws of Lumisys Delaware (1)
3.4 Certificate of Amendment to Amended and Restated Certificate
of Incorporation of Lumisys Delaware, filed with the Delaware
Secretary of State on October 26, 1995 (1)
4.1 Reference is made to Exhibits 3.1 through 3.3
4.2 Specimen stock certificate (1)
10.1 Form of Indemnity Agreement entered into between the Company
and its directors and officers (1)
*10.2 The Company's 1987 Stock Option Plan (the "1987 Plan") (1)
*10.3 Form of Incentive Stock Option under the 1987 Plan (1)
*10.4 Form of Supplemental Stock Option under the 1987 Plan (1)
*10.5 Form of Early Exercise Agreement under the 1987 Plan (1)
*10.6 The Company's 1995 Stock Option Plan (the "1995 Plan") (1)
*10.7 Form of Incentive Stock Option under the 1995 Plan (1)
*10.8 Form of Supplemental Stock Option under the 1995 Plan (1)
*10.9 Form of Early Exercise Agreement under the 1995 Plan (1)
*10.10 The Company's 1995 Employee Stock Purchase Plan (1)
*10.11 The Company's 1995 Non-Employee Directors' Stock Option Plan
(1)
10.12 Stock Purchase Agreement dated as of March 31, 1995 among the
Company, Imagraph Corporation and Microfield Graphics, Inc.(1)
10.13 The Company's Amended and Restated Information and
Registration Rights Agreement dated as of April 26, 1991, as
amended (1)
10.14 Registration Rights Granted to Nicholas K. Sheridon, dated
December 15, 1987 between the Company and Nicholas K. Sheridon
(1)
10.15 Lease, dated January 1, 1993 between Teachers Realty
Corporation and Imagraph Corporation (1)
10.16 Industrial Real Estate Lease, dated October 12, 1995, by and
between the Company and APT-Cabot California, Inc. (1)
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.0 Financial data schedule
- - ---------------------------------------------------
(1) Incorporated by reference to the exhibit bearing the same number in
the Company's Form S-1 Registration Statement declared effective
November 14, 1995 (File No. 33-97230).
(2) Incorporated by reference to the exhibit bearing the same number in
the Company's Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the exhibit bearing the same number in
the Company's Form 8-K filed on October 6, 1997 (File No. 033-97230).
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K filed in the fourth quarter of 1998
None.
(d) Financial statement schedules - The response to this portion of
Item 14 is submitted in item 8 of this report.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 in
Sunnyvale, California on March 30, 1998:
LUMISYS INCORPORATED
Dated: March 30, 1999 By/s/ Phillip Berman
-----------------------
Phillip Berman, M.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Phillip Berman Chief Executive Officer March 30, 1999
- - ----------------------- and Director
Phillip Berman, M.D.
/s/Bala S. Manian Chairman of the Board March 30, 1999
- - ----------------------- of Directors
Bala S. Manian, Ph.D
/s/ Dean MacIntosh Vice President and Chief March 30, 1999
- - ----------------------- Officer (Principal Financial
Dean MacIntosh and Accounting Officer)
/s/ Douglas DeVivo Director March 30, 1999
- - -----------------------
Douglas G. DeVivo, Ph.D.
/s/ C. Richard Kramlich Director March 30, 1999
- - -----------------------
C. Richard Kramlich
/s/ David Lapan Director March 30, 1999
- - -----------------------
David Lapan, M.D.
/s/ Craig Klosterman Director March 30, 1999
- - -----------------------
Craig L. Klosterman
/s/ Austin Vanchieri Director March 30, 1999
- - -----------------------
Austin E. Vanchieri
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
LUMISYS, INCORPORATED
12/31/98
NAME STATE OF INCORPORATION
X-RAY SCANNER CORPORATION CALIFORNIA
COMPURAD, INC. DELAWARE
IMAGRAPH CORPORATION OREGON
EXHIBIT 23.1 Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-30117, 333-42199, 33-80253, 333-73019 and
333-73017) of Lumisys Incoporated of our report dated January 22, 1999
appearing on Page 23 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 30, 1999
<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LUMISYS
INCORPORATED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENT-ASSETS> 27934000
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