UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 0-26832
Lumisys Incorporated
(Exact name of registrant as specified in its charter)
Delaware 77-0133232
(State of incorporation) (I.R.S. Employer Identification No.)
225 Humboldt Court, Sunnyvale, CA 94089
(Address of principal executive offices) (Zip Code)
(408) 733-6565
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 7, 1999, 9,509,894 shares of the registrant's Common Stock, $.001
par value, were outstanding.
Lumisys Incorporated
Index
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flow for the Three
Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lumisys Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
March 31, December 31,
1999 1998
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 13,598 $ 10,651
Short-term investments 3,001 7,007
Accounts receivable, net of allowances
of $682 and $717 4,718 4,206
Inventories 4,599 4,046
Deferred tax assets 1,453 1,453
Other current assets 561 571
-------- ----------
Total current assets 27,930 27,934
Property and equipment, net 817 753
Purchased software, net 1,793 1,919
-------- ----------
$ 30,540 $ 30,606
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,842 $ 1,601
Accrued expenses 2,307 2,791
Merger and related costs 881 900
-------- ----------
Total current liabilities 5,030 5,292
-------- ----------
Note payable to related party 151 146
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares
authorized; no shares issued and outstanding --- ---
Common stock, $0.001 par value; 25,000 shares
authorized; 9,581 and 9,957 shares issued
and outstanding, respectively 10 10
Additional paid-in capital 28,822 28,887
Accumulated deficit (3,473) (3,725)
Deferred compensation --- (4)
-------- ----------
Total stockholders' equity 25,359 25,168
-------- ----------
$ 30,540 $ 30,606
======== ==========
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)
(n thousands, except per share amounts)
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
----------- -----------
Sales $ 6,730 $ 6,472
Cost of sales 3,521 2,884
------- -------
Gross profit 3,209 3,588
------- -------
Operating expenses:
Sales and marketing 1,060 914
Research and development 917 1,600
General and administrative 964 950
------- -------
Total operating expenses 2,941 3,464
------- -------
Income from operations 268 124
Interest income 143 261
------- -------
Income before income taxes 411 385
Provision for income taxes 159 148
------- -------
Net income $ 252 $ 237
======= =======
Net income per share
Basic $ 0.03 $ 0.02
======= =======
Diluted $ 0.03 $ 0.02
======= =======
Weighted average shares used to
compute net income per share:
Basic 9,593 10,223
======= =======
Diluted 9,683 10,402
======= =======
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
----------- -----------
Cash flow from operating activities:
Net income $ 252 $ 237
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 240 75
Other 5 5
Changes in assets and liabilities:
Accounts receivable (512) 1,115
Inventories (553) (394)
Other assets 10 (17)
Accounts payable 241 (16)
Accrued expenses (484) (530)
Merger and related costs (19) (463)
------ -----
Net cash provided by (used in) operating activities (820) 12
------ -----
Cash flows from investing activities:
Sales (purchases) of short-term investments, net 4,006 (20)
Purchases of property and equipment (174) (164)
------ -----
Net cash provided by (used in) investing activities 3,832 (184)
------ -----
Cash flows from financing activities:
Proceeds from sale of common stock 3 43
Purchase of treasury stock (68) (1,456)
------ -----
Net cash used in financing activities (65) (1,413)
------ -----
Net increase (decrease) in cash and cash equivalents 2,947 (1,585)
Cash and cash equivalents at beginning of period 10,651 7,522
------ -----
Cash and cash equivalents at end of period $13,598 $ 5,937
======= =======
The accompanying notes are an integral part of these financial statements.
Lumisys Incorporated
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The condensed consolidated financial statements of Lumisys Incorporated (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 1998, included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheet as of March 31, 1999, and the
condensed consolidated statements of income and of cash flow for the three
months ended March 31, 1999 and 1998 are unaudited but, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of the results for these
interim periods.
The results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1999 or any future period.
Note 2 - Net Income Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted earnings per share reflects the weighted-average common shares
outstanding plus the potential effect of dilutive securities which are
convertible to common shares such as options, warrants, convertible debt and
preferred stock.
The following is a reconciliation between the components of the basic and
diluted net income per share calculations for the periods presented below (in
thousands):
Three Months Ended March 31,
1999 1998
------ ------
Net income $ 252 $ 237
====== ======
Weighted average shares outstanding - basic 9,593 10,223
Effect of dilutive securities:
Potential common stock
Stock options and warrants 90 179
------ ------
Weighted average shares outstanding - diluted 9,683 10,402
====== ======
For the period ending March 31 1999 and 1998, respectively, 1,667,087 and
550,308 shares of potential common stock are considered anti-dilutive and are
excluded from the calculation of dilutive net income per share.
Note 3 - Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
earnings such as unrealized gains or losses on available-for-sale short-term
investments. The Company's unrealized gains and losses on available-for-sale
short-term investments have been insignificant for all periods presented.
Note 4 - Composition of Certain Financial Statement Amounts
March 31, December 31,
1999 1998
--------- ----------
(In thousands)
Inventories:
Raw materials $ 4,360 $ 3,649
Work-in-process 783 1,031
Finished goods 584 457
------- -------
5,727 5,137
Less: inventory reserves (1,128) (1,091)
------- -------
$ 4,599 $ 4,046
======= =======
Accrued expenses:
Payroll and related benefits $ 713 $ 1,066
Warranty 410 468
Professional fees 100 129
Unearned revenue 459 599
Income taxes 561 354
Other 64 175
------- -------
$ 2,307 $ 2,791
======= =======
Note 5- 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 included in the notes to the
financial statements for the year ended December 31, 1998, included in the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. 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
Three months ended March 31, 1998:
Sales $ 5,162 $ 1,310 $ --- $ 6,472
Income (loss) before taxes $ 544 $ (159) $ --- $ 385
Total assets at December 31, 1998 $30,716 $ 5,001 $(5,111) $30,606
Three months ended March 31, 1999:
Sales $ 5,901 $ 842 $ (13) $ 6,730
Income (loss) before taxes $ 1,121 $ (710) $ --- $ 411
Total assets at March 31, 1999 $31,718 $ 4,992 $(6,170) $30,540
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Except for the historical information contained herein, the following
discussion contains forward-looking statements within the meaning of section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. As such, they are subject to a number of uncertainties that could
cause actual results to differ materially from the statements. The words
"expect," "believe," "anticipate," "intend" and words of similar import are
intended to identify these statements as forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as those discussed in the
Company's 1998 Annual Report on Form 10-K and other documents filed by the
Company with the Securities and Exchange Commission. The Company does not
undertake any obligation to update forward-looking statements.
Overview
Lumisys Incorporated ("Lumisys" or the "Company") designs, manufactures and
markets computed radiography ("CR") systems that scan medical or industrial
images from a reusable phosphor plate and a family of precision digitizers
that convert medical images on film 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, industrial inspection and
multimedia imaging.
In December 1998, the Company introduced a CR system for use in the medical
market, the ACR-2000 DeskTopCR. The medical CR system utilizes 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. Since its introduction
in December 1998, the Company has sold over 100 ACR-2000 DeskTopCR systems.
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 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 CCD
film digitizers and CR software with its new ACR-2000 product
Results of Operations
Total sales for the first quarter of 1999 increased 4.0% to $6.7 million from
$6.5 million for the first quarter of 1998. The increase was due to the first
full quarter of sales of the ACR-2000 which was introduced in December 1998.
Sales of the Company's digitizer products in the U.S. continued to decline,
while international sales were consistent with the same quarter in the prior
year. Sales by the Company's Imagraph division decreased by 36.1% from the
prior year due to consolidation of distributors and changes in technology
needs.
Gross profit for the first quarter of 1999 decreased 10.6% to $3.2 million
from $3.6 million for the corresponding period of 1998. Gross margin
decreased to 47.7% in the first quarter of 1998 from 55.4% in the first
quarter of 1998, primarily due to the transfer of the manufacturing
engineering function from research and development to manufacturing overhead
in late 1998, upon the completion of the ACR-2000. In addition, material
costs increased due to the current product mix. If sales volume of the ACR-
2000 increases and as the sheet metal versions of the digitizer are phased
out, the Company believes margins should improve.
Sales and marketing expenses increased 16.0% in the first quarter of 1999 to
$1.1 million from $914,000 in the first quarter of 1998. The increase was
primarily due to the introduction of the ACR-2000 and the expansion of the
international sales force. The Company expects its sales and marketing
expenses to increase to further develop and support the CR distribution
channel. As a percentage of sales, these expenses increased to 15.8% in the
first quarter of 1999 from 14.1% in the first quarter of 1998.
Research and development expenses decreased 42.7% in the first quarter of 1999
to $917,000 from $1.6 million in the same quarter of 1998, primarily due to
restructuring following the acquisition of CompuRAD. In addition, the ACR-2000
project was completed in 1998 and transferred to manufacturing. As a
percentage of sales, research and development expenses also decreased to 13.6%
in the first quarter of 1999 from 24.7% in the same quarter of 1998. The
Company expects its research and development expenditures to decrease as a
percent of revenue since the initial CR and video film digitizer developments
are near completion and follow on development efforts will be less
comprehensive 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 if and when the
next new product is identified.
General and administrative expenses increased slightly by 1.5% in the first
quarter of 1999 to $964,000 from $950,000 in the first quarter of 1998.
Economies achieved by the restructuring following the acquisition of CompuRAD
were offset by amortization expense related to the purchased software. As a
percentage of sales, general and administrative expenses remained almost
constant at 14.3% in the first quarter of 1999 compared to 14.7% in the first
quarter of 1998.
The Company recognized a provision for income taxes in the first quarter of
1999 of $159,000 compared with a provision of $148,000 in the corresponding
period of 1998. The Company has provided a partial valuation allowance
against the balance of the deferred tax assets remaining as of March 31, 1999.
The Company expects to continue to be subject to an effective tax rate of
approximately 39% for the remainder of 1999.
Liquidity and Capital Resources
At March 31, 1999, the Company's working capital was $22.9 million. The
Company had cash, cash equivalents and short-term investments of approximately
$16.6 million at March 31, 1999, compared with $17.7 million at December 31,
1998. The decrease is primarily due to $820,000 used in operating activities
in the first quarter 1999, and to a lesser extent, $174,000 of expenditures
for capital property and equipment, primarily related to the upgrades to the
manufacturing facility for production of the ACR-2000. In addition, the
Company repurchased 20,000 shares of the Company's common stock for a total of
$68,000 under it's stock repurchase plan.
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.
Risk Factors
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. The Company expects that these fluctuations will continue.
The Company typically does not obtain long-term volume purchase contracts from
its customers, and a substantial portion of the Company's backlog is scheduled
for delivery within 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.
New Product Development in Hardware and Software Products; Uncertainty of
Market Acceptance. The Company's success is dependent on market acceptance of
its new and existing products. There can be no assurance that sales of new
products will achieve significant market acceptance in the future. The market
for PACS 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, computed radiography or video frame grabbers could cause a
decline in sales or loss of market acceptance of the Company's products. In
particular, several companies have announced developments leveraging the
technology used in flat panel displays to produce high-resolution, two
dimensional image sensor arrays that make it possible for x-ray images to be
captured digitally without film or chemical processing. While this emerging
technology, known as digital radiography ("DR"), is expensive, there can be no
assurance that future advances in this technology or other technologies will
not produce systems better positioned for the marketplace that will therefore
reduce the digitizer and CR market to the then installed base of imaging
systems. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements on a timely or
cost-effective basis, and such failure could have a material adverse effect on
the Company's business and results of operations.
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. In 1996, CLS entered the market 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
CR and 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. For the first quarter of 1999, two
customers represented 14% and 10%, respectively, of the Company's total sales.
Large customers also accounted for a significant portion of the Company's
backlog at March 31, 1999. 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 in the Superior Court of the State of California, County
of Santa Clara, and the United States District Court for the Northern District
of California against the Company, several of its current and former officers
and directors, and its underwriters. The complaints are brought on behalf of
all persons who purchased the Company's common stock between November 15, 1995
and July 11, 1996. The complaints allege that defendants made material false
statements and omitted to disclose material information concerning the
Company's actual and expected performance, causing the price of the Company's
stock to be artificially inflated. The federal complaint alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934; the state
complaint alleges claims under California's securities statutes. Neither
complaint specifies the amount of damages sought. The Company and the other
defendants deny all allegations of wrongdoing. On January 9, 1998, the court
dismissed the state court complaint with leave to amend. On March 31, 1998,
the court dismissed the federal complaint with leave to amend. On May 26,
1998, the state court dismissed plaintiff's first amended complaint with leave
to amend. Plaintiffs have filed a first amended complaint in the federal
action, and a second amended complaint in the state action. Defendants have
filed motions to dismiss both of these complaints. There can be no assurance
that the Company will prevail in this action or that the plaintiffs will not
recover damages.
Third-Party Reimbursement. Third-party payers, such as governmental programs
and private insurance plans, can indirectly affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement that they will provide for the taking, storing and
interpretation of medical images. In recent years, healthcare costs have
risen substantially, and third-party payers have come under increasing
pressure to reduce such costs. In this regard, extensive studies undertaken
by the Clinton Administration, even though not successfully translated into
regulatory action, have stimulated widespread analysis and reaction in the
private sector focused on healthcare cost reductions, which may involve
reductions in reimbursement rates in radiology. A decrease in the
reimbursement amounts for radiological procedures may decrease the amount
which physicians, clinics and hospitals are able to charge patients for such
services. As a result, adoption of teleradiology, 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.
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.
Item 3. 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.
Part 2 - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits furnished:
Exhibit
Number Description of Document
- ----------- --------------------------------
Financial Data Schedule
(b). Reports on Form 8-K: The Company filed no Current Reports on Form 8-K
in the three months ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in Sunnyvale, California, on May
14, 1999:
LUMISYS INCORPORATED
Dated: May 13, 1999 By: /s/ Phillip Berman
----------------------
Phillip Berman, M.D.
Chief Executive Officer
/s/ Dean MacIntosh
----------------------
Dean MacIntosh
Vice President and
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LUMISYS INCORPORATED CONSOLIDATED BALANCE SHETS AT MARCH 31, 1999 AND
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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