SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarter Ended June 29, 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 0-19386
FISCHER IMAGING CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2756787
(State of incorporation) (I.R.S. Employer Identification No.)
12300 North Grant Street
Denver, Colorado 80241
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 452-6800
Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Shares Outstanding as of
Title of Class June 29, 1998
-------------------- ------------------------
Common Stock, $0.01 par value 6,980,150
<PAGE>
FISCHER IMAGING CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
June 29, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and six months ended
June 29, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows -
Three and six months ended
June 29, 1998 and June 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
FISCHER IMAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
June 29, December 31,
1998 1997
------------------------
ASSETS
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,101 $ 3,439
Trade accounts receivable, net of allowance for doubtful
accounts of approximately $674 and $778 at June 29, 1998
and December 31, 1997, respectively 14,048 14,132
Inventories 19,924 17,373
Deferred income taxes 1,334 1,334
Prepaid expenses and other current assets 1,388 1,169
------- -------
Total current assets 37,795 37,447
------- -------
PROPERTY AND EQUIPMENT (at cost)
Manufacturing equipment 9,813 9,521
Office equipment and leasehold improvements 5,483 5,563
------- -------
15,296 15,084
Less-Accumulated depreciation and amortization 9,499 9,417
------- -------
Property and equipment, net 5,797 5,667
------- -------
INTANGIBLE ASSETS, net 3,271 3,615
DEFERRED INCOME TAXES 668 668
DEFERRED COSTS AND OTHER ASSETS 1,618 1,747
------- -------
TOTAL ASSETS $ 49,149 $ 49,144
======= =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt $ 287 $ 224
Trade accounts payable 5,419 4,876
Accrued salaries and wages 1,738 2,027
Customer deposits 2,682 1,136
Accrued warranty and installation costs 1,222 1,090
Accrued restructuring costs 995 1,180
Deferred service revenue 654 771
Other current liabilities 868 964
------- -------
Total current liabilities 13,865 12,268
LONG-TERM DEBT 735 309
ACCRUED RESTRUCTURING COSTS, LONG-TERM 745 900
OTHER NONCURRENT LIABILITIES 475 482
------- -------
TOTAL LIABILITIES 15,820 13,959
------- -------
STOCKHOLDERS' INVESTMENT
Common Stock, $.01 par value, 25,000,000 shares
authorized, 6,980,150 and 6,948,648 shares issued
and outstanding at June 29, 1998 and
December 31, 1997, respectively 70 69
Preferred Stock, 5,000,000 shares authorized:
Series C Junior Participating Preferred Stock,
$.01 par value, 500,000 shares authorized,
no shares issued and outstanding - -
Series D Convertible Preferred Stock, $.01 par value,
1,333,333 shares authorized, issued and outstanding
at June 29, 1998 and December 31, 1997; liquidation
preference of $10,000,000 13 13
Additional paid-in capital 49,366 49,235
Accumulated deficit (16,759) (14,656)
Accumulated other comprehensive income (foreign
currency translation adjustments) 639 524
------- -------
TOTAL STOCKHOLDERS' INVESTMENT 33,329 35,185
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 49,149 $ 49,144
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FISCHER IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
--------------------- ----------------------
June 29, June 30, June 29, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES $15,250 $15,151 $28,917 $27,453
COST OF SALES 9,304 9,808 17,712 18,360
------ ------ ------ ------
Gross profit 5,946 5,343 11,205 9,093
OPERATING EXPENSES
Research and development 1,529 1,554 2,921 3,066
Selling, marketing and 3,968 4,040 7,499 8,716
service
General and administrative 1,266 1,081 2,624 2,242
------ ------ ------ ------
Total operating expenses 6,763 6,675 13,044 14,024
------ ------ ------ ------
LOSS FROM OPERATIONS (817) (1,332) (1,839) (4,931)
Interest expense (59) (12) (113) (49)
Interest income 16 103 46 128
Other (expense) income, net (124) (171) (197) (439)
------ ------ ------ ------
LOSS BEFORE INCOME TAXES (984) (1,412) (2,103) (5,291)
Benefit for income taxes -- -- -- --
------ ------ ------ ------
NET LOSS $ (984) $(1,412) $(2,103) $(5,291)
====== ====== ====== ======
NET LOSS PER SHARE
Basic $ (0.14) $ (0.20) $ (0.30) $ (0.76)
====== ====== ====== ======
Diluted $ (0.14) $ (0.20) $ (0.30) $ (0.76)
====== ====== ====== ======
SHARES USED TO CALCULATE
LOSS PER SHARE
Basic
6,980 6,949 6,980 6,949
====== ====== ====== ======
Diluted 6,980 6,949 6,980 6,949
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FISCHER IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
----------------------
June 29, June 30,
1998 1997
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,103) $ (5,291)
------- -------
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation 1,130 904
Amortization of intangible assets 344 359
Provision for doubtful accounts (112) 31
Provision for excess and obsolete inventories 428 470
Sales and retirements of assets 103 49
Foreign exchange losses 43 385
Restructuring costs (340) --
Other changes in current assets and liabilities-
Decrease in trade accounts receivable 196 4,576
(Increase) Decrease in inventories (3,302) 3,765
Increase in prepaid expenses and other current (219) (77)
assets
Decrease in deferred costs and other assets 129 374
Increase (Decrease) in trade accounts payable 543 (1,476)
Decrease in accrued salaries and wages (289) (322)
Increase in customer deposits 1,546 251
Increase (Decrease) in accrued warranty and 132 (211)
installation costs
Decrease in deferred service revenue (117) (2)
Decrease in other current liabilities (96) (597)
Other (7) 1
------- -------
Total adjustments 112 8,480
Net cash (used in) provided by operating ------- -------
activities (1,991) 3,189
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (410) (1,201)
------- -------
Net cash used in investing activities (410) (1,201)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of common stock, net 132 142
Repayments of long-term debt (141) (219)
------- -------
Net cash used in financing activities (9) (77)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 72 (78)
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,338) 1,833
CASH AND CASH EQUIVALENTS, beginning of period 3,439 3,289
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,101 $ 5,122
======= =======
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FISCHER IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated balance
sheets and statements of operations and cash flows contain all adjustments,
consisting only of normal recurring items, necessary to present fairly the
financial position of Fischer Imaging Corporation (the "Company") at June 29,
1998, its results of operations for the three and six months ended June 29, 1998
and June 30, 1997 and cash flows for the six months ended June 29, 1998 and June
30, 1997.
The unaudited consolidated financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and note disclosures required by generally accepted accounting
principles. The financial statements should be read in conjunction with the
audited financial statements and notes thereto contained in the Company's latest
annual report on Form 10-K for the year ended December 31, 1997.
The Company typically closes its first three fiscal quarters as of the Sunday
closest to the end of March, June and September. In 1998 and 1997, to more
evenly distribute the days between quarters, the first three fiscal quarters are
being closed as of the Monday closest to quarter-end.
2. INVENTORIES
Inventories include costs of materials, direct labor and manufacturing overhead.
Inventories are priced at the lower of cost (using primarily the last-in,
first-out ("LIFO") method of valuation) or market. Writedowns for excess or
obsolete inventories are charged to expense in the period in which conditions
giving rise to the writedowns are first recognized.
Inventories consisted of the following components (in thousands):
June 29, December 31,
1998 1997
---------- ------------
FIFO cost-
Raw materials $13,738 $11,960
Work in process and finished goods 13,060 11,705
LIFO valuation adjustment (586) (586)
------ ------
Total before valuation reserves 26,212 23,079
Less valuation reserves (6,288) (5,706)
------ ------
Inventories, net $19,924 $17,373
====== ======
3. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following (in thousands):
June 29, December 31,
1998 1997
---------- ------------
Accrued sales, property, and
other state and local taxes $ 459 $ 688
Other 409 276
---- ----
Total other current liabilities $ 868 $ 964
==== ====
6
<PAGE>
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following (in thousands):
June 29, December 31,
1998 1997
---------- ------------
Capitalized lease obligations $ 995 $ 505
Other 27 28
----- -----
1,022 533
Less--Current maturities (287) (224)
----- -----
Long-term debt $ 735 $ 309
===== =====
See "Management's Discussion & Analysis - Liquidity and Capital Resources" for a
discussion of the Company's line of credit.
5. NET (LOSS) EARNINGS PER SHARE
The Company presents basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"), which was required to be adopted on December 15, 1997. SFAS 128
establishes standards for computing and presenting basic and diluted earnings
per share. Under this statement, basic earnings or loss per share is computed by
dividing the net earnings or loss by the weighted average number of shares of
common stock outstanding. Diluted earnings or loss per share is determined by
dividing the net earnings or loss by the sum of (1) the weighted average number
of common shares outstanding, (2) if not anti-dilutive, the number of shares of
convertible preferred stock as if converted upon issuance, and (3) if not
anti-dilutive, the effect of outstanding stock options determined utilizing the
treasury stock method. For the three and six month periods included in the
accompanying Consolidated Statements of Operations, the effects of the
convertible preferred stock and stock options were excluded from the calculation
of diluted earnings per share since the result would have been anti-dilutive.
6. RESTRUCTURING COSTS
During the third quarter of 1997, the Company decided to close its Addison,
Illinois manufacturing facility and, accordingly, recorded a $2.9 million
restructuring provision for the anticipated shortfall between required lease
payments and estimated sublease payments during the facility's remaining lease
term (which runs through June 2002), estimated facility closing costs, severance
and certain other non-recurring costs associated with this decision. The Company
expects that the transfer of production from this facility will be completed in
the near future. During the three and six months ended June 29, 1998, the
Company spent approximately $19,000 and $340,000, respectively, for severance
and facility closing costs, net of proceeds from asset dispositions.
7
<PAGE>
7. REPORTING COMPREHENSIVE INCOME
In 1998, the Company adopted Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130, effective for years beginning
after December 15, 1997, establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise except those resulting from
investments by or distributions to its owners. For the Company, comprehensive
income includes only net earnings or loss and foreign currency translation
adjustments, as follows:
Three Months Ended Six Months Ended
------------------- --------------------
June 29, June 30, June 29, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
Net loss $(984) $(1,412) $(2,103) $(5,291)
Foreign currency
translation adjustments 43 87 115 307
---- ------ ------ ------
Comprehensive loss $(941) $(1,325) $(1,988) $(4,984)
==== ====== ====== ======
8. CHANGES TO DIRECTOR STOCK OPTION PLAN
Under the Company's Nonemployee Director Plan (the "Director Plan"), adopted in
1993, non-qualified options to acquire shares of common stock may be granted to
nonemployee directors, at a price no less than fair market value on the date of
grant. At the Company's June 12, 1998 Annual Meeting, stockholders approved an
amendment and restatement of the Director Plan to, among other changes, increase
from 200,000 to 300,000 the number of shares of common stock authorized for
issuance under the Director Plan, increase from 2,000 to 5,000 the number of
shares granted annually to nonemployee directors, decrease from 2,000 to 1,000
the number of options granted annually to directors who serve on the
Compensation Committee, extend the term of the options, and increase the period
for exercising options after leaving the Board.
At the same time, to acknowledge the services provided by its nonemployee
directors and to increase the Company's ability to retain such Directors,
stockholders also approved the repricing of certain outstanding options
previously granted to nonemployee directors, in view of the significant decline
in the market value of the Company's common stock. The repricing resulted in the
lowering of the exercise price of 68,000 options with existing exercise prices
ranging from $4.6875 to $13.380 to an exercise price of $4.25. The repricing of
outstanding options did not have a material impact on the operating results of
the Company.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto appearing in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (the "Form 10-K"). This Form 10-Q,
including the information incorporated by reference herein, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. For this purpose, statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes", "expects", "anticipates",
"plans", "estimates", and similar words and expressions are intended to identify
such statements. These forward-looking statements include statements concerning
the growth of the Company's markets, future operating results including revenues
and expenses, the Company's ability to satisfy its short and long-term liquidity
needs, the success and timing of its cost-cutting measures including the closure
of the Company's Addison, Illinois manufacturing facility, sales under the
Company's strategic alliances, OEM agreements and otherwise, marketing
arrangements for its Mammotest products and other products, and other matters.
These forward-looking statements involve risks and uncertainties. The actual
results that the Company achieves may differ materially from those discussed in
such forward-looking statements due to the risks and uncertainties described in
this Form 10-Q, in the Business section of Form 10-K under the headings "Risks
Associated with OEM Agreements", "International Operations," "Strategic
Alliances", "Risks of Technological Change and New Products," "Risks of New
Product Development and Market Acceptance," "Manufacturing and Operating Risks,"
"Competition," "Government Regulation," "Government Reimbursement," "Patents and
Intellectual Property," "Risk of Dependence on Key Personnel," "Product
Liability, Market Withdrawal, and Product Recalls", in the Market for
Registrant's Common Equity and Related Stockholder Matters section of Form 10-K
under the headings "Risk of Price Volatility of Common Stock," "Risks Associated
with Shares Eligible for Future Sale," "Risks Associated with Control by
Management and Certain Stockholders," and "Certain Anti-Takeover Effects," in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") section of Form 10-K under the "Overview" heading, and
elsewhere in the Business and MD&A sections and other sections of Form 10-K.
OVERVIEW
The Company designs, manufactures and markets specialty and general purpose
medical imaging systems for the diagnosis and treatment of disease. The
Company's newest product lines are directed towards medical specialties in which
image-guided, minimally-invasive therapies are replacing open surgical
procedures. These products are used primarily in the diagnosis and treatment of
breast cancer, heart disease and vascular disease. The Company also designs and
manufactures specialty x-ray imaging components and subsystems for several
leading medical products companies as an original equipment manufacturer ("OEM")
and sells general radiology systems for use in hospitals, clinics and
physicians' offices.
9
<PAGE>
Revenues during the second quarter of 1998 were $15,250,000, about the same as
the second quarter of 1997, but a 12% increase as compared to the first quarter
of 1998. Gross margin as a percent of revenues increased from approximately 35%
in the second quarter of 1997 to 39% in the second quarter of 1998. Operating
expenses of $6,763,000, in the second quarter were about the same as the
$6,675,000 for the second quarter of 1997. Excluding legal costs, which
increased primarily due to the patent infringement lawsuit against Trex Medical
Corporation, operating expenses were reduced in the second quarter of 1998 as
compared to the second quarter of 1997. The resulting net loss for the second
quarter of 1998 was $984,000, or $.14 per share, as compared to the 1997 second
quarter net loss of $1,412,000, or $.20 per share.
The Company experienced losses in late 1996, during the year ended December 31,
1997, and during the first half of 1998. Throughout this period, sales under
the Company's OEM arrangements were significantly lower than comparable prior
periods, primarily due to decreased shipments of Tilt-C systems to GE Medical
Systems. During the fourth quarter of 1996 and the first half of 1997, the
Company also experienced decreases in the sales of its Mammotest systems versus
comparable prior periods. However, during the last six months of 1997 and the
first six months of 1998 sales of Mammotest systems increased versus comparable
prior periods. The Company continues to face aggressive and successful
competition within the surgical stereotactic core needle breast biopsy market
from U. S. Surgical Corporation but believes that its marketing alliance with
Johnson and Johnson's Ethicon EndoSurgery, Inc. ("Ethicon EndoSurgery"), entered
into in October 1997, is beginning to favorably impact its revenues in this
market.
In November 1997, the Company entered into an alliance with Sterling Diagnostic
Imaging, Inc. ("Sterling"), under which the Company will develop specific
digital radiographic systems, utilizing Sterling's DirectRay(TM) digital image
detector technology. The Company believes that production shipments of digital
radiography systems will begin during the fourth quarter of 1998, although no
assurance can be given to that effect.
The Company believes that, in addition to measures to increase sales of its
products, improving factory utilization and limiting growth of operating
expenses will be key elements in its efforts to return to acceptable levels of
profitability. Accordingly, during the third quarter of 1997, the Company
announced its intention to close its Addison, Illinois manufacturing facility
and outsource or transfer Addison production. The Company recorded a $2.9
million restructuring provision in the third quarter, to provide for the
anticipated shortfall between required lease and estimated sublease payments
during the facility's remaining lease term, estimated facility closing costs,
severance and certain other non-recurring costs associated with this decision.
The Company believes that transfer of production from the Addison facility is
nearing completion.
10
<PAGE>
The Company cannot predict when it will return to profitability, although it has
taken significant steps to improve sales and reduce manufacturing and other
costs. Improvement in the Company's results of operations will depend on many
factors including, among other things, demand for the Company's products, the
ability of the Company to maintain or increase gross margins, control
manufacturing and other costs, effectively implement distribution agreements for
its products, implement its marketing and sales strategies in the United States
and internationally, and the successful development and introduction of new
products.
The Company has experienced and is likely to continue to experience significant
quarterly and annual fluctuations in revenues, operating results and net income,
depending on such factors as the timing of large system shipments to customers,
the timing of orders under OEM contracts and related manufacturing and shipment
scheduling, new product introductions and new marketing programs by the Company
and its competitors, the effect of economic conditions on the Company's markets,
the effects of managed healthcare on customer capital expenditures and
reimbursement, increases in marketing and research costs in relation to sales,
regulatory clearance of new products, seasonal purchasing patterns of hospitals
and the timing of purchasing decisions by customers. Additionally, because the
timing of the occurrence of such factors is difficult to anticipate and many of
the Company's costs are fixed, the Company may not be able to sufficiently
reduce its costs in periods when its revenues are less than anticipated and may
suffer unexpected losses or lower income in these periods.
The Company is attempting to expand international sales and marketing efforts,
which can be expected to result in losses from international operations until
international revenues reach sufficient levels. Additionally, the Company's
exposure to foreign currency and other risks of international business may
increase as its international business grows. The Company attempts to minimize
these risks through measures including, but not limited to, requiring payments
in U.S. dollars and using letters of credit. There can be no assurance, however,
that the Company will be successful in its international sales efforts or in
minimizing any associated risks. Revenues from customers outside the United
States declined significantly from 1996 to 1997 and in the first half of 1998,
versus the first half of 1997.
RESULTS OF OPERATIONS
The Company's revenues and net loss for the second quarter of 1998 were
$15,250,000 and $984,000, respectively, as compared to revenues of $15,151,000
and a net loss of $1,412,000 for the second quarter of 1997. Revenues in the
second quarter of 1998 were favorably impacted by significant increases in
shipments of mammography and electrophysiology products. These increases were
largely offset by declines in OEM and general radiography product shipments.
Gross margin as a percent of revenues increased from 35.3% in the second quarter
of 1997 to 39.0% in the second quarter of 1998, primarily due to improved
absorption of manufacturing costs associated with higher production levels,
manufacturing cost reductions associated with the closure of the Company's
Addison manufacturing facility, and a shift in mix to relatively higher margin
products. Excluding legal costs primarily associated with the patent lawsuit
against Trex Medical Corporation, operating expenses were lower in the second
quarter of 1998 versus the second quarter of 1997. As a result of these factors,
the net loss in the second quarter of 1998 was reduced to $984,000, from the
second quarter 1997 net loss of $1,412,000, an improvement of $428,000.
11
<PAGE>
The following table sets forth the percentage of revenues represented by certain
data included in the Company's statements of operations for the periods
indicated:
Three Months Ended Six Months Ended
------------------------- ---------------------
June 29, June 30, June 29, June 30,
1998 1997 1998 1997
------------ ----------- ---------- ---------
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 39.0 35.3 38.7 33.1
Research and development 10.0 10.3 10.1 11.2
Selling, marketing and service 26.0 26.7 25.9 31.7
General and administrative 8.3 7.1 9.1 8.2
Loss from Operations (5.4) (8.8) (6.4) (18.0)
Benefit for income taxes --- --- --- ---
Net loss (6.5) (9.3) (7.3) (19.3)
Revenues. Second quarter 1998 revenues were $15,250,000, up slightly from second
quarter 1997 revenues of $15,151,000. For the six months ended June 29, 1998,
revenues were $28,917,000, a 5% increase over revenues of $27,453,000 for the
comparable six months of 1997. For both the three and six month periods, the
increase reflects significantly higher shipments of mammography and
electrophysiology products, partly offset by declines in OEM and general
radiography product shipments. The increase was primarily in the U. S. direct
and dealer channels of distribution, partly offset by declines in the OEM and
international dealer and direct channels.
Gross Profit. For the second quarter of 1998, gross profit expressed as a
percentage of revenues was 39.0%, as compared to 35.3% for the second quarter of
1997. For the six months ended June 29, 1998 and June 30, 1997, gross profit as
a percentage of revenues was 38.7% and 33.1%, respectively. The increase in
gross profit as a percentage of revenues was due to reductions in unfavorable
manufacturing variances, as a result of improved absorption of manufacturing
costs caused by higher production levels and by reductions in manufacturing
costs associated with the closing of the Company's Addison manufacturing
facility. In addition, the Company experienced a favorable shift in product mix
from OEM and general radiography products to proprietary products and service
revenues, which generally have higher margins.
Research and Development Expenses. Research and development expenses for the
second quarter of 1998 and 1997 were $1,529,000 and $1,554,000, respectively, or
10.0% and 10.3%, respectively, of revenues. For the six months ended June 29,
1998 and June 30, 1997, research and development expenses were $2,921,000 and
$3,066,000 respectively, or 10.1% and 11.2%, respectively, of revenues. The
lower level of research and development expenses over last year is primarily
attributable to efficiencies achieved due to the transfer of engineering
activities from the Company's Addison, Illinois location, partly offset by
increased product development expenses relating to the Company's alliance with
Sterling Diagnostic Imaging. For both the three and six month periods ended June
29, 1998 and June 30, 1997, the decrease in research and development as a
percentage of revenues is essentially due to higher revenues in the respective
three and six months periods of 1998 as compared to the same periods in 1997.
12
<PAGE>
Selling, Marketing and Service Expenses. Selling, marketing and service expenses
for the second quarter of 1998 and 1997 were $3,968,000 and $4,040,000,
respectively, or 26.0% and 26.7%, respectively, of revenues. For the six months
ended June 29, 1998, selling, marketing and service expenses were $7,499,000, or
25.9% of revenues, as compared to $8,716,000, or 31.7% of revenues, for the
comparable six months of 1997. The decrease in selling, marketing and service
expense for the three and six month periods ended June 30, 1998 as compared to
the same periods of 1997 and the decrease as a percentage of revenues for both
the three and six month periods is primarily the result of a more cost-effective
sales compensation program, a reduced scope of marketing activities, and
efficiencies gained by the closure of the Addison manufacturing facility and the
resultant consolidation of service and technical support functions.
General and Administrative Expenses. General and administrative expenses for the
second quarter of 1998 and 1997 were $1,266,000 and $1,081,000, respectively, or
8.3% and 7.1%, respectively, of revenues. For the six months ended June 29, 1998
and June 30, 1997, general and administrative expenses were $2,624,000 and
$2,242,000, respectively, or 9.1% and 8.2%, respectively, of revenues. For both
the three and six month periods, the increase in general and administrative
expenses and the increase as a percentage of revenues was due to increased legal
expenses associated with the Company's patent infringement lawsuits against Trex
Medical Corporation, which were partially offset by cost savings associated with
the Company's closure of its Addison, Illinois manufacturing facility.
Interest Expense / Interest Income. Interest expense for the three month periods
ended June 29, 1998 and June 30, 1997 was $59,000 and $12,000, respectively, and
for the six month periods then ended, was $113,000 and $49,000, respectively.
Interest income for the second quarter of 1998 and 1997 was $16,000 and
$103,000, respectively. For the six month periods ended June 29, 1998 and June
30, 1997, interest income was $46,000 and $128,000, respectively. The increase
in interest expense and the reduction in interest income for both the three and
six month periods ended June 29, 1998 as compared to the three and six months
ended June 30, 1997 are primarily due to increases in temporary borrowings under
the Company's working capital line of credit and reductions in cash balances in
the 1998 three and six month periods, due primarily to an increased investment
in inventories.
Net Loss. The Company's net loss for the second quarter of 1998 was $984,000, an
improvement of $428,000 as compared to the second quarter 1997 net loss of
$1,412,000. The net loss for the six months ended June 29, 1998 was $2,103,000 a
$3,188,000 improvement over the $5,291,000 loss for the six months ended June
39, 1997. The improvement was due to the favorable effects of higher revenues,
the improvement in gross margin as a percentage of revenue caused by higher
production levels and the resultant improved absorption of manufacturing costs,
reductions in manufacturing costs associated with the closing of the Addison
manufacturing facility, and by reductions in operating expenses.
13
<PAGE>
INCOME TAXES
The Company's estimated effective tax rate for the year ended December 31, 1998
is currently 0%. Accordingly, no income tax benefit has been provided for the
three or six month periods ended June 29, 1998. This rate was determined based
upon the anticipated 1998 results of operations includable in the domestic
consolidated tax return and upon projected net temporary differences between
operating results reflected in the financial statements and those required to be
reflected in the domestic consolidated tax return for 1998. As of December 31,
1997, the Company had approximately $2,002,000 of net deferred tax assets, which
represents timing differences that are more likely than not to be realized
against taxable income of future years. The amount of net deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income do not materialize. No income tax provisions have been
recognized for foreign tax jurisdictions and no income tax benefits have been
recognized for subsidiary losses outside the domestic consolidated return
because they are not expected to reverse in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended June 29, 1998 was
$2.0 million compared to $3.2 million provided by operations in the comparable
period of 1997. The use of cash flow in operations was primarily due to a $1.8
million increase in working capital, excluding noncash provisions. This working
capital increase was the result of a $3.3 million increased investment in
inventories and $0.3 million of restructuring-related expenditures (see Note 8
to Notes to Consolidated Financial Statements), offset by a $1.5 million
increase in customer deposits and a $0.5 million increase in accounts payable.
Approximately $0.2 million of cash was used to fund the net loss before non-cash
depreciation, amortization, obsolescence, and other provisions for the six
months ended June 29, 1998.
Net cash used in investing activities was $0.4 million for the six months ended
June 29, 1998, compared to $1.2 million for the same period in 1997. The
decrease was principally related to increased use of non-cash capital lease
financing.
Net cash used in financing activities for the six months ended June 29, 1998 was
$0.0 million, or essentially unchanged from the $0.1 million used in financing
activities for the same period in 1997.
As of June 29, 1998, the Company had $1.1 million in cash and cash equivalents
and working capital of $23.9 million. The Company has renewed, on a short-term
basis, its bank revolving line of credit arrangement, which had expired in
February 1997. Under the terms of this renewal, the Company has a $15.0 million
of credit. Due to the effects of further restrictions based on eligible
receivables and inventory, $7.1 million of the line was available as of June 29,
1998, all of which was unused. The agreement, which is renewable on a monthly
basis, is secured by the Company's accounts receivable, inventory, and fixed
assets. Renewals are subject to a renewal fee of $5,000 per month, and
borrowings under the agreement would have been subject to interest of 9.5% per
annum (one percent over the bank's prime rate of interest) as of June 29, 1998.
The Company expects its long-term liquidity needs to be satisfied principally
from cash flows generated from operations. The Company believes that its
short-term liquidity needs can be satisfied through cash provided from
operations and current cash and cash equivalent balances, through borrowings
under its revolving line of credit arrangement, or through other credit
arrangements.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
The information contained in Part II, Item 1, "Legal Proceedings" of the
Company's Form 10-Q for the quarter ended March 30, 1998 is herein incorporated
by reference.
In April 1992 and April 1998, the Company filed separate patent infringement
lawsuits against Trex Medical Corporation alleging infringement of certain
features of the Company's Mammotest stereotactic breast biopsy system. In July
1998, the United States District Court for the District of Colorado granted the
Company's Motion to Consolidate the two patent infringement lawsuits
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders, held on June 12, 1998, the following
matters were submitted to a vote of stockholders and approved:
(i) Election of two Class I directors to the Board of Directors:
Name For Against
---- --- -------
R. John Fletcher 6,172,378 135,264
Kathryn A. Paul 6,171,339 136,303
(ii) Approval of Amendments to the Employee Stock Purchase Plan, as
described in the Company's definitive Proxy Statement filed with
the Securities and Exchange Commission on April 29, 1998:
Name For Against Not Voted
---- --- ------- ---------
5,933,938 197,877 43,533 132,294
(iii) Approval of the Amendment and Restatement of the Nonemployee Director
Stock Option Plan and the Repricing of Outstanding Nonemployee
Director Options, as described in the Company's definitive Proxy
Statement filed with the Securities and Exchange Commission on
April 29, 1998:
Name For Against Not Voted
---- --- ------- ---------
5,077,736 1,048,817 48,785 132,294
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS
Exhibits filed with this report:
`
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended June 29, 1998 to be signed on its behalf by the undersigned thereunto duly
authorized.
FISCHER IMAGING CORPORATION
/s/ WILLIAM C. FEE
-----------------------------------
William C. Fee
Vice President/
Chief Accounting Officer
(Principal Accounting Officer)
July 30, 1998
16
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-29-1998
<CASH> 1,101
<SECURITIES> 0
<RECEIVABLES> 14,722
<ALLOWANCES> 674
<INVENTORY> 19,924
<CURRENT-ASSETS> 37,795
<PP&E> 15,296
<DEPRECIATION> 9,499
<TOTAL-ASSETS> 49,149
<CURRENT-LIABILITIES> 13,865
<BONDS> 735
0
13
<COMMON> 70
<OTHER-SE> 33,246
<TOTAL-LIABILITY-AND-EQUITY> 49,149
<SALES> 15,250
<TOTAL-REVENUES> 15,250
<CGS> 9,304
<TOTAL-COSTS> 9,304
<OTHER-EXPENSES> 6,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (984)
<INCOME-TAX> 0
<INCOME-CONTINUING> (984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (984)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
