<PAGE>
UNITED STATES 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 QUARTERLY PERIOD ENDED OCTOBER 3, 1999
/ / 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 (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
---- ----
The number of shares of the registrant's common stock outstanding as of
October 3, 1999 was 7,029,000.
<PAGE>
FISCHER IMAGING CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
October 3, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) -
Three and nine months ended October 3, 1999 and September 28, 1998 4
Consolidated Statements of Cash Flows (unaudited) -
Nine months ended October 3, 1999 and September 28, 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE>
FISCHER IMAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 31,
1999 1998
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,121 $ 929
Trade accounts receivable, net of allowance for doubtful
accounts of approximately $1,234 and $726 at October 3, 1999
and December 31, 1998, respectively 14,667 16,797
Inventories 17,134 22,023
Prepaid expenses and other current assets 1,002 1,098
----------- ----------
Total current assets 33,924 40,847
----------- ----------
PROPERTY AND EQUIPMENT
Manufacturing equipment 9,620 9,467
Office equipment and leasehold improvements 6,246 5,936
----------- ----------
15,866 15,403
Less- Accumulated depreciation and amortization 11,488 9,994
----------- ----------
Property and equipment, net 4,378 5,409
----------- ----------
INTANGIBLE ASSETS, net 2,538 2,957
DEFERRED COSTS AND OTHER ASSETS 1,176 1,756
----------- ----------
TOTAL ASSETS $ 42,016 $ 50,969
=========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt $ 6,455 $ 6,838
Trade accounts payable 5,274 5,204
Accrued salaries and wages 1,842 2,225
Customer deposits 1,904 2,599
Accrued warranty and installation costs 1,550 1,124
Accrued restructuring costs - 1,015
Deferred service revenue 728 1,132
Other current liabilities 1,882 1,615
----------- ----------
Total current liabilities 19,635 21,752
LONG-TERM DEBT 387 587
OTHER NONCURRENT LIABILITIES 200 200
----------- ----------
TOTAL LIABILITIES 20,222 22,539
----------- ----------
STOCKHOLDERS' INVESTMENT
Common Stock, $.01 par value, 25,000,000 shares authorized, 7,028,855 and
6,980,150 shares issued and outstanding at
October 3, 1999 and December 31, 1998, respectively 70 70
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, 506,667
and 1,333,333 shares authorized, issued and outstanding at October 3,
1999 and December 31, 1998, respectively; liquidation preference of
$3.8 million and $10.0 million at
October 3, 1999 and December 31, 1998, respectively (Note 6) 5 13
Additional paid-in capital 43,264 49,366
Accumulated deficit (22,200) (21,459)
Accumulated other comprehensive income (foreign
currency translation adjustments) 655 440
----------- ----------
TOTAL STOCKHOLDERS' INVESTMENT 21,794 28,430
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 42,016 $ 50,969
=========== ==========
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Products and services $ 12,692 $ 15,878 $ 43,552 $ 44,795
Sale of manufacturing license (Note 6) - - 6,200 -
-------- -------- -------- --------
Total 12,692 15,878 49,752 44,795
COST OF SALES
Products and services 7,779 9,812 27,628 27,524
Sale of manufacturing license - - 400 -
-------- -------- -------- --------
Total 7,779 9,812 28,028 27,524
-------- -------- -------- --------
Gross profit 4,913 6,066 21,724 17,271
OPERATING EXPENSES
Research and development 1,493 1,651 4,570 4,572
Selling, marketing and service 3,928 3,527 11,378 11,026
General and administrative 1,284 1,293 4,863 3,917
Restructuring provision (Note 7) - - 750 -
-------- -------- -------- --------
Total operating expenses 6,705 6,471 21,561 19,515
-------- -------- -------- --------
LOSS FROM OPERATIONS (1,792) (405) 163 (2,244)
Interest expense (159) (86) (569) (199)
Interest income 3 6 72 52
Other (expense) income, net (183) 191 (407) (6)
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (2,131) (294) (741) (2,397)
Benefit for income taxes - - - -
-------- -------- -------- --------
NET LOSS $ (2,131) $ (294) $ (741) $ (2,397)
======== ======== ======== ========
NET LOSS PER SHARE
Basic and diluted $ (0.30) $ (0.04) $ (0.11) $ (0.34)
-------- -------- -------- --------
-------- -------- -------- --------
SHARES USED TO CALCULATE LOSS PER SHARE
Basic and diluted 7,029 6,980 7,029 6,980
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
OCTOBER 3, SEPTEMBER 28,
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (741) $ (2,397)
-------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Noncash sale of manufacturing license (6,200) -
Restructuring provision 750 -
Write-off of investment 100 -
Depreciation 1,617 1,717
Amortization of intangible assets 419 509
Provision for doubtful accounts 358 (79)
Provision for excess and obsolete inventories 804 1,031
Sales and retirements of assets - 119
Foreign exchange losses 198 (88)
Restructuring payments (1,015) (655)
Other changes in current assets and liabilities-
Decrease (Increase) in trade accounts receivable 1,522 (2,554)
Decrease (Increase) in inventories 3,935 (4,502)
Decrease (Increase) in prepaid expenses and other current assets 96 (473)
Decrease in deferred costs and other assets 480 22
(Decrease) Increase in trade accounts payable 70 1,161
Decrease in accrued salaries and wages (383) 163
(Decrease) Increase in customer deposits (695) 1,099
Increase in accrued warranty and installation costs 426 157
Decrease in deferred service revenue (404) 89
Increase (Decrease) in other current liabilities (83) 4
Other (24) (14)
---------- -----------
Total adjustments 1,971 (2,294)
---------- -----------
Net cash provided by (used in) operating activities 1,230 (4,691)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (562) (1,120)
---------- -----------
Net cash used in investing activities (562) (1,120)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of common stock, net 90 132
Net borrowings under line of credit agreement (423) 3,526
Repayments of long-term debt (160) (255)
---------- -----------
Net cash used in financing activities (493) 3,403
---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 17 13
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 192 (2,395)
CASH AND CASH EQUIVALENTS, beginning of period 929 3,439
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,121 $ 1,044
========== ===========
</TABLE>
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 management's opinion, 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") on October
3, 1999, its results of operations for the three and nine months ended
October 3, 1999 and September 28, 1998 and its cash flows for the nine months
ended October 3, 1999 and September 28, 1998. Results of operations and cash
flows for the interim periods may not be indicative of the results of
operations and cash flows for the full fiscal year.
These unaudited consolidated financial statements 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, 1998.
Typically, and for the year ending December 31, 1999, the Company closes its
first three fiscal quarters as of the Sunday closest to the end of March,
June and September. In 1998, to more evenly distribute the days between
quarters, the first three fiscal quarters were 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):
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
FIFO cost-
Raw materials $13,904 $14,684
Work in process and finished goods 9,966 14,099
LIFO valuation adjustment (520) (520)
------- -------
Total before valuation reserves 23,350 28,263
Less valuation reserves (6,216) (6,240)
------- -------
Inventories, net $17,134 $22,023
------- -------
------- -------
</TABLE>
(3) OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 31,
1999 1998
------ ------
<S> <C> <C>
Accrued sales, property, and
Other state and local taxes $450 $594
Legal and contractual accruals 1,169 615
Other 263 406
------ ------
Total other current liabilities $1,882 $1,615
====== ======
</TABLE>
6
<PAGE>
FISCHER IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(4) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 31,
1999 1998
------ ------
<S> <C> <C>
Borrowing under bank revolving line of credit $6,147 $6,572
Capitalized lease obligations 667 827
Other 28 26
------ ------
6,842 7,425
Less--Current maturities (6,455) (6,838)
------ ------
Long-term debt $387 $587
====== ======
</TABLE>
See "Management's Discussion & Analysis - Liquidity and Capital Resources"
for further discussion of the Company's line of credit.
(5) NET LOSS PER SHARE
Basic income or loss per share is computed by dividing the net income or loss
by the weighted average number of shares of common stock outstanding. Diluted
income or loss per share is determined by dividing the net income or loss by
the sum of: (1) the weighted average number of common shares outstanding; (2)
if dilutive, the number of shares of convertible preferred stock as if
converted upon issuance; and (3) if dilutive, the effect of outstanding stock
options determined utilizing the treasury stock method.
A reconciliation between the number of securities used to calculate basic
and, if dilutive, diluted income per share is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
1999 1998 1999 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding
(Shares used in Basic Earnings Per Share Computation)...... 7,029 6,980 7,029 6,980
-------- ----- ----- -----
Shares of convertible preferred stock (as if converted).... 507 1,333 775 1,333
Effect of stock options (treasury stock method)............ - - - 5
-------- ----- ----- -----
Shares used in Diluted Earnings Per Share Computation,
if dilutive............................................... 7,536 8,313 7,804 8,318
======== ===== ===== =====
</TABLE>
For the three and nine months ended October 3, 1999 and for the three and
nine months ended September 28, 1998, the effects of the convertible
preferred stock and stock options were excluded from the calculation of
diluted income per share in the accompanying Consolidated Statements of
Operations since the result would have been anti-dilutive. As of October 3,
1999 and September 28, 1998, there were, respectively, 1,058,925 and 956,175
outstanding options to purchase shares of Common Stock under the Company's
current stock option plans.
7
<PAGE>
FISCHER IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(6) SALE OF MANUFACTURING LICENSE
By an agreement effective March 24, 1999, General Electric Company, on behalf
of GE Medical Systems, exchanged 826,666, or 62%, of the 1,333,333 shares of
Convertible Preferred Stock then owned by GE Medical Systems ("GEMS") for a
non-exclusive right to manufacture the Tilt-C system, which the Company has
manufactured for GEMS since 1994. The Company expects to continue
manufacturing for GE Medical Systems through at least December 1999, the
original expiration date of its manufacturing agreement with GEMS. Completion
of this transaction reduced GEMS' ownership of the Company from 15.9% to
6.7%, on a diluted basis.
(7) RESTRUCTURING PROVISION AND PAYMENTS
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 remaining lease obligations (net of estimated
sublease payments), facility closing costs, severance and other non-recurring
costs associated with this decision. In January 1999, the Company fulfilled
its remaining facility obligations by agreeing to a $1.0 million lease
buyout, over an eight month period, completing the closure within the
original $2.9 million provision.
During the second quarter of 1999, the Company decided to discontinue a
product line previously produced in its Addison facility. Accordingly, the
Company accrued an additional $750,000 provision for the closure of the
Addison facility, principally for the discontinuing of this product line and
related product acceptance issues.
During the nine months ended October 3, 1999 and September 28, 1998, the
Company's restructuring payments were approximately $1,015,000 and $655,000,
respectively including, in 1999, required payments under the lease buyout.
(8) COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of an enterprise
other than the change 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- -----------------------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
1999 1998 1999 1998
--------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Net loss $(2,131) $(294) $(741) $(2,397)
Foreign currency translation adjustments 5 (190) 215 (75)
------- ----- ----- -------
Comprehensive loss $(2,126) $(484) $(526) $(2,472)
======= ===== ===== =======
</TABLE>
8
<PAGE>
FISCHER IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(9) OPERATING AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in a single industry segment: the design, manufacture,
and marketing of x-ray imaging systems. Because of differences in
distribution costs, strategies, and aftermarket potential, the Company
separately manages and reports operating results for products sold by the
Company (proprietary) from those manufactured for sale to other medical
products companies under Original Equipment Manufacturer ("OEM") contracts.
The Company's manufacturing and most distribution activities are in the
United States, including export sales to Europe, primarily, and elsewhere.
The Company also has marketing operations in Europe and Australia. The
following is a summary of the Company's operations by segment (in thousands):
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL
------------------------------------- ----------------- INTERNAL
PROPRIETARY OEM EXPORT TOTAL AUSTRALIA EUROPE SALES TOTAL
----------- ------ ------ ------- --------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 3, 1999
Revenues:
Product........................ $6,025 $2,502 $1,362 $9,889 $108 $574 $(574) $ 9,997
Service........................ 2,542 - - 2,542 37 116 - 2,695
------ ------ ------ ------- ----- ---- ----- -------
8,567 2,502 1,362 12,431 145 690 (574) 12,692
------ ------ ------ ------- ----- ---- ----- -------
Costs of sales:
Product........................ 2,981 1,609 698 5,288 69 156 (156) 5,357
Service........................ 520 - - 520 8 19 (44) 503
------ ------ ------ ------- ----- ---- ----- -------
Allocated...................... 3,501 1,609 698 5,808 77 175 (200) 5,860
------ ------ ------
Unallocated.................... 1,919 - - - 1,919
------- ----- ---- ----- -------
7,727 77 175 (200) 7,779
------- ----- ---- ----- -------
Gross profit..................... 4,704 68 515 (374) 4,913
Operating expenses 6,438 76 565 (374) 6,705
------- ----- ---- ----- -------
Loss from operations............. (1,734) (8) (50) - (1,792)
Interest expense................. (162) - 3 - (159)
Interest income.................. - 3 - - 3
Other expense, net............... (173) (40) 30 - (183)
------- ----- ---- ----- -------
Net loss......................... $(2,069) $ (45) $(17) $ - $(2,131)
======= ===== ==== ===== =======
Other information:
Capital expenditures... $182 - - $ 182
Depreciation........... 540 - - 540
THREE MONTHS ENDED SEPTEMBER 28, 1998
Revenues:
Product...................... $8,315 $4,372 $1,238 $13,925 $ (2) $ - $ (47) $ 13,876
Service...................... 1,907 - - 1,907 53 42 - 2,002
------ ------ ------ ------- ----- ---- ----- -------
10,222 4,372 1,238 15,832 51 42 (47) 15,878
====== ====== ====== ======= ===== ==== ===== =======
Costs of sales:
Product...................... 4,681 2,848 811 8,340 (2) 18 (112) 8,244
Service...................... 244 - - 244 29 (19) 65 319
------ ------ ------ ------- ----- ---- ----- -------
Allocated.................... 4,925 2,848 811 8,584 27 (1) (47) 8,563
Unallocated.................. ------ ------ ------ 1,249 - - - 1,249
------- ----- ---- ----- -------
9,833 27 (1) (47) 9,812
------- ----- ---- ----- -------
Gross profit..................... 5,999 24 43 - 6,066
Operating expenses............... 6,137 167 167 - 6,471
------- ----- ---- ----- -------
Loss from operations............. (138) (143) (124) - (405)
Interest expense................. (86) - - - (86)
Interest income.................. 5 - 1 - 6
Other expense, net............... (50) (51) 292 - 191
------- ----- ---- ----- -------
Net loss......................... $ (269) $(194) $169 $ - $ (294)
======= ===== ==== ===== =======
Other information:
Capital expenditures... $ 710 - - $ 710
Depreciation........... 568 4 15 587
</TABLE>
9
<PAGE>
FISCHER IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL
------------------------------------- ----------------- INTERNAL
PROPRIETARY OEM EXPORT TOTAL AUSTRALIA EUROPE SALES TOTAL
----------- ------ ------ ------- --------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED OCTOBER 3, 1999
Revenues:
Product...................... $19,996 $8,728 $7,000 $35,724 $ 129 $ 805 $ (928) $35,730
Service...................... 7,258 - - 7,258 129 435 - 7,822
Sale of manufacturing license. 6,200 - - 6,200 - - - 6,200
------- ------ ------ ------- ------ ------ ------- -------
33,454 8,728 7,000 49,182 258 1,240 (928) 49,752
------- ------ ------ ------- ------ ------ ------- -------
Costs of sales:
Product...................... 10,385 5,942 4,662 20,989 82 315 (434) 20,952
Service...................... 1,642 - - 1,642 52 49 (120) 1,623
Sale of manufacturing license. 400 - - 400 - - - 400
------- ------ ------ ------- ------ ------ ------- -------
Allocated.................... 12,427 5,942 4,662 23,031 134 364 (554) 22,975
------- ------ ------
Unallocated.................. 5,053 - - - 5,053
------- ------ ------ ------- -------
28,084 134 364 (554) 28,028
------- ------ ------ ------- -------
Gross profit..................... 21,098 124 876 (374) 21,724
Operating expenses 21,014 292 629 (374) 21,561
------- ------ ------ ------- -------
Income (loss) from operations.... 84 (168) 247 - 163
Interest expense................. (468) - (101) - (569)
Interest income.................. 66 6 - - 72
Other expense, net............... (203) 159 (363) - (407)
------- ------ ------ ------- -------
Net loss......................... $ (521) $ (3) $ (217) $ - $ (741)
======= ====== ====== ======= =======
Other information:
Identifiable assets.......... $40,140 $1,021 $ 855 $42,016
Capital expenditures......... 562 - - 562
Depreciation................. 1,604 13 - 1,617
NINE MONTHS ENDED SEPTEMBER 28, 1998
Revenues:
Product...................... $24,200 $11,647 $2,824 $38,671 $ 69 $ (387) $38,733 $ 380
Service...................... 5,821 - - 5,821 123 118 - 6,062
------- ------- ------ ------- ------ ------ ------- -------
30,021 11,647 2,824 44,492 192 (387) 44,795 498
------- ------- ------ ------- ------ ------ ------- -------
Costs of sales:
Product...................... 13,829 7,601 1,716 23,146 70 205 (437) 22,984
Service...................... 969 - - 969 100 20 50 1,139
------- ------- ------ ------- ------ ------ ------- -------
Allocated.................... 14,798 7,601 1,716 24,115 170 225 (387) 24,123
------- ------- ------
Unallocated.................. 3,401 - - - 3,401
------- ------ ------ ------- -------
27,516 170 225 (387) 27,524
------- ------ ------ ------- -------
Gross profit..................... 16,976 22 273 - 17,271
Operating expenses............... 18,664 400 451 - 19,515
------- ------ ------ ------- -------
Loss from operations............. (1,688) (378) (178) - (2,244)
Interest expense................. (197) - (2) - (199)
Interest income.................. 43 5 4 - 52
Other expense, net............... (74) (168) 236 - (6)
Income taxes..................... - - - - -
------- ------ ------ ------- -------
Net loss......................... $(1,916) $(541) $ 60 $ - $(2,397)
======= ====== ====== ======= =======
Other information:
Identifiable assets.......... $49,344 $ 721 $ 904 $50,969
Capital expenditures......... 1,120 - - 1,120
Depreciation................ 1,679 10 28 1,717
</TABLE>
Internal sales from the United States to Australia and Europe are recorded on
the basis of transfer pricing established by the Company. International sales
to OEM customers are managed and, therefore, reported as part of OEM business
results.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations
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, 1998 (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 considered
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 about:
- - resolutions of deficiencies noted by the FDA;
- - the adequacy of financial resources;
- - future revenues, expenses, and other operating results;
- - sales under the company's strategic alliances, marketing arrangements, and
other agreements pertaining to Mammotest, digital radiography, and other
products;
- - the status of SenoScan and other new products in development;
- - the size and growth of the company's markets;
- - the effectiveness of efforts to transfer production activities from the
company's Addison, Illinois manufacturing facility;
- - the success of efforts to reduce manufacturing and other costs;
- - manufacturing capacity and capabilities;
- - submissions to the FDA and receipt of FDA approvals and clearances;
- - the costs and risks associated with becoming Year 2000 compliant;
- - the availability of raw materials and components; 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 set
forth:
(1) in the Business section of the Form 10-K under the headings: "Risks
Associated with OEM Agreements," "Sales and Marketing," "International
Operations," "Strategic Alliances," "Risks of Technological Change and New
Products," "Risks of New Product Development and Market Acceptance,"
"Competition," "Government Regulation," "Government Reimbursement,"
`Manufacturing and Operating Risks," "Product Liability, Market Withdrawal,
and Product Recalls," "Patents and Intellectual Property," "Risk of
Dependence on Key Personnel,"
(2) in the Market for Registrant's Common Equity and Related Stockholder
Matters under the headings "Risk of Price Volatility of Common Stock," `Risks
of Fluctuations in Quarterly Results of Operations," "Risks of Fluctuations
in Quarterly Results of Operations," Risks Associated with Shares Eligible
for Future Sale," "Risks Associated with Control by Management and Certain
Stockholders," and "Certain Anti-Takeover Effects,"
11
<PAGE>
(3) in the Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") section of the Form 10-K under the "Overview"
heading; and
(4) elsewhere in the Business, MD&A, and other sections of the Form 10-K, and
in this Form 10-Q under the "Overview" section of MD&A and elsewhere.
OVERVIEW
RISK OF CONTINUED LOSSES
The company designs, manufactures and markets specialty and general purpose
medical imaging systems for the diagnosis and treatment of disease. The
company's newer products are directed towards medical specialties, such as
diagnosing and treating breast cancer, heart disease and vascular disease, in
which image-guided, minimally invasive therapies are replacing open surgical
procedures. The company also designs and manufactures specialty x-ray imaging
components and subsystems for several leading medical product companies and
sells general radiology systems for use in hospitals, clinics and physicians'
offices.
Except for the last nine months of 1995, the first nine months of 1996, and
excluding the first quarter 1999 one-time gain from the sale of a
manufacturing license, the company has experienced significant losses since
1993. Significant factors giving rise to these losses include: costs
associated with excessive manufacturing capacity; intense competition for
some of the company's products; declining margins and demand for OEM
products; and a general slowdown in capital expenditures by hospitals. The
company cannot predict when it will return to profitability, although it has
taken significant steps to reduce costs and improve sales, including:
- - entering into distribution partnerships in 1997 and 1998 with Ethicon
Endo-Surgery for the marketing and sale of Mammotest breast biopsy systems
in the United States and in Europe;
- - entering into a strategic alliance with Direct Radiography Corp. for the
development and marketing of digital radiography products;
- - closure of the company's Addison, Illinois manufacturing facility; and
- - other actions to reduce operating expenses and manufacturing costs.
Improvement in the company's results of operations will depend on many
factors, including:
- - sufficient demand for the company's products to offset the effects of
planned reductions in OEM business;
- - the adequacy of financial resources;
- - the company's ability to improve gross margins;
- - the effectiveness of efforts to control manufacturing and other costs;
- - effective negotiation and implementation of product distribution
arrangements;
- - effective implementation of domestic and international marketing and sales
strategies; and
- - the development and introduction of new products that compete successfully.
Because improved factory utilization was believed to be a key factor in
returning to profitability, the company decided in the third quarter of 1997
to close its Addison, Illinois manufacturing facility and outsource or
transfer Addison production. Not all production has been successfully
transferred, however, and, in the second quarter of 1999, the company accrued
an additional
12
<PAGE>
$750,000 provision for the Addison closure, principally for the discontinuing
of a product line formerly produced in that facility, including related
acceptance issues. See Note 7 to Notes to Consolidated Financial Statements.
The company expects continued significant fluctuations in quarterly and
annual revenues, operating results and net income, depending on factors such
as:
- - delays in the development of new products;
- - the timing issues with respect to the receipt, manufacture, and shipment of
OEM and large system product orders;
- - new product introductions or marketing initiatives by the company or its
competitors;
- - the effects of managed healthcare on capital expenditures and
reimbursement;
- - increases in marketing, research, and other costs in relation to sales;
- - regulatory clearance of new products;
- - the effect of general economic conditions on the company's markets;
- - seasonal patterns and other timing issues affecting customer purchasing
decisions; and
- - the outcome of claims against the company.
These factors can occur unexpectedly and, because many of its costs are
fixed, the company may not be able to sufficiently reduce costs in periods
when revenues are less than anticipated and may, as a result, suffer
unexpectedly larger losses.
Over the past several years, the company has attempted to expand its
international sales and marketing efforts, which has resulted in losses from
its international operations. The company can expect to continue to incur
losses unless sufficient levels of international revenues are reached.
Additionally, the company's exposure to foreign currency and other
international business risk may increase if its international business grows.
The company attempts to minimize these risks by: (1) generally requiring
payments in U.S. dollars; (2) using letters of credit; and (3) requiring
advance deposits and through other means. There can be no assurance that
international sales efforts will be successful or that the associated risks
can be minimized. International revenues declined substantially in 1998 and
1997, but increased significantly during the first nine months of 1999 as
compared to the first nine months of 1998.
Sales of the company's Mammotest breast biopsy systems have fluctuated
significantly in recent years, based on changes in competitive conditions.
For example, Mammotest sales were lower in 1997 as compared to 1996, due in
part to aggressive competition within the surgical stereotactic core needle
breast biopsy market from U. S. Surgical, which was then selling breast
biopsy systems purchased from Trex Medical, the company's principal
competitor in this market. The company's sales in this market improved in
1998, in part due to its marketing partnership with Ethicon Endo-Surgery. In
December 1998, U. S. Surgical decided to cease distributing breast biopsy
systems and, therefore, terminated its supply agreement with Trex Medical.
While U. S. Surgical's decision may improve long-term competitive conditions
for Mammotest, there could be unfavorable near-term impacts, depending on
inventory conditions and other factors.
The company's partner in developing digital imaging products for the general
radiography market has been Direct Radiography Corp. In early 1999, the
Agfa-Gevaert Group acquired Direct Radiography's parent company, Sterling
Diagnostic Imaging, Inc. Direct Radiography was not included in this
acquisition, but was later sold to Hologic Corporation in June 1999. The
13
<PAGE>
company does not have a definitive agreement with Direct Radiography or
Hologic. At this time the company cannot predict whether an agreement will be
reached.
The company is also a party to litigation from time to time, as both
plaintiff and defendant. As plaintiff, the company is pursuing a substantial
patent infringement case and certain other matters. As defendant, the company
is involved in several litigation matters with OEM and other customers, among
others, and accrued $750,000 in the second quarter of 1999 in relation to
several of these matters.
YEAR 2000 UPDATE
GENERAL
The company uses software and related technologies in its products and in
product development and manufacturing that may be impacted by the Year 2000.
The Year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As a result, date-sensitive
systems may recognize the Year 2000 as 1900, or not at all. This factor could
cause systems to incorrectly process critical financial and operational
information.
YEAR 2000 PROJECT
The company is evaluating its products, computer hardware, and operating
software, and third party suppliers for possible Year 2000 problems. This
project is organized as follows:
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
COMPLETION OUT-OF-POCKET
AREA TASK/STATUS DATE COST
- -------------------------------- ----------------------------------------- ----------- -------------
<S> <C> <C> <C>
I. PRODUCTS:
Current versions Initial review Complete *
Documentation Complete *
Earlier versions Develop evaluation/testing program Complete *
Perform testing Complete *
Documentation Complete *
Develop remedial program, if necessary Complete *
II. PRIMARY BUSINESS SOFTWARE:
Upgrade to Year 2000 compliant version Complete Under $25,000
Perform testing Complete *
Provide user training Complete *
Update customized reporting/features Complete *
III. OTHER SOFTWARE APPLICATIONS:
Major payroll and
Engineering applications Obtain certification of Year 2000 compliance Complete
Other applications Evaluate and/or obtain certifications 4th qtr 1999 *
IV. HARDWARE:
Networks Confirm Year 2000 compliance Complete *
Personal computers Confirm Year 2000 compliance Complete *
Replace or upgrade as necessary Complete Under $100,000
V. THIRD PARTY SUPPLIERS:
Establish evaluation criteria Complete *
Send initial survey to suppliers Complete *
Re-survey suppliers, as necessary 4th qtr 1999 *
14
<PAGE>
<CAPTION>
ANTICIPATED ANTICIPATED
COMPLETION OUT-OF-POCKET
AREA TASK/STATUS DATE COST
- -------------------------------- ----------------------------------------- ----------- -------------
<S> <C> <C> <C>
Re-source as necessary 4th qtr 1999 *
</TABLE>
* No significant out-of-pocket costs incurred or expected to be incurred.
At this time, the company does not feel that major contingency plans will be
needed for internal business systems based on completed testing, and does not
have such plans. Completed surveys from critical third party suppliers
regarding their Year 2000 compliance have indicated the company should
receive an uninterrupted flow of materials, but these suppliers have not
guaranteed this result.
COSTS
The cost to be incurred in conjunction with the Year 2000 project is expected
to be less than $200,000, for anticipated upgrades to existing desk-top
personal computers and for the assistance of outside consultants in upgrading
the company's primary business system. This amount is not considered material
to the company's financial position. Unanticipated problems could cause this
amount to be exceeded, however, and no assurance can be given that, under
such circumstances, the amount would not be material.
Most Year 2000 Project activities are being performed with internal
resources. Consequently, Year 2000 activities may delay new information
systems development and other projects. Such delays are not, however,
expected to materially impact the company's results of operations.
RISKS
The failure to correct a material Year 2000 problem could result in
interruption or failure of normal business activities. The Year 2000 problem
involves inherent uncertainty, in part because of uncertainty regarding the
Year 2000 readiness of third-party suppliers and customers. Therefore, the
company cannot state with certainty whether the consequences of Year 2000
failures will have a material impact on the company's results of operations,
liquidity or financial condition. The Year 2000 Project is expected to
significantly reduce the company's level of uncertainty about the Year 2000
problem, particularly with respect to the Year 2000 readiness of its
third-party suppliers. The company believes that the possibility of
significant interruptions of normal operations should be significantly
reduced by the implementation of upgraded business systems and the completion
of the Year 2000 project as scheduled.
Based on its assessment to date, the company believes that few of its current
products will be affected by the Year 2000 problem. Of those that may be
affected, the only significant risk appears to be the possible inaccurate
dating of patient records. The remedial actions to correct dating problems
that may occur appear to be either:
- - the customer being able to reset the date (on a one-time basis) to prevent
future occurrences; or
- - implementation of modifications, made by the company or third-party
suppliers, which are currently available.
The company has completed its evaluation of earlier versions of current products
and has not identified any issues that cannot be easily addressed. If such
problems are identified at a later
15
<PAGE>
date, however, disruption of customers' operations could conceivably occur,
potentially resulting in legal actions being taken against the company, even
though Year 2000 problems are not expressly covered by product warranties.
Readers are cautioned that forward-looking statements contained in the Year
2000 Update should be read in conjunction with the company's cautionary
statement regarding forward-looking statements elsewhere in this Form 10-Q,
which is provided under the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
FDA REGULATION
The company is subject to periodic inspections by the Food and Drug
Administration, whose primary purpose is to audit the company's compliance
with Good Manufacturing Practices, which include testing, quality control and
documentation procedures. In March 1995, the company's Denver facility
received a Warning Letter from the FDA concerning documentation and other
deficiencies. The company rectified these deficiencies and resolved this
matter with the FDA in June 1995. In December 1996, following an inspection
of the Denver facility, the FDA issued Inspectional Observations Form 483 and
a subsequent Warning Letter regarding manufacturing practices. As required,
the company responded as to planned corrective actions and obtained a
favorable third-party certification of manufacturing and quality systems. In
October 1998, following a subsequent inspection, the FDA issued a Form 483
regarding possible deficiencies in manufacturing, quality, and documentation
practices. The company submitted its response to the Form 483 and is
instituting corrective actions.
Failure to satisfy FDA requirements can result in: (1) the company's
inability be awarded federal government contracts; (2) an inability to
receive new product marketing or export clearances; or (3) FDA enforcement
actions including, among other things, product seizure, injunction, and/or
criminal or civil proceedings which could be initiated without further
notice. The issuance of the most recent Form 483 increases the possibility
that one or more of these sanctions could be imposed. Although the company
strives to operate within FDA requirements, there can be no assurance that
deficiencies can be corrected or that the company can satisfy future FDA
compliance concerns. Sanctions resulting from FDA compliance reviews or
related delays in product clearances could have a material adverse effect on
the company.
1999 RESULTS OF OPERATIONS, EXCLUDING RESTRUCTURING CHARGE AND OTHER ONE-TIME
ITEMS
The company's results of operations for the three and nine months ended
October 3, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------------------------
GROSS OPERATING NET INCOME
REVENUES PROFIT EXPENSES (LOSS)
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED OCTOBER 3, 1999:
Reported results of operations $49,752 $21,724 $20,811 $ (741)
Restructuring provision (1) - - (750) 750
Sale of manufacturing license (2) (6,200) (5,800) - (5,800)
Accruals for contractual issues (3) - - (886) 886
------- ------- ------- -------
Normalized results of operations $43,552 $15,924 $19,175 $(4,905)
======= ======= ======= =======
</TABLE>
16
<PAGE>
(1) During the second quarter of 1999, the Company decided to discontinue a
product line previously produced in its Addison, Illinois manufacturing
facility and recorded an additional facility closing charge of $750,000,
primarily for related product acceptance issues. See Note 7 to these
unaudited consolidated financial statements.
(2) During the first quarter of 1999, the company sold to G. E. Medical Systems
a non-exclusive right to manufacture the Tilt-C system, in exchange for
826,666 shares of Series D Convertible Preferred Stock previously owned by
G. E. Medical Systems. See Note 6 to Notes to Consolidated Financial
Statements.
(3) Based upon legal activities occurring during the first quarter of 1999, the
company concluded that it is probable that the company will incur settlement
costs to resolve contractual issues with respect to two product
installations.
The remainder of Management's Discussion and Analysis of Results of
Operations will be based on normalized results of operations for the nine
months ended October 3, 1999.
RESULTS OF OPERATIONS
OVERVIEW. Third quarter 1999 revenues and normalized net loss were
$12,692,000 and $2,131,000, respectively, as compared to revenues of
$15,878,000 and a net loss of $294,000 for the third quarter of 1998. The
revenue decrease reflected planned reductions in OEM product shipments and
decreased general radiography product shipments, offset by a significant
increase in high margin service revenues. Gross margin as a percent of
revenues increased from 38.2% in the third quarter of 1998 to 38.7% in the
third quarter of 1999, primarily due to the improved margin on mammography
product shipments. Operating expenses were modestly higher in the third
quarter of 1999 as compared to the third quarter of 1998, due to higher sales
expense and higher service costs related to installation and warranty
provisions, offset by lower research and development expenses. As a result of
these factors, the net loss increased from $294,000 in the third quarter 1998
to $2,131,000 in the third quarter of 1999.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
1999 1998 1999* 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Gross margin 38.7 38.2 36.6 38.6
Research and development 11.8 10.4 10.5 10.2
Selling, marketing and service 30.9 22.2 26.1 24.6
General and administrative 10.1 8.1 9.1 8.7
Loss from Operations (14.1) (2.6) (13.3) (5.0)
Benefit for income taxes - - - -
Net loss (16.8) (1.9) (11.3) (5.4)
</TABLE>
* Based on normalized results of operations. See "1999 Results of Operations,
Excluding Restructuring Charge and Other One-Time Items" on Page 17 of this
Form 10-Q.
REVENUES. Third quarter 1999 revenues were $12,692,000, a 20% decrease from
third quarter 1998 revenues of $15,878,000. The decrease reflects planned
reductions in OEM product shipments and decreased general radiography product
shipments, offset by a significant increase in high margin service revenues.
The decrease was in the OEM and U. S. dealer sales channels, partly offset by
an increase in the U.S. direct sales channel.
17
<PAGE>
For the nine months ended October 3, 1999, normalized revenues were
$43,552,000, or about 3% less than revenues of $44,795,000 for the nine
months ended September 28, 1998. This decrease reflected a planned reduction
in OEM revenues and decreases in general radiography revenues, partially
offset by service, mammography and electrophysiology revenues. The decreases
in product sales were in U. S. dealer and OEM channels, partly offset by
increases in the international direct and dealer and U. S. direct channels of
distribution.
GROSS PROFIT. For the third quarter of 1999, gross profit expressed as a
percentage of revenues was 38.7%, as compared to 38.2% for the third quarter
of 1998. The increase in gross profit as a percentage of revenues was
primarily due to the shift in product mix to higher margin mammography and
service revenues, from relatively lower margin OEM revenues.
For the nine months ended October 3, 1999, normalized gross profit as a
percentage of revenues was 36.6%, as compared to 38.6% for the nine months
ended September 28, 1998. This decrease was due to higher manufacturing
variances as a percentage of revenues as well as the unfavorable impact of
the large China order shipped in the second quarter which had no margin.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
third quarters of 1999 and 1998 were $1,493,000 and $1,651,000, respectively,
or 11.8% and 10.4%, respectively, of revenues. For the nine months ended
October 3, 1999 and September 28, 1998, research and development expenses
were $4,570,000 and $4,572,000, respectively, or 10.5% and 10.2%,
respectively, of revenues. The decrease in the three month period ended
October 3, 1999 as compared to the three month period ended September 28,
1998 was due to lower expenditures related to digital general radiography
product development and reduced workforce in the research and development
department.
SELLING, MARKETING AND SERVICE EXPENSES. Selling, marketing and service
expenses for the third quarters of 1999 and 1998 were $3,928,000 and
$3,527,000, respectively, or 30.9% and 22.2%, respectively, of revenues. For
the nine months ended October 3, 1999 and September 28, 1998, selling,
marketing and service expenses were $11,378,000 and $11,026,000,
respectively, or 26.1% and 24.6%, respectively, of revenues. As compared to
the same three and nine month periods in 1998, marketing and service expense
increased in the three and nine months ended October 3, 1999 due to higher
domestic service expenses associated with higher service revenues, partially
offset by lower marketing and international sales expenditures, as the
company has increased its reliance on the marketing outlays and international
distribution efforts of its marketing and distribution partners. The increase
of selling, marketing and service expense as a percent of revenues was
primarily due to the lower revenue levels for the three and nine month
periods ended October 3, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the third quarters of 1999 and 1998 were $1,284,000 and $1,293,000,
respectively, or 10.1% and 8.1%, respectively, of revenues. For the nine
months ended October 3, 1999 and September 28, 1998, general and
administrative expenses were $3,977,000 on a proforma basis, and $3,917,000,
respectively, or 9.1% and 8.7% of revenues, respectively. For both the three
and nine month periods, the modest increases in 1999 were due to higher legal
costs; whereas, the increases as a percent of revenues were due to lower
revenue levels in the 1999 three and six month periods.
18
<PAGE>
INTEREST EXPENSE / INTEREST INCOME. Interest expense for the three months
ended October 3, 1999 and September 28, 1998 was $159,000 and $86,000,
respectively and, for the nine month periods then ended was $569,000 and
$199,000, respectively. Interest income for the third quarters of 1999 and
1998 was $3,000 and $6,000, respectively, and for the nine month periods
ended October 3, 1999 and September 28, 1998 was $72,000 and $52,000,
respectively. The increase in interest expense, net of interest income, in
the three and nine month periods ended October 3, 1999 as compared to the
three and nine month periods ended September 28, 1998 is due primarily to
higher levels of borrowings under the company's working capital line of
credit, primarily due to the funding of cash operating losses, net of
reductions in required investment in inventory.
RESTRUCTURING PROVISION. During the second quarter of 1999, the company
decided to discontinue product support and marketing for a product line
previously produced in its Addison, Illinois manufacturing facility.
Accordingly, the company accrued an additional $750,000 provision for the
closure of the Addison facility, primarily related to product acceptance
issues. See Note 7 to Notes to Consolidated Financial Statements.
NET LOSS. The company's normalized net loss for the third quarter of 1999 was
$2,131,000, as compared to the third quarter 1998 net loss of $294,000. For
the nine months ended October 3, 1999 the company's normalized net loss was
$4,905,000 as compared to the $2,397,000 net loss for the nine months ended
September 28, 1998. For the three and nine months ended October 3, 1999, the
net loss increased relative to the three and nine month periods ended
September 28, 1998 primarily as the result of the unfavorable effects of
lower levels of production hours and material purchases on absorption of
manufacturing costs, the effects of planned reductions in OEM product
shipments, increased bad debt expense, and increased litigation costs. These
unfavorable effects were partly offset by the favorable effects of increases
in service revenues and shipments of mammography product.
INCOME TAXES
The company's estimated effective tax rate for the year ended December 31,
1999 is currently 0%. Accordingly, no income tax benefit or provision has
been recorded for the three or nine month periods ended October 3, 1999. This
rate was determined based upon the anticipated 1999 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 1999 domestic
consolidated tax return. As of December 31, 1998, the company had valuation
allowances of approximately $8.8 million, reducing net deferred tax assets to
$0. The realizability of net deferred tax assets is dependent on the
company's ability to generate future taxable income, and the company's
estimate of realizable deferred tax assets may change in the near future.
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 provided by operating activities for the nine months ended October 3,
1999 was $1.2 million compared to $4.7 million used in operations in the
comparable nine month period of
19
<PAGE>
1998. The cash provided by operations was due to a $3.2 million decrease in
working capital, partly offset by $1.9 million used to fund cash operating
results (net income excluding non-cash expenses and the non-cash sale of a
manufacturing license). The working capital decrease consisted of a $3.9
million decreased investment in inventories, $1.5 million in net collections
of accounts receivable, offset by $1.0 million of restructuring-related
expenditures (see Note 7 to Notes to Consolidated Financial Statements) and
by a $0.7 million decrease in customer deposits.
Net cash used in investing activities was $0.6 million for the nine months
ended October 3, 1999, down $0.6 million from the comparable nine month
period in 1998.
Net cash used in financing activities for the nine months ended October 3,
1999 was $0.5 million, principally resulting from the reduction in borrowings
under the company's bank revolving line of credit, made possible by the
decreased investment in working capital.
As of October 3, 1999, the company had $1.1 million in cash and cash
equivalents, working capital of $14.3 million, and a $10.0 million bank
revolving line of credit facility, which is subject to restrictions as to
availability based on eligible receivables and inventory, as defined. As of
October 3, 1999, $3.5 million was available under the line. The agreement is
secured by the company's accounts receivable, inventories, and fixed assets
and may be called by the lender upon 30 days notice. The agreement is
renewable monthly and such renewals are subject to a fee of $5,000 per month.
The borrowings under the agreement are subject to interest at one percent
over the bank's prime rate of interest, or 9.25%, at October 3, 1999.
In late July 1999, the company and its lender amended the terms of their
month-to-month line of credit facility by reducing the maximum borrowing
level from $15.0 million to $10.0 million, but increasing the percentage
which may be borrowed against qualified inventories (the "advance rate").
Inventory balances do not typically fluctuate during the production cycle as
much as accounts receivable and other components of the borrowing base.
Therefore, the increase in advance rate against inventories may provide the
company with improved access to funds during all phases of its operating
cycle, although no assurance can be given to that effect.
The company's losses and negative cash flows from operations over the past
several years have depleted substantially all of its cash and have resulted
in borrowing levels at times approaching the maximum amounts available.
Further, as noted above, the principal lender could withdraw the revolving
credit facility at any time upon 30 days notice. Any such withdrawal, or any
occurrence of liquidity needs exceeding its available borrowing capacity,
would have a material adverse impact on the company's operations. The company
has, however, taken significant actions to reduce the level of operating
losses and fixed cash requirements. See "Overview" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The company has no present plans for capital expenditures in 1999 materially
different from recent years.
The company believes its current cash and cash equivalent balances and its
available borrowings under the line of credit will satisfy its liquidity
needs for 1999. The company may need to obtain additional debt or equity
capital to fund long-term growth needs.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Market risk represents the risk of loss that may impact the
financial position, results of operations or cash flows of the company due to
adverse changes in financial and commodity market prices and rates. The
company is exposed to market risk in the areas of changes in United States
interest rates and changes in foreign currency exchange rates as measured
against the United States dollar. These exposures are directly related to its
normal operating and funding activities. Historically and as of October 3,
1999, the company has not used derivative instruments or engaged in hedging
activities.
INTEREST RATE RISK
The interest payable on the company's revolving line of credit is
variable based on the prime rate and, is therefore, affected by changes in
market interest rates. At October 3, 1999, approximately $6.1 million was
outstanding with an interest rate of 9.25% (prime plus 1%). The line of
credit is cancelable upon 30 days notice by the lender and, should such
cancellation occur, or the company's liquidity needs exceed amounts available
under this line of credit, the interest rate applicable to replacement credit
facilities might be significantly higher. For example, if the interest rate
in effect for the three month periods ended October 3, 1999 and September 28,
1998 on the company's line of credit had been twice the rates in effect, the
company would have incurred additional interest expense of approximately
$159,000, or $.02 per share, and $86,000, or $.01 per share, respectively.
The company attempts to manage its interest rate risk by monitoring interest
rates which are available under other types of lending instruments and
through other lenders but, at present, does not qualify for lending
instruments which would not be more expensive that its current month-to-month
lending arrangement. Therefore, the company's exposure to changes in interest
rates will be significant until such time as its operating results permit it
greater access to other lenders and lending instruments on terms equivalent
or superior to those available under its current lending agreement.
FOREIGN CURRENCY RISK
The company has wholly owned subsidiaries in Australia and Germany.
Local assets and liabilities, principally intercompany debt to the parent
company, are recorded in local currencies, thereby creating exposures to
changes in exchange rates. These changes may positively or negatively affect
the company's operating results. As disclosed in Note 9 to Notes to
Consolidated Financial Statements, revenues in foreign currency through all
foreign subsidiaries constituted under 7% of the company's total revenues for
the three month periods ended October 3, 1999 and September 28, 1998. The
company therefore does not believe that foreseeable near-term changes in
exchange rates will have in a material effect on future earnings, fair values
or cash flows of the company and has chosen not to enter into foreign
currency hedging instruments. There can be no assurance that such an approach
will prove to have been successful, especially in the event of a significant
and sudden decline in the value of any of the applicable local currencies.
21
<PAGE>
PART II. OTHER INFORMATION
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
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 October 3, 1999 to be signed on its behalf by the undersigned thereunto
duly authorized.
FISCHER IMAGING CORPORATION
/s/ LOUIS E. RIVELLI
-------------------------
Louis E. Rivelli
President and Chief Operating Officer
November 17, 1999
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> OCT-03-1999
<CASH> 1,121
<SECURITIES> 0
<RECEIVABLES> 15,901
<ALLOWANCES> 1,234
<INVENTORY> 17,134
<CURRENT-ASSETS> 33,924
<PP&E> 15,866
<DEPRECIATION> 11,488
<TOTAL-ASSETS> 42,016
<CURRENT-LIABILITIES> 19,635
<BONDS> 387
0
5
<COMMON> 70
<OTHER-SE> 21,719
<TOTAL-LIABILITY-AND-EQUITY> 42,016
<SALES> 12,692
<TOTAL-REVENUES> 12,692
<CGS> 7,779
<TOTAL-COSTS> 7,779
<OTHER-EXPENSES> 6,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159
<INCOME-PRETAX> (2,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,131)
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
