-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QOaaMZCJ1C//FS5AiZvNkQl1SQjrqYrJaJQFBIvKgRNXFkV7L5tfVnoHdTCSV4bD kApu35fdqW4r9gMAhjzwsw== 0001001289-98-000004.txt : 19980518 0001001289-98-000004.hdr.sgml : 19980518 ACCESSION NUMBER: 0001001289-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUMISYS INC \DE\ CENTRAL INDEX KEY: 0001001289 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770133232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26832 FILM NUMBER: 98625337 BUSINESS ADDRESS: STREET 1: 225 HUMBOLDT CT CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087336565 MAIL ADDRESS: STREET 1: 225 HUMBOLDT CT CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission File Number: 0-26832 Lumisys Incorporated (Exact name of registrant as specified in its charter) Delaware 77-0133232 (State of incorporation) (I.R.S. Employer Identification No.) 225 Humboldt Court, Sunnyvale, CA 94089 (Address of principal executive offices) (Zip Code) (408) 733-6565 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / X / No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of May 13, 1998, 10,123,203 shares of the registrant's Common Stock, $.001 par value, were outstanding. Lumisys Incorporated Index Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated balance sheets at March 31, 1998 and December 31, 1997 3 Consolidated statements of income for the three months ended March 31, 1998 and 1997 4 Consolidated statements of cash flow for the three months ended March 31, 1998 and 1997 5 Notes to financial statements 6 - 8 Item 2. Management's discussion and Analysis of Financial Condition and Results of Operations 8 - 17 Part II. OTHER INFORMATION Item 1. Legal proceedings 17 - 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Lumisys Incorporated Consolidated Balance Sheets (Unaudited) (In thousands) March 31, December 31, 1998 1997 --------- ------------ ASSETS Current assets: Cash and cash equivalents $ 5,937 $ 7,522 Short-term investments 17,027 17,007 Accounts receivable, net of allowances of $672 and $401 3,507 4,622 Inventories 3,286 2,892 Deferred tax assets 1,453 1,453 Other current assets 333 316 ------- ------- Total current assets 31,543 33,812 Property and equipment, net 694 606 ------- ------- $32,237 $34,418 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,339 $ 1,355 Accrued expenses 2,433 2,967 Merger and related costs 1,654 2,117 ------- ------- Total current liabilities 5,426 6,439 ------- ------- Note payable to related party 134 130 Commitments and contingencies Stockholders' equity Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding --- --- Common stock, $0.001 par value; 25,000 shares authorized; 10,065 and 10,370 shares issued and outstanding 10 10 Additional paid-in capital 30,852 32,265 Accumulated deficit (4,170) (4,407) Deferred compensation related to stock options (15) (19) ------- ------- Total stockholders' equity 26,677 27,849 ------- ------- $32,237 $34,418 ======= ======= The accompanying notes are an integral part of these financial statements. Lumisys Incorporated Consolidated Statements of Income (Unaudited) (In thousands, except per share amounts) Three months ended ------------------------- March 31, March 31, 1998 1997 ----------- ----------- Sales $ 6,472 $ 7,814 Cost of sales 2,884 3,344 ----------- ----------- Gross profit 3,588 4,470 ----------- ----------- Operating expenses: Sales and marketing 914 1,136 Research and development 1,600 1,567 General and administrative 950 904 ----------- ----------- Total operating expenses 3,464 3,607 ----------- ----------- Income from operations 124 863 Interest income 261 294 ----------- ----------- Income before income taxes 385 1,157 Provision for income taxes 148 503 ----------- ----------- Net income $ 237 $ 654 =========== =========== Net income per share Basic $ 0.02 $ 0.07 =========== =========== Diluted $ 0.02 $ 0.06 =========== =========== Weighted average shares used to compute net income per share Basic 10,223 10,038 =========== =========== Diluted 10,402 10,464 =========== =========== The accompanying notes are an integral part of these financial statements. Lumisys Incorporated Consolidated Statements of Cash Flow (Unaudited) (In thousands) Three months ended ------------------------- March 31, March 31, 1998 1997 ----------- ----------- Cash flows from operating activities: Net income $ 237 $ 654 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 80 92 Changes in assets and liabilities: Accounts receivable 1,115 (1,355) Inventories (394) 163 Other assets (17) 44 Accounts payable (16) (94) Accrued expenses (530) 590 Merger and related costs (463) --- ----------- ----------- Net cash provided by operating Activities 12 94 ----------- ----------- Cash flows from investing activities: Purchase of short-term investments (20) --- Purchases of property and equipment (164) (187) ----------- ----------- Net cash used in investing activities (184) (187) ----------- ----------- Cash flows from financing activities: Proceeds from sale (purchase) of common stock, net (1,413) 32 ----------- ----------- Net cash provided by financing Activities (1,413) 32 ----------- ----------- Net decrease in cash and cash Equivalents (1,585) (61) Cash and cash equivalents at beginning of period 7,522 22,490 ----------- ----------- Cash and cash equivalents at end of period $ 5,937 $22,429 =========== =========== The accompanying notes are an integral part of these financial statements. Lumisys Incorporated Notes to Consolidated Financial Statements Note 1 - Basis of Presentation The consolidated financial statements of Lumisys Incorporated (the "Company") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1997, included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. On November 25, 1997, the Company merged with CompuRAD, Inc. ("CompuRAD"). Such merger was accounted for as a pooling-of- interests. Accordingly, the consolidated historical financial statements for all periods presented combine the financial results of Lumisys and CompuRAD. The consolidated balance sheet as of March 31, 1998, and the consolidated statements of income and of cash flows for the three months ended March 31, 1998 and 1997 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the results for these interim periods. The results of operations for the three months ended March 31, 1998, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 1998 or any future period. Note 2 - Net Income Per Share The Company adopted SFAS No. 128 ("SFAS 128"), "Earnings Per Share." SFAS 128 requires the presentation of basic and diluted earnings per share for companies with potentially dilutive securities, such as options. All historical earnings per share information has been restated as required by SFAS 128. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the weighted-average common shares outstanding plus the potential effect of dilutive securities which are convertible to common shares such as options, warrants, convertible debt and preferred stock. The following is a reconciliation between the components of the basic and diluted net income per share calculations for the periods presented below (in thousands): Three Months Ended March 31, 1998 1997 ----------- ---------- Net income $ 237 $ 654 =========== ========== Weighted average shares outstanding - basic 10,223 10,038 Effect of dilutive securities: Potential common stock Stock options and warrants 179 426 ----------- ---------- Weighted average shares outstanding - diluted 10,402 10,464 =========== ========== For the three months ended March 31, 1998 options for 434,688 shares of common stock is considered anti-dilutive and is excluded from the calculation of dilutive net income per share. Note 3 - Composition of Certain Financial Statement Amounts March 31, December 31, 1998 1997 ----------- ---------- (In thousands) Inventories: Raw materials $ 2,856 $ 2,363 Work-in-process 770 586 Finished goods 721 1,093 ----------- ---------- 4,347 4,042 Less: inventory reserves (1,061) (1,150) ----------- ---------- $ 3,286 $ 2,892 =========== ========== Accrued expenses: Payroll and related benefits $ 783 $ 1,122 Warranty 464 465 Accrued professional fees 413 401 Unearned revenue 290 979 Other 483 --- ----------- ---------- $ 2,433 $ 2,967 =========== ========== Note 4 - Revenue Recognition In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Positions No. 97-2 provides guidance for recognizing revenue on software transactions and supersedes SOP 91-1 "Software Revenue Recognition". In March 1998, the AICPA issued Statement of Position No. 98-4 ("SOP 98-4") "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition". SOP 98-4 defers, for one year, the application of certain passages in SOP 97-2 which limit what is considered vendor-specific objective evidence ("VSOE") necessary to recognize revenue for software licenses on multiple-element arrangements when undelivered elements exist. Additional guidance is expected bo be provided prior to adoption of the deferred provision of SOP 97-2. The Company will determine the impact, if any, the further guidance will have on current revenue recognition practices when issued. Adoption of the remaining provisions of SOP 97-2 did not have a material impact on revenue recognition during the first quarter of 1996. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Lumisys designs, manufactures and markets an integrated suite of hardware and software products for digitizing, networking, archiving, routing and displaying medical images in a PACS and teleradiology environment. The Company offers laser and CCD x- ray film digitizers, video frame digitizers, and software to enable health care organizations to capture, store, distribute and display medical images over LANs and WANs. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as those discussed in the Company's 1997 Annual Report on Form 10-K. Results of Operations Total sales for the first quarter of 1998 decreased 17.2% to $6.5 million from $7.8 million for the first quarter of 1997. This decrease was primarily due to lower software sales in 1998 as a result of the Company's software product strategy change. In November 1997, the Company decided to sell software products to OEM and VAR customers only, whereas previously the Company sold software to direct end-user customers as well. OEM and VAR sales have a longer sales cycle compared to the sales cycle for direct end-user customers and therefore sales decreased after the change in strategy. Gross profit for the first quarter of 1998 decreased 19.7% to $3.6 million from $4.5 million for the corresponding period of 1997. Gross margin decreased to 55.4% in the first quarter of 1998 from 57.2% in the first quarter of 1997 primarily due to lower margins in software products as a result of lower software sales for the first quarter of 1998 compared to the first quarter of 1997. Sales and marketing expenses decreased 19.5% in the first quarter of 1998 to $914,000 from $1,136,000 in the first quarter of 1997. The decrease was primarily due to the decrease in the Company's sales and marketing personnel as a result of the strategic change in software product sales. As a percentage of sales, these expenses decreased slightly to 14.1% in the first quarter of 1998 from 14.5% in the first quarter of 1997. Research and development expenses increased 2.1% in the first quarter of 1998 to $1,600,000 from $1,567,000 in the same quarter of 1997. As a percentage of sales, research and development expenses increased to 24.7% in the first quarter of 1998 from 20.0% in the same quarter of 1997, as a result of lower revenues. General and administrative expenses increased 5.1% in the first quarter of 1998 to $950,000 from $904,000 in the first quarter of 1997. As a percentage of sales, general and administrative expenses increased to 14.7% in the first quarter of 1998 from 11.6% in the first quarter of 1997 as a result of lower revenues. The Company recognized a provision for income taxes in the first quarter of 1998 of $148,000 compared with a provision of $503,000 in the corresponding period of 1997. The Company has provided a partial valuation allowance against the balance of the deferred tax assets remaining as of March 31, 1998. The Company expects to continue to be subject to an effective tax rate of approximately 39% for the remainder of 1998. Liquidity and Capital Resources The Company has financed its activities primarily from net cash provided by operations, which contributed $12,000 in the first quarter of 1998 and $94,000 in the same period of 1997. At March 31, 1998, the Company's working capital was $26.1 million. The Company had cash, cash equivalents and short-term investments of approximately $23.0 million at March 31, 1998, compared with $24.5 million cash, cash equivalents and short-term investments at December 31, 1997. The decrease is primarily due to the purchase by the Company of 344,000 shares of its Common Stock. The Company does not currently have any significant capital commitments and believes that existing sources of liquidity and funds expected to be generated from operations will provide adequate cash to fund the Company's anticipated working capital and other cash needs for the foreseeable future. Risk Factors That Could Effect Results of Operations Significant Fluctuations in Operating Results. There can be no assurance that the Company will be profitable on a quarterly or annual basis in the future. The Company has experienced quarterly fluctuations in operating results caused by various factors, including the timing of orders by major customers, customer inventory levels, shifts in product mix, the incurrence of acquisition-related costs and general conditions in the healthcare industry which have reduced capital equipment budgets and delayed or reduced the adoption of teleradiology, and expects that these fluctuations will continue. The Company typically does not obtain long-term volume purchase contracts from its customers, and a substantial portion of the Company's backlog is scheduled for delivery within 90 days or less. Customers may cancel orders and change volume levels or delivery times without penalty. Quarterly sales and operating results therefore depend on the volume and timing of the backlog as well as bookings received during the quarter. A significant portion of the Company's operating expenses are fixed, and planned expenditures are based primarily on sales forecasts and product development programs. If sales do not meet the Company's expectations in any given period, the materially adverse impact on operating results may be magnified by the Company's inability to adjust operating expenses sufficiently or quickly enough to compensate for such a shortfall. Furthermore, the Company's gross margins may decrease in the future due to increasing sales of lower margin products and volume discounts. Results of operations in any period should not be considered indicative of the results to be expected for any future period. Fluctuations in operating results may also result in fluctuations in the price of the Company's Common Stock. Uncertainty of Market Acceptance. The Company's success is dependent on market acceptance of its new and existing products. There can be no assurance that sales of new products will achieve significant market acceptance in the future. In addition, third party payers, such as governmental programs and private insurance plans, can indirectly affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement that they will provide for the taking, storing and interpretation of medical images. A decrease in the reimbursement amounts for radiological procedures may decrease the amount which physicians, clinics and hospitals are able to charge patients for such services. As a result, adoption of teleradiology and PACS may slow as capital investment budgets are reduced, thereby significantly reducing the demand for the Company's products. New Product Development in Software Products; Uncertainty of Market Acceptance. The market for PACS and teleradiology software is uncertain. Current and future competitors are likely to introduce competing software making it difficult to predict the rate at which the market will grow, if at all, or the rate at which new or increased competition will result in market saturation. If the market for such software fails to grow or grows more slowly than anticipated, the Company's business, financial condition and results of operations would be materially adversely effected. The Company expects that the sales cycle for PACS and teleradiology software through the OEM and System Integrator sales channels will be longer than that for its other existing hardware products. Accordingly, the Company's quarterly revenues and operating results may be subject to greater fluctuation as the Company begins to market and sell PACS and teleradiology software through these new channels. Additionally, the Company has limited experience in marketing, installing and supporting its software through these sales channels, and there can be no assurance that the Company can obtain the necessary resources to market, install and support its PACS and teleradiology software in an efficient, cost-effective and competitive manner. The failure of PACS and teleradiology software to achieve market acceptance for any reason could have a material adverse effect on the Company's business, financial condition and results of operations. Significant Risks Associated with Acquisitions. The integration of any acquisitions will require special attention from management, which may temporarily distract its attention from the day-to-day business of the Company. Any acquisitions will also require integration of the companiess' product offerings and coordination of research and development and sales and marketing activities. Furthermore, as a result of acquisitions, the Company may enter markets in which it has no or little direct prior experience. There can also be no assurance that the Company will be able to retain key technical personnel of an acquired company or recruit new management personnel for the acquired businesses, or that the Company will, or may in the future, realize any benefits as a result of such acquisitions. Acquisitions by the Company may result in potentially dilutive issuances of equity securities, the incurrence of debt, one-time acquisition charges and amortization expenses related to goodwill and intangible assets, each of which could be significant and could materially adversely affect the Company's financial condition and results of operations. In addition, the Company believes that it may be required to expand and enhance its financial and management controls, reporting systems and procedures as it integrates acquisitions. There can be no assurance that the Company will be able to do so effectively, and failure to do so when necessary would have a material adverse effect upon the Company's business and results of operations. New Product Development in Image Digitizers; Rapid Technological Change; Product Development. The market for the Company's products is characterized by rapid technological advances, changes in customer requirements and frequent new product introductions and enhancements. The Company's future success will depend upon its ability to enhance its current products, to develop and introduce new products that keep pace with technological developments and to respond to evolving customer requirements. Any failure by the Company to anticipate or respond adequately to technological developments by its competitors or to changes in customer requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness or revenues. In the past, the Company has experienced delays in the development and introduction of new products and product enhancements, and there can be no assurance that the Company will not experience such delays in the future. In addition, new product introductions or enhancements by the Company's competitors or the use of other technologies that do not depend on film digitization could cause a decline in sales or loss of market acceptance of the Company's products. In particular, computed radiography ("CR") systems are currently available and have been sold for medical applications for over ten years with limited acceptance. In addition, several companies have announced developments leveraging the technology used in flat panel displays, digital radiography ("DR"), to produce high-resolution, two dimensional image sensor arrays that make it possible for x-ray images to be captured digitally without film or chemical processing. While this emerging technology is expensive, there can be no assurance that future advances in this technology or other technologies will not produce systems better positioned for the marketplace that will therefore reduce the digitizer market to the then installed base of imaging systems. There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements on a timely or cost-effective basis, and such failure could have a material adverse effect on the Company's business and results of operations. Risks Associated With Software Products. Software and systems as complex as those offered by the Company frequently contain undetected errors or failures when first introduced or when new versions are released. The Company has in the past discovered bugs and system errors in certain of its software enhancements, both before and after initial shipment. There can be no assurance that, despite testing by the Company, errors will not occur in the Company's products resulting in loss of, or delay in, the Company's business, financial condition and results of operations. Peripherals and hardware from third party manufacturers also may contain defects and incompatibilities which could adversely affect market acceptance of the Company's software products. Long Sales Cycles. The OEM and System Integrator sales cycle for PACS and teleradiology systems is lengthy. The sales cycle of the Company's products is subject to delays associated with changes or the anticipation of changes in the regulatory environment affecting healthcare enterprises, changes in the customer's strategic system initiatives, competing information systems projects within the customer organization, consolidation in the healthcare industry in general, the highly sophisticated nature of the Company's software and competition in the PACS and teleradiology markets in general. The time required from initial contact to purchase order typically ranges from one to six months, and the time from purchase order to delivery and recognition of revenue typically ranges from one to six months. During the sales process, the Company expends substantial time, effort and funds preparing a contract proposal, demonstrating the software and negotiating the purchase order. For these and other reasons, the Company cannot predict when or if the sales process with a prospective customer will result in a purchase order. Competition. Competition in the United States laser-based film digitizer market has not been significant. A new company, CLS entered the market in 1996 with a product similar to the laser- based film digitizers offered by Lumisys. To date, the Company is unaware of any sales made by CLS. Several Japanese competitors such as Konica, Nishimoto Sangyo and Abe Sekkei offer competitive products on an international basis and may decide in the future to devote additional resources to marketing competitive products in the United States. In addition, General Scanning Inc. is expected to introduce a laser-based film digitizer during 1998. The markets for medical film digitizers incorporating charge- coupled devices ("CCDs") are highly competitive. The Company faces competition from companies such as Vidar Systems Inc., Canon Inc., Vision Ten Inc., Hell Linotype and Howtek in the CCD- based film digitizer market. There can be no assurance that the Company's competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features that render the Company's products less competitive or obsolete. In addition, large domestic companies, such as Kodak, Imation, Sterling Diagnostics ("Sterling", formerly the medical group of E.I. DuPont de Nemours and Company) and General Electric Co. ("GE"), and European companies, such as Siemens, Philips Electronics N.V. ("Philips") and Agfa, have the technical and financial ability to design and market digitizer products competitive with the Company's products, and some of them have in the past produced and marketed such products. While most of these companies currently purchase products from the Company, the Company believes that it will be required to continue to improve the price and performance characteristics of its products to retain their business especially in view of the fact that these customers are not contractually required to purchase their digitizers exclusively or at all from the Company. All of these companies have significantly greater financial, marketing and manufacturing resources than the Company and would be significant competitors if they decided to enter this market. The markets for medical video image digitizers are also highly competitive. Competitors in the video digitizer market are Precision Digital Images Corp., Epix, Inc. and Matrox Electronic Systems Ltd. Competition in the OEM markets for PACS and teleradiology software products and services is also intense and is expected to increase. The Company's principal competitors in the PACS and teleradiology software market are ISG, Applicare Medical Imaging B.V., Mitra Imaging Inc., and Access Radiology Corporation. Furthermore, other major healthcare information and equipment companies not presently offering competing products may enter the Company's markets. Increased competition could result in price reduction, reduced gross margins and loss of market share, any of which could materially adversely effect the Company's business, financial condition and results of operations. In addition, many of the Company's competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and market recognition than the Company in the Internet/Intranet clinical information systems area. Many of the Company's competitors also currently have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result of these factors, the Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than the Company. There can be no assurances that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a materially adverse effect on its business, financial condition or results of operations. Proprietary Rights. The Company relies on a combination of trade secrets, copyright and trademark laws, nondisclosure and other contractual provisions to protect its proprietary rights. The Company currently has no blocking patents covering its technology and it has not registered any of its trademarks. There can be no assurance that measures taken by the Company to protect its intellectual property will be adequate or that the Company's competitors will not independently develop systems and services that are substantially equivalent or superior to those of the Company. Substantial litigation regarding intellectual property rights exists in the software industry, and the Company expects that software products may be increasingly subject to third-party infringement claims as the number of competitors in the Company's industry segment grows and the functionality of systems overlap. Although the Company believes that its systems and applications do not infringe upon the proprietary rights of third-parties, there can be no assurance that third-parties will not assert infringement claims against the Company in the future, that the Company would prevail in any such dispute or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. In addition, any such claim may require the Company to incur substantial litigation expenses or subject the Company to significant liabilities and could have a material adverse effect on the Company's business, financial condition and results of operations. Customer Concentration; Reliance on OEMs. A significant portion of the Company's net sales is derived from a small number of customers. In 1995, 1996, and 1997, there were no companies that accounted individually for more than 10% of the Company's revenues. Large customers accounted for a significant portion of the Company's backlog at March 31, 1997. The Company expects to continue to depend upon its principal customers for a significant portion of its sales, although there can be no assurance that the Company's principal customers will continue to purchase products and services from the Company at current levels, if at all. The loss of one or more major customers or a change in their buying patterns could have a material adverse effect on the Company's business and results of operations. Single-Source Suppliers. The Company purchases industry-standard parts and components for the assembly of its products, generally from multiple vendors. Although the Company relies on single- source suppliers for certain components, such as lasers, photomultiplier tubes and certain electronic components primarily to control price and quality, the Company believes that alternate sources of supply are available from other vendors for such components and has qualified second source suppliers for some, but not all, single-sourced parts. The Company maintains good relationships with its vendors and, to date, has not experienced any material supply problems. While the Company seeks to maintain an adequate inventory of single-sourced components there can be no assurance that such inventories will be sufficient or that delays in part or component deliveries will not occur in the future, which could result in delays or reductions in product shipments. Furthermore, even if currently single-sourced components could be replaced by other qualified parts, product redesign and testing could be costly and time consuming. These factors could have a material adverse effect on the Company's business, financial condition and results of operations. Government Regulation. The manufacturing and marketing of the Company's digitizer, video board, and software products are subject to extensive government regulation in the United States and in other countries, and the process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. If a medical device manufacturer can establish that a newly developed device is "substantially equivalent" to a device that was legally marketed prior to May 1976, the date on which the Medical Device Amendments of 1976 were enacted, or to a device the FDA found to be substantially equivalent to a legally marketed pre-1976 device, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) premarket notification. The 510(k) premarket notification must be supported by appropriate data establishing the claim of substantial equivalence to the satisfaction of the FDA. Receipt of 510(k) clearance normally takes at least three months, but may take much longer and may require the submission of clinical safety and efficacy data to the FDA. All of the Company's laser- based film digitizers, the CCD-based film digitizer and software products that are commercially available have received 510(k) clearance. There can be no assurance that 510(k) clearance for any future product or any modification of an existing product will be granted, or that the process will not be unduly lengthy. In the future, the FDA may require manufacturers of certain medical devices to engage in a more thorough and time consuming approval process than the 510(k) process, which could have a material adverse effect on the Company's business and results of operations. The Company is also required to register as a Class II medical device manufacturer with the FDA and state agencies, such as the California Department of Health Services ("CDHS"). As such, the Company may be inspected on a routine basis by both the FDA and the CDHS for compliance with the FDA's GMP, QSR and other applicable regulations. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner with respect to manufacturing, reporting of product malfunctions and other matters. If the FDA believes that a company is not in compliance with federal regulatory requirements, it can institute proceedings to detain or seize products, issue a recall, prohibit marketing and sales of the company's products and assess civil and criminal penalties against the company, its officers or its employees. Failure to comply with the regulatory requirements could have a material adverse effect on the Company's business and results of operations. The Company was inspected by the FDA in 1996 and was found to be compliant with the FDA's GMP regulations but has not been inspected by CDHS to date. The Company also relies on 510(k) pre-market notification for its current internally developed products. Additionally, the Company relies on 510(k) clearance and the finding by the FDA of substantial equivalence for the Image Management System technology acquired from Star Technologies, Inc. in July 1997. The Company believes that its success depends upon commercial sales of new versions of its PACS and teleradiology software which may be subject to clearance or approval from the FDA and its foreign counterparts. There can be no assurance that a similar 510(k) clearance for any future product or enhancement of an existing product will be granted or that the process will not be lengthy. If the Company cannot establish that a product is "substantially equivalent" to certain legally marketed devices, the 510(k) clearance procedure may be unavailable and the Company may be required to utilize the longer and more expensive PMA process. Failure to receive or delays in receipt of FDA clearances or approvals, including the need for additional data as a prerequisite to clearance or approval, could have a material adverse effect on the Company's business, financial condition and results of operations. Sales of the Company's products outside the United States are subject to foreign regulatory requirements that vary from country to country. Additional approvals from foreign regulatory authorities may be required, and there can be no assurance that the Company will be able to obtain foreign approvals on a timely basis or at all, or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In Europe, the Company will be required to obtain certifications necessary to enable the "CE" mark to be affixed to the Company's products by mid 1998 to continue commercial sales in member countries of the European Union. The CE mark is an international symbol of quality and complies with applicable European medical device directives. The Company has not yet obtained this CE certification. The Company is currently working towards this certification, but such approval by mid-1998 is not assured. Failure to comply with foreign regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Litigation. On July 9, 1997 and July 10, 1997, two class action complaints were filed in the Superior Court of the State of California, County of Santa Clara, and the U.S. District Court for the Northern District of California, respectively, against the Company, several of its current and former officers and directors, and its underwriters. The complaints are brought on behalf of all persons who purchased the Company's Common Stock during the putative class period, November 15, 1995 to July 11, 1996. The complaints allege that, during the class period, defendants made material misstatements and omitted to disclose material information concerning the Company's actual and expected performance and results, causing the price of the Company's Common Stock to be artificially inflated. The federal complaint alleges claims under Sections 10(b) and 20(a) of the Exchange Act, and SEC Rule 10b-5 promulgated thereunder; the state complaint alleges claims under California state law. Neither the federal nor the state complaint specifies the amount of damages sought. The Company and the other defendants vigorously deny all allegations of wrongdoing, and intend to defend themselves aggressively. On January 9, 1998, the Santa Clara Superior Court dismissed the State complaint in part with prejudice and in part with leave to amend. Plaintiff has filed an amended complaint in State court and on March 23, 1998, defendants filed a demurer to the amended complaint. On March 6, 1998, the federal court dismissed the federal complaint with leave to amend. There can be no assurance that the Company will prevail in this action or that the plaintiffs will not recover damages. Third-Party Reimbursement. Third-party payers, such as governmental programs and private insurance plans, can indirectly affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement that they will provide for the taking, storing and interpretation of medical images. In recent years, healthcare costs have risen substantially, and third-party payers have come under increasing pressure to reduce such costs. In this regard, extensive studies undertaken by the Clinton Administration, even though not successfully translated into regulatory action, have stimulated widespread analysis and reaction in the private sector focused on healthcare cost reductions, which may involve reductions in reimbursement rates in radiology. A decrease in the reimbursement amounts for radiological procedures may decrease the amount which physicians, clinics and hospitals are able to charge patients for such services. As a result, adoption of teleradiology and PACS may slow as capital investment budgets are reduced, and the demand for the Company's products could be significantly reduced. Product Liability and Insurance. The manufacture and sale of medical products entails significant risk of product liability claims. While the Company believes that its current insurance coverage is appropriate, there can be no assurance that such coverage is adequate to protect the Company from any liabilities it might incur in connection with the sale of the Company's products. In addition, the Company may require increased product liability coverage as additional products are commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business and results of operations. Volatility of Stock Prices. The market price of the Company's Common Stock has been and may continue to be volatile. This volatility may result from a number of factors, including fluctuations in the Company's quarterly revenues and net income, announcements of technical innovations or new commercial products by the Company or its competitors, and conditions in the market for medical image digitizers and the teleradiology and health care industry and for PACS and teleradiology products and healthcare information systems and services. Also, the stock market has experienced and continues to experience extreme price and volume fluctuations which have affected the market prices of securities, particularly those of medical technology companies, and which often have been unrelated to the operating performance of the companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Stock in future periods. Market Risk. The Company has an investment portfolio of fixed income that are classified as "available-for-sale securities". These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. The Company attempts to limit this exposure by investing primarily in short-term securities. From time to time, the Company makes certain capital equipment or other purchases denominated in foreign currencies. As a result, the Company's cash flows and earnings are exposed to fluctuations in interest rates and foreign currency exchange rates. The Company attempts to limit these exposures through operational strategies and generally has not hedged currency exposures. Year 2000 Issue. The rapid approach of Year 2000 presents significant issues for many computer systems, since much of the software in use today may not accurately process data beyond 1999. The Company has recently implemented new information systems and accordingly does not anticipate any internal Year 2000 issue from its own information systems, databases or programs. However, the Company could be adversely impacted by Year 2000 issues faced by major distributors, suppliers, customers, vendors and financial service organizations with which the Company interacts. The Company is currently taking steps to address the impact, if any, of the Year 2000 issue on the operations of the Company. There can be no assurances that such a review will detect all potential failures of the Company's and/or third-party's computer systems. A significant failure of the Company's or a third-party's computer system could have a material adverse effect on the Company's business, financial condition and results of operations. Part 2 - OTHER INFORMATION Item 1. Legal Proceedings On July 9, 1997 and July 10, 1997, two class action complaints were filed in the Superior Court of the State of California, County of Santa Clara, and the U.S. District Court for the Northern District of California, respectively, against the Company, several of its current and former officers and directors, and its underwriters. The complaints are brought on behalf of all persons who purchased the Company's Common Stock during the putative class period, November 15, 1995 to July 11, 1996. The complaints allege that, during the class period, defendants made material misstatements and omitted to disclose material information concerning the Company's actual and expected performance and results, causing the price of the Company's Common Stock to be artificially inflated. The federal complaint alleges claims under Sections 10(b) and 20(a) of the Exchange Act, and SEC Rule 10b-5 promulgated thereunder; the state complaint alleges claims under California state law. Neither the federal nor the state complaint specifies the amount of damages sought. The Company and the other defendants vigorously deny all allegations of wrongdoing, and intend to defend themselves aggressively. On January 9, 1998, the Santa Clara Superior Court dismissed the State complaint in part with prejudice and in part with leave to amend. Plaintiff has filed an amended complaint in State court and on March 23, 1998, defendants filed a demurer to the amended complaint. On March 6, 1998, the federal court dismissed the federal complaint with leave to amend. There can be no assurance that the Company will prevail in this action or that the plaintiffs will not recover damages. On July 18, 1997, a third-party filed a complaint in Santa Clara Superior Court against the Company and one of its officers. The complaint contains causes of action for liable, defamation, negligent infliction of emotional distress and punitive damages. The Company and the other defendant vigorously deny all allegations of wrongdoing and intend to defend themselves aggressively. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits furnished: Exhibit Number Description of Document ----------- -------------------------------- 27 Financial Data Schedule (b) Reports on Form 8-K: none. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LUMISYS INCORPORATED Dated: May 15, 1998 By:/s/ Douglas G. DeVivo ----------------------- Douglas G. DeVivo Chief Executive Officer May 15, 1998 /s/ Craig L. Klosterman ----------------------- Craig L. Klosterman Chief Operating and Chief Financial Officer 21 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LUMISYS INCORPORATED CONSOLIDATED BALANCE SHEETS AND mARCH 31, 1998 AND CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1998 MAR-31-1998 5937 17027 4179 672 3286 1786 1625 931 32237 5426 0 0 0 10 26667 32237 6472 6472 2884 2884 3464 0 (261) 385 148 237 0 0 0 237 .02 .02
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