-----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, MzgUL7cL6qQd5VAjkeWm1RbpDtHj0/7kg3vGShdXjsebtFTft+paad1Lhr0ot0Kw r5vHo25xYx4beKbHF3e98Q== 0000927356-99-000876.txt : 19990513 0000927356-99-000876.hdr.sgml : 19990513 ACCESSION NUMBER: 0000927356-99-000876 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990404 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FISCHER IMAGING CORP CENTRAL INDEX KEY: 0000750901 STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844] IRS NUMBER: 362756787 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19386 FILM NUMBER: 99618266 BUSINESS ADDRESS: STREET 1: 12300 N GRANT ST CITY: DENVER STATE: CO ZIP: 80241 BUSINESS PHONE: 3034526800 MAIL ADDRESS: STREET 1: 12300 NORTH GRANT STREET CITY: DENVER STATE: CO ZIP: 80241 10-Q 1 FORM 10-Q FOR FISCHER IMAGING CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended April 4, 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 (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (ii) has been subject to such filing requirements for the past 90 days. Yes X No ____ ---- Shares Outstanding as of Title of Class April 4, 1999 ---------------------------------------- -------------------- Common Stock, $0.01 par value 7,028,855
FISCHER IMAGING CORPORATION TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheets - April 4, 1999 and December 31, 1998 3 Consolidated Statements of Operations - Three months ended April 4, 1999 and March 30, 1998 4 Consolidated Statements of Cash Flows - Three months ended April 4, 1999 and March 30, 1998 5 Notes to Consolidated Financial Statements 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 21 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 24
FISCHER IMAGING CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share data)
April 4, December 31, 1999 1998 -------------- -------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,105 $ 929 Trade accounts receivable, net of allowance for doubtful accounts of approximately $739 and $726 at April 4, 1999 and December 31, 1998, respectively 14,379 16,797 Inventories 21,191 22,023 Prepaid expenses and other current assets 768 1,098 -------- -------- Total current assets 37,443 40,847 -------- -------- PROPERTY AND EQUIPMENT (at cost) Manufacturing equipment 9,518 9,467 Office equipment and leasehold improvements 6,087 5,936 -------- -------- 15,605 15,403 Less- Accumulated depreciation and amortization 10,457 9,994 -------- -------- Property and equipment, net 5,148 5,409 -------- -------- INTANGIBLE ASSETS, net 2,817 2,957 DEFERRED COSTS AND OTHER ASSETS 1,949 1,756 -------- -------- TOTAL ASSETS $ 47,357 $ 50,969 ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES Notes payable and current maturities of long-term debt $ 5,508 $ 6,838 Trade accounts payable 5,589 5,204 Accrued salaries and wages 1,614 2,225 Customer deposits 2,993 2,599 Accrued warranty and installation costs 1,686 1,124 Accrued restructuring costs 377 1,015 Deferred service revenue 867 1,132 Other current liabilities 2,196 1,615 -------- -------- Total current liabilities 20,830 21,752 LONG-TERM DEBT 520 587 OTHER NONCURRENT LIABILITIES 200 200 -------- -------- TOTAL LIABILITIES 21,550 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 April 4, 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 April 4, 1999 and December 31, 1998, respectively; liquidation preference of $3.8 million and $10.0 million at April 4, 1999 and December 31, 1998, respectively (Note 6) 5 13 Additional paid-in capital 43,264 49,366 Accumulated deficit (18,109) (21,459) Accumulated other comprehensive income (foreign currency translation adjustments) 577 440 -------- -------- TOTAL STOCKHOLDERS' INVESTMENT 25,807 28,430 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 47,357 $ 50,969 ======== ========
The accompanying notes are an integral part of these financial statements. 3 FISCHER IMAGING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) (Unaudited)
Three Months Ended ------------------------------------- April 4, March 30, 1999 1998 ------------- ------------- REVENUES Products and services $14,165 $13,667 Sale of manufacturing license (Note 6) 6,200 -- ------- ------- Total 20,365 13,667 COST OF SALES Products and services 9,101 8,408 Sale of manufacturing license 400 -- ------- ------- Total 9,501 8,408 ------- ------- Gross profit 10,864 5,259 OPERATING EXPENSES Research and development 1,415 1,392 Selling, marketing and service 3,475 3,531 General and administrative 2,223 1,358 ------- ------- Total operating expenses 7,113 6,281 ------- ------- INCOME (LOSS) FROM OPERATIONS 3,751 (1,022) Interest expense (280) (54) Interest income 57 30 Other (expense) income, net (178) (73) ------- ------- INCOME (LOSS) BEFORE INCOME TAXES 3,350 (1,119) Benefit for income taxes -- -- ------- ------- NET INCOME (LOSS) $ 3,350 $(1,119) ======= ======= NET INCOME (LOSS) PER SHARE Basic $ 0.48 $ (0.16) ======= ======= Diluted $ 0.40 $ (0.16) ======= ======= SHARES USED TO CALCULATE INCOME (LOSS) PER SHARE Basic 7,029 6,980 ======= ======= Diluted 8,344 6,980 ======= =======
The accompanying notes are an integral part of these financial statements. 4 FISCHER IMAGING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Three Months Ended ---------------------- April 4, March 30, 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,350 $(1,119) ------- ------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Noncash sale of manufacturing license (6,200) -- Depreciation 529 549 Amortization of intangible assets 140 172 Provision for doubtful accounts -- (4) Provision for excess and obsolete inventories 301 305 Sales and retirements of assets -- 60 Foreign exchange losses 151 57 Restructuring costs (638) (321) Other changes in current assets and liabilities- Decrease in trade accounts receivable 2,418 272 Decrease (Increase) in inventories 531 (2,215) Decrease (Increase) in prepaid expenses and other current assets 330 (108) (Increase) Decrease in deferred costs and other assets (193) 90 Increase in trade accounts payable 385 978 Decrease in accrued salaries and wages (611) (13) Increase in customer deposits 394 899 Increase (Decrease) in accrued warranty and installation costs 562 (52) Decrease in deferred service revenue (265) (26) Increase (Decrease) in other current liabilities 581 (278) Other (82) (3) ------- ------- Total adjustments (1,667) 362 ------- ------- Net cash provided (used in) by operating activities 1,683 (757) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (186) (161) ------- ------- Net cash used in investing activities (186) (161) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sales of common stock, net 90 132 Net borrowings under line of credit agreement (1,350) -- Repayments of long-term debt (47) (80) ------- ------- Net cash used in financing activities (1,307) (52) ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (14) 15 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 176 (851) CASH AND CASH EQUIVALENTS, beginning of period 929 3,439 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 1,105 $ 2,588 ======= =======
The accompanying notes are an integral part of these financial statements. 5 FISCHER IMAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL - ---------- In the opinion of management, the accompanying unaudited consolidated balance sheets and statements of operations and cash flows contain all adjustments, consisting only of normal recurring items, necessary to present fairly the financial position of Fischer Imaging Corporation (the "Company") on April 4, 1999, its results of operations for the three months ended April 4, 1999 and March 30, 1998 and its cash flows for the three months ended April 4, 1999 and March 30, 1998. The unaudited consolidated financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by generally accepted accounting principles. The financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company's latest annual report on Form 10-K for the year ended December 31, 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): April 4, December 31, 1999 1998 --------------- ------------ FIFO cost- Raw materials $14,410 $14,684 Work in process and finished goods 14,169 14,099 LIFO valuation adjustment (520) (520) ------- ------- Total before valuation reserves 28,059 28,263 Less valuation reserves (6,868) (6,240) ------- ------- Inventories, net $21,191 $22,023 ======= ======= 6 3. OTHER CURRENT LIABILITIES - ----------------------------- Other current liabilities consisted of the following (in thousands):
April 4, December 31, 1999 1998 -------------- --------------- Accrued sales, property, and other state and local taxes $ 397 $ 594 Other 1,799 1,021 ------- ------- Total other current liabilities $ 2,196 $ 1,615 ======= =======
4. NOTES PAYABLE AND LONG-TERM DEBT - ----------------------------------- Notes payable and long-term debt consisted of the following (in thousands):
April 4, December 31, 1999 1998 -------------- --------------- Borrowing under bank revolving line of credit $ 5,222 $ 6,572 Capitalized lease obligations 779 827 Other 27 26 ------- ------- 6,028 7,425 Less--Current maturities (5,508) (6,838) ------- ------- Long-term debt $ 520 $ 587 ======= =======
See "Management's Discussion & Analysis - Liquidity and Capital Resources" for a discussion of the Company's line of credit. 5. NET EARNINGS (LOSS) PER SHARE - --------------------------------- The Company presents basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which establishes standards for computing and presenting basic and diluted earnings per share. Under this statement, basic earnings or loss per share is computed by dividing the net earnings or loss by the weighted average number of shares of common stock outstanding. Diluted earnings or loss per share is determined by dividing the net earnings or loss by the sum of (1) the weighted average number of common shares outstanding, (2) if not anti-dilutive, the number of shares of convertible preferred stock as if converted upon issuance, and (3) if not anti-dilutive, the effect of outstanding stock options determined utilizing the treasury stock method. A reconciliation between the number of securities used to calculate basic and, where anti-dilutive, diluted earnings per share is as follows: April, 4, March 30, 1999 1998 ------------ ------------ Weighted average number of common shares outstanding (Shares used in Basic Earnings Per Share Computation)................................................... 7,029 6,980 ----- ----- Shares of convertible preferred stock (as if converted)............................... 1,315 1,333 Effect of stock options (treasury stock method)....................................... -- 2 ----- ----- Shares used in Diluted Earnings Per Share Computation, if dilutive.................... 8,344 8,315 ===== =====
7 For the three months ended March 30, 1998, the effects of the convertible preferred stock and stock options were excluded from the calculation of diluted earnings per share in the accompanying Consolidated Statements of Operations because the result would have been anti-dilutive. As of April 4, 1999 and March 30, 1998, there were, respectively, 1,058,925 and 860,000 outstanding options to purchase shares of Common Stock under the company's current stock option plans. 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 its manufacturing activity 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 COSTS - ----------------------- During the third quarter of 1997, the Company decided to close its Addison, Illinois manufacturing facility and, accordingly, recorded a $2.9 million restructuring provision for the 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 obligations for this facility by agreeing to a $1.0 million lease buyout, over an eight month period, completing the Addison closure within the original $2.9 million provision. During the three months ended April 4, 1999 and March 30, 1998, the Company spent approximately $638,000 and $321,000, respectively including, in 1999, required payments under the lease buyout. 8. REPORTING COMPREHENSIVE INCOME - ---------------------------------- In 1998, the Company adopted Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130, effective for years beginning after December 15, 1997, establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise except those changes resulting from investments by or distributions to its owners. For the Company, comprehensive income includes only net earnings or loss and foreign currency translation adjustments, as follows:
Three Months Ended ---------------------------------- April 4, March 30, 1999 1998 -------------- -------------- Net income (loss) $3,350 $(1,119) Foreign currency translation adjustments 137 73 ------ ------- Comprehensive income (loss) $3,487 $(1,046) ====== =======
8 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):
Three Months Ended United States International Internal - ------------------ ---------------------------------------- ------------------- --------- April 4, 1999: Proprietary OEM Export Total Australia Europe Sales Total - -------------- ----------- ------- ------- --------- ---------- ------- --------- --------- Revenues: Product.............................. $ 5,840 $3,684 $2,225 $11,749 $ 21 $ 115 $(174) $11,711 Service.............................. 2,269 2,269 39 146 2,454 Sale of manufacturing license........ 6,200 -- -- 6,200 -- -- -- 6,200 ------- ------- ------- ------- ------ ----- ----- ------- 14,309 3,684 2,225 20,218 60 261 (174) 20,365 ------- ------- ------- ------- ------ ----- ----- ------- Costs of sales: Product.............................. 3,065 2,656 1,156 6,877 13 63 (118) 6,835 Service.............................. 556 -- -- 556 24 20 (56) 544 Sale of manufacturing license........ 400 -- -- 400 -- -- -- 400 ------- ------- ------- ------- ------ ----- ----- ------- Allocated............................ 4,021 2,656 1,156 7,833 37 83 (174) 7,779 ------- ------- ------- Unallocated.......................... 1,722 -- -- 1,722 ------- ------ ----- ------- 9,555 37 83 (174) 9,501 ------- ------ ----- ----- ------- Gross profit........................... 10,663 23 178 -- 10,864 Operating expenses..................... 6,939 92 82 -- 7,113 ------- ------ ----- ----- ------- Loss from operations................... 3,724 (69) 96 -- 3,751 Interest expense....................... (229) -- (51) -- (280) Interest income........................ 56 1 -- -- 57 Other expense, net..................... (25) 79 (232) -- (178) Income taxes........................... -- -- -- -- -- ------- ------ ----- ----- ------- Net loss............................... $ 3,526 $ 11 $(187) $ -- $ 3,350 ======= ====== ===== ===== ======= Identifiable assets.................... $45,593 $1,033 $ 731 $47,357 ======= ====== ===== ======= Capital expenditures................... $ 186 $ -- $ -- $ 186 ======= ====== ===== ======= Depreciation........................... $ 523 $ 6 $ -- $ 529 ======= ====== ===== =======
9
Three Months Ended United States International Internal - ------------------ --------------------------------------- ------------------- --------- March 30, 1998: Proprietary OEM Export Total Australia Europe Sales Total - --------------- ----------- ------- ------ --------- ---------- ------- --------- ---------- Revenues: Product........................... $7,363 $3,445 $890 $11,698 $ 38 $ 238 $(288) $11,686 Service........................... 1,899 -- -- 1,899 35 47 -- 1,981 ------ ------- ------ ------- ----- ----- ----- ------- 9,262 3,445 890 13,597 73 285 (288) 13,667 ------ ------- ------ ------- ----- ----- ----- ------- Costs of sales: Product........................... 4,338 2,277 514 7,129 46 131 (281) 7,025 Service........................... 347 -- -- 347 35 9 (7) 384 ------ ------- ------ ------- ----- ----- ----- ------- Allocated......................... 4,685 2,277 514 7,476 81 140 (288) 7,409 ------ ------- ------ Unallocated....................... 999 -- -- 999 ------- ----- ----- ------- 8,475 81 140 (288) 8,408 ------- ----- ----- ----- ------- Gross profit........................ 5,122 (8) 145 -- 5,259 Operating expenses.................. 6,068 107 106 -- 6,281 ------- ----- ----- ----- ------- Loss from operations................ (946) (115) 39 -- (1,022) Interest expense.................... (54) -- -- -- (181) Interest income..................... 29 1 -- -- 271 Other expense, net.................. (9) 44 (108) -- (760) Income taxes........................ -- -- -- -- -- ------- ----- ----- ----- ------- Net loss............................ $ (980) $ (70) $ (69) $ -- $(1,119) ======= ===== ===== ===== ======= Identifiable assets................. $48,338 $ 904 $ 721 $49,963 ======= ===== ===== ======= Capital expenditures................ $ 161 $ -- $ -- $ 161 ======= ===== ===== ======= Depreciation........................ $ 537 $ 8 $ 4 $ 549 ======= ===== ===== =======
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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition should be read in conjunction with the company's Consolidated Financial Statements and Notes thereto appearing in the company's Annual Report on Form 10-K for the year ended December 31, 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 deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "expects," "anticipates," "plans," "estimates," and similar words and expressions are intended to identify such statements. These forward-looking statements include statements about: . resolutions of deficiencies noted by the FDA; . the adequacy of financial resources; . future operating results including revenues and expenses; . 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 company's assessment of costs of modifications required to become Year 2000 compliant; . 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 described in the risks of investing in the company set forth: (i) 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," in the Market for Registrant's 11 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," (ii) 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, (iii) elsewhere in the Business, MD&A, and other sections of the Form 10-K, and (iv) 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. The company has experienced significant losses in four of the five years ended December 31, 1998 and, excluding the sale of a manufacturing license (See Note 6 to these Consolidated Financial Statements), in the first quarter of 1999. Although the company was profitable in 1995 and for the first nine months of 1996, significant losses have been incurred since then. Significant factors giving rise to recent losses include excessive manufacturing capacity and related manufacturing costs, intense competition for certain 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. These include: . 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 Radigraphy Corporation for the development and marketing of digital radiography products (See the "Strategic Alliances" heading of the Business Section of Form 10-K); . 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: 12 . demand for the company's products; . the availability of adequate financial resources; . the company's ability to maintain or increase gross margins; . the effectiveness of efforts to control manufacturing and other costs; . effective negotiation and implementation of product distribution arrangements; . effective implementation of marketing and sales strategies in the United States and internationally; . maintenance or renewal of orders under OEM agreements with favorable terms; and . the development and introduction of new products that compete successfully. The company believes that improved factory utilization is a key factor in returning to profitability. Therefore, the company decided in the third quarter of 1997 to close its Addison, Illinois manufacturing facility and outsource or transfer Addison production. In January 1999, the company fulfilled its remaining obligations for this facility by agreeing to a $1.0 million lease buyout, over an eight month period, completing the Addison closure within the original $2.9 million provision. The company expects continued significant quarterly and annual fluctuations in revenues, operating results and net income, depending on such factors as: . delays in development projects; . the timing of orders for large system products and products produced under OEM contracts, and related manufacturing and shipment scheduling; . 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 of the company's markets; and . the effects of seasonal patterns and other timing issues with respect to customer purchasing decisions. Because the timing of the occurrence of such factors is difficult to anticipate and many of the company's costs are fixed, the company may not be able to sufficiently reduce its costs in periods when its revenues are less than anticipated and may suffer unexpected losses or lower income in these periods. In recent years, the company has attempted to expand its international sales and marketing efforts, which have resulted in losses from its international operations. The company can expect to continue to incur losses until international revenues reach sufficient levels. Additionally, the company's exposure to foreign currency and other international business risk may increase as its international business grows. The company attempts to minimize these risks by: (i) generally requiring payments in U.S. dollars; (ii) using letters of credit; and (iii) requiring advance deposits and through other means. There can be no assurance, however, that international sales efforts will be successful or that the associated risks can be minimized. International revenues 13 declined substantially in 1998 and 1997, but increased significantly in the first quarter of 1999 as compared to the first quarter of 1998. Sales of the company's Mammotest breast biopsy systems 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. Sales in this market increased in 1998, in part due to the company's marketing partnerships with Ethicon Endo-Surgery. In December 1998, following its acquisition by Tyco Corporation, U. S. Surgical terminated its OEM agreement with Trex Medical, the company's principle competitor in this market. While long-term competitive conditions for Mammotest may become more favorable to the company, there could be unfavorable near-term impacts of U. S. Surgical's departure from this market, depending on inventory conditions and other factors. In January 1999, the Agfa-Gevaert Group announced the acquisition of Sterling Diagnostic Imaging, Inc., the parent of Direct Radiography Corp., the company's partner in developing digital imaging products for the general radiography market. Direct Radiography was not included in this acquisition; however, on April 29, 1999, Sterling entered into an agreement whereby Hologic Corporation will acquire Direct Radiography. The company expects to continue its partnership with Direct Radiography under its new ownership. 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 inability to properly treat the Year 2000 could cause systems to process critical financial and operational information incorrectly. Year 2000 Project The company is in the process of evaluating its products, computer hardware, and operating software, and third party suppliers for possible Year 2000 problems. This project is organized as follows: 14
Anticipated Anticipated Completion Out-of-Pocket Area Task/Status Date Cost - --------------------------------- ------------------------------------------------- --------------- -------------------- 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 2nd qtr 1999 * 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 certificaton of Year 2000 compliance Complete Other applications Evaluate and/or obtain certifications 3rd qtr 1999 * IV. Hardware: Networks Confirm Year 2000 compliance Complete * Personal computers Confirm Year 2000 compliance Complete * Replace or upgrade as necessary 2nd qtr 1999 Under $100,000 V. Third party suppliers: Establish evaluation criteria Complete * Survey suppliers 2nd qtr 1999 * Re-source as necessary 3rd qtr 1999 *
* No significant out-of-pockets incurred or expected to be incurred. At this time, the company has not formulated contingency plans in the event that systems are not Year 2000 compliant. The need to develop such plans will be assessed following the completion of testing of its primary business software and upon receipt of information from critical third party suppliers regarding their Year 2000 compliance. 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. It is anticipated that most Year 2000 Project activities will be performed with internal resources. Consequently, Year 2000 activities can be anticipated to continue to delay other projects, particularly in the area of new information systems development. Such delays are not, however, expected to materially impact the company's results of operations. 15 Risks The failure to correct a material Year 2000 problem could result in an interruption in, or failure of, normal business activities or operations. There is inherent uncertainty regarding the Year 2000 problem, in part resulting from the uncertainty of the Year 2000 readiness of third-party suppliers and customers. Therefore, the company is unable to predict 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, in particular, with respect to the Year 2000 compliance and 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 currently under development by the company or third-party suppliers, which were finalized and available to customers as of the end of the first quarter of 1999. The company is nearing completion of its evaluation of earlier versions of current products and may conclude that problems less easily addressed do exist. If such problems are identified, 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-K, 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 was issued a Warning Letter by 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 ("Form 483") and a subsequent Warning Letter regarding manufacturing practices. The company was required to respond as to planned corrective actions and 16 to obtain a favorable third-party certification of the Denver facility's manufacturing and quality systems. These actions were completed. In October 1998, following a periodic inspection of the Denver facility, the FDA issued a Form 483 regarding possible deficiencies in manufacturing, quality, and documentation practices. The company has prepared and submitted its response to the Form 483. The recent issuance of another Form 483 increases the possibility that one or more of these sanctions could be imposed. Failure to satisfy FDA requirements can result in the company's inability to receive awards of federal government contracts, to receive new marketing or export clearances for products manufactured at its Denver facility, or FDA enforcement actions including, among other things, product seizure, injunction, and/or criminal or civil proceedings being initiated by the FDA without further notice. Although the company strives to operate within the requirements imposed by the FDA, there can be no assurance that these deficiencies can be corrected or that the company will be able to satisfy FDA compliance concerns in the future. Ongoing FDA compliance reviews and/or related delays in product clearances could have a material adverse effect on the company. Proforma Results of Operations for the Three Months Ended April 4, 1999 The company's results of operations for the three months ended April 4, 1999 included items of a non-recurring nature, as follows (in thousands):
Increase (Decrease) --------------------------------------------------------------------------- Gross Operating Net Income Revenues Profit Expenses (Loss) ------------------ ------------------ ------------------ ----------------- Reported results of operations $20,365 $10,864 $7,113 $ 3,350 Sale of manufacturing license (1) (6,200) (5,800) -- (5,800) Accruals for contractual issues (2) -- -- (886) 886 ------- ------- ------ ------- Normalized proforma results of operations $14,165 $ 5,064 $6,227 $(1,564) ======= ======= ====== =======
(1) During the first quarter, 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 held by G. E. Medical Systems. See Note 6 to these unaudited consolidated financial statements. (2) Due to legal activities which occurred during the first quarter of 1999, the company has 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 proforma results of operations for the three months ended April 4, 1999. Results of Operations Revenues and net loss, on a normalized proforma basis, for the first quarter of 1999 were $14,165,000 and $1,564,000, respectively, as compared to revenues of $13,667,000 and a net loss of $1,119,000 for the first quarter of 1998. Revenues in the 17 first quarter of 1999 were favorably impacted by significant increases in shipments of mammography products and higher service revenues, partially offset by a substantial decline in shipments of electrophysiology products. Gross margin as a percent of revenues decreased from 38.5% in the first quarter of 1998 to 35.8% in the first quarter of 1999, primarily due to increased unfavorable absorption of manufacturing costs associated with lower levels of production hours and material purchases and to inefficiencies associated with production activities transferred from the company's Addison, Illinois factory, partially offset by a shift in mix to higher margin proprietary products. On a normalized proforma basis, operating expenses were about the same in the first quarter of 1999 versus the first quarter of 1998. Other income and expense was more unfavorable in the first quarter of 1999 versus 1998, primarily due to foreign exchange loss in Europe caused by the strengthening U. S. dollar, and higher interest expense associated with higher borrowings under the company's revolving line of credit. As a result of these factors, the net loss increased from $1,119,000 in the first quarter 1998 to $1,564,000, on a normalized proforma basis, in the first 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 (on a normalized proforma basis for 1999): Three Months Ended April 4, March 30, 1999 1998 --------------- --------------- Revenues 100.0 % 100.0 % Gross margin 35.8 38.5 Research and development 10.0 10.2 Selling, marketing and service 24.5 25.8 General and administrative 9.4 9.9 Loss from Operations (8.2) (7.5) Benefit for income taxes --- --- Net loss (11.0) (8.2) Revenues. First quarter normalized proforma 1999 revenues were $14,165,000, a 4% increase from first quarter 1998 revenues of $13,677,000. The increase reflects approximately 20% increases in shipments of mammography products and service revenues, offset by a substantial decline in shipments of electrophysiology product shipments, essentially caused by a delay in the shipment of two systems planned for the first quarter of 1999. The increase was in the U. S. direct and international dealer channels of distribution, and was offset by a decline in U. S. dealer sales. Gross Profit. For the first quarter of 1999, gross profit expressed as a percentage of revenues was 35.8%, as compared to 38.5% for the first quarter of 1998. The decrease in gross profit as a percentage of revenues was primarily due to: (i) an increase in unfavorable absorption of manufacturing costs associated with lower levels of material purchases and fewer production hours and (ii) inefficiencies associated with production activities transferred from the company's Addison, Illinois factory, which were partly offset by a shift in mix to higher margin mammography products and service revenues. 18 Research and Development Expenses. Research and development expenses for the first quarter of 1999 and 1998 were $1,415,000 and $1,392,000, respectively. This represented 10.0% of revenues for 1999 and 10.2% of revenues for 1998. These results were relatively unchanged. The key product development focuses continue to be digital mammography, digital general radiography, and ultrasound mammography. Selling, Marketing and Service Expenses. Selling, marketing and service expenses for the first quarters of 1999 and 1998 were $3,475,000 and $3,531,000, respectively, or 24.5% and 25.8%, respectively, of revenues. As compared to the same period in 1998, selling, marketing and service expense decreased modestly, both in amount and as a percentage of revenuesdue to a reduction in marketing outlays, as the company has increased its reliance on the marketing outlays of its marketing partners. The reduction in marketing expenditures was partly offset by a shift in sales mix to proprietary products sold though the direct channel of distribution, with associated higher commissions, installation and warranty provisions. General and Administrative Expenses. General and administrative expenses for the first quarter of 1999 and 1998 remained relatively unchanged at $1,337,000, on a normalized proforma basis, and $1,358,000, respectively, Legal costs were at a high level in the first quarters of both 1999 and 1998 due to the company's patent infringement lawsuit against Trex Medical Corporation. Interest Expense / Interest Income. Interest expense for the three months ended April 4, 1999 and March 30, 1998 was $280,000 and $54,000, respectively. Interest income for the first quarter of 1999 and 1998 was $57,000 and $30,000, respectively. The increase in interest expense, net of interest income, in the first quarter of 1999 as compared to the first quarter of 1998 is due primarily to higher levels of borrowings under the company's working capital line of credit, primarily due to the funding of operating losses, offset by reductions in investment in inventory and accounts receivable. Net Loss. The company's net loss for the first quarter of 1999, on a normalized proforma basis, was $1,564,000, as compared to the first quarter 1998 net loss of $1,119,000. The deterioration was primarily due to the unfavorable effects of lower levels of production hours and material purchases on absorption of manufacturing costs and a $230,000 foreign exchange loss from European operations, partly offset the the favorable effects of increases in higher mammography product sales and service revenues. 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 months ended April 4, 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 19 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 three months ended April 4, 1999 was $1.7 million compared to $0.8 million used in operations in the comparable period of 1998. The cash provided by operations was due to a $4.1 million decrease in working capital, partly offset by $1.8 million of cash used to fund operating results (net income before non-cash expenses and excluding the non-cash sale of a manufacturing license). The working capital decrease consisted of $2.4 million in net collections of accounts receivable, a $0.5 million decreased investment in inventories, a $0.4 million increase in customer deposits, and a $1.4 million in increased accruals; partly offset by $0.6 million of restructuring-related expenditures (see Note 7 to Notes to Consolidated Financial Statements). Net cash used in investing activities was $0.2 million for the three months ended April 4, 1999, or essentially the same as the comparable period in 1998. Net cash used in financing activities for the three months ended April 4, 1999 was $1.3 million, principally due to reduced borrowings under the company's bank revolving line of credit, made possible by the decreased investment in working capital. As of April 4, 1999, the company had $1.1 million in cash and cash equivalents and working capital of $16.6 million. The company has a $15.0 million bank revolving line of credit arrangement, subject to borrowing base restrictions. Due to the effects of these restrictions, which are based on eligible receivables and inventory, only $8.9 million of the line was available as of April 4, 1999, of which $3.7 million was unused. 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 8.75%, at April 4, 1999. 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 approaching the maximum amounts available. Further, as noted above, the principal lender may withdraw the revolving credit facility at any time upon giving the company 30 days notice. Any such withdrawal, or any occurrence of the company's 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. 20 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 its long-term needs for growth. 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 April 4, 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 April 4, 1999, approximately $5.2 million was outstanding with an interest rate of 8.75% (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 April 4, 1999 and March 30, 1998 on the company's line of credit had been twice the rates in effect, would have incurred additional interest expense of approximately $280,000, or $.03 per share, and $54,000, 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 a wholly-owned subsidiary in Australia and a 90% owned subsidiary in Denmark which, in turn, owns subsidiaries in Germany and France. 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 at Note 10 to Notes to Consolidated Financial Statements, revenues in foreign currency through all foreign subsidiaries constituted under 3% of the company's total revenues for the three month periods ended April 4, 1999 and March 30, 1998. 21 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. 22 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 September 28, 1998 to be signed on its behalf by the undersigned thereunto duly authorized. FISCHER IMAGING CORPORATION /s/ WILLIAM C. FEE ------------------ William C. Fee Vice President , Finance/ Chief Financial Officer and Principal Accounting Officer May 12, 1999 23 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1999 APR-04-1999 1,105 0 15,118 739 21,191 37,443 15,605 10,457 47,357 20,830 520 0 5 70 25,732 47,357 14,165 20,365 9,101 9,501 7,113 0 280 3,350 0 3,350 0 0 0 3,350 .48 .40
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