-----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, K2TjnZ7zXt0T2gAPQziPQFpyo94+/jcsl+yGhTwxec+ppa6qyM5n1bpo3smayDQO C2lNv8/aMsPjM0vxQo+srA== 0000927356-99-001304.txt : 19990813 0000927356-99-001304.hdr.sgml : 19990813 ACCESSION NUMBER: 0000927356-99-001304 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990812 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: 99685488 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended July 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 ---- ---- The number of shares of Registrants's Common Stock outstanding as of July 4, 1999 was 7,029,000. FISCHER IMAGING CORPORATION TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheets -- July 4, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Operations (unaudited) -- Three and six months ended July 4, 1999 and June 29, 1998 4 Consolidated Statements of Cash Flows (unaudited) -- Six months ended July 4, 1999 and June 29, 1998 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II. OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 22 FISCHER IMAGING CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share data)
July 4, December 31, 1999 1998 ----------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,109 $ 929 Trade accounts receivable, net of allowance for doubtful accounts of approximately $700 and $726 at July 4, 1999 and December 31, 1998, respectively 16,492 16,797 Inventories 17,529 22,023 Prepaid expenses and other current assets 834 1,098 ----------- ------------ Total current assets 35,964 40,847 PROPERTY AND EQUIPMENT Manufacturing equipment 9,519 9,467 Office equipment and leasehold improvements 6,246 5,936 ----------- ------------ 15,765 15,403 Less- Accumulated depreciation and amortization 11,003 9,994 ----------- ------------ Property and equipment, net 4,762 5,409 ----------- ------------ INTANGIBLE ASSETS, net 2,678 2,957 DEFERRED COSTS AND OTHER ASSETS 1,373 1,756 ----------- ------------ TOTAL ASSETS $ 44,777 $ 50,969 =========== ============ LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES Notes payable and current maturities of long-term debt $ 5,891 $ 6,838 Trade accounts payable 4,888 5,204 Accrued salaries and wages 2,072 2,225 Customer deposits 2,518 2,599 Accrued warranty and installation costs 1,629 1,124 Accrued restructuring costs 261 1,015 Deferred service revenue 808 1,132 Other current liabilities 2,140 1,615 ----------- ------------ Total current liabilities 20,207 21,752 LONG-TERM DEBT 450 587 OTHER NONCURRENT LIABILITIES 200 200 ----------- ------------ TOTAL LIABILITIES 20,857 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 July 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 July 4, 1999 and December 31, 1998, respectively; liquidation preference of $3.8 million and $10.0 million at July 4, 1999 and December 31, 1998, respectively (Note 6) 5 13 Additional paid-in capital 43,264 49,366 Accumulated deficit (20,070) (21,459) Accumulated other comprehensive income (foreign currency translation adjustments) 651 440 ---------- ------------ TOTAL STOCKHOLDERS' INVESTMENT 23,920 28,430 ---------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 44,777 $ 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 Six Months Ended ---------------------------- --------------------------- July 4, June 29, July 4, June 29, 1999 1998 1999 1998 -------- --------- -------- -------- REVENUES Products and services $ 16,695 $ 15,250 $ 30,860 $ 28,917 Sale of manufacturing license (Note 6) -- -- 6,200 -- -------- --------- -------- -------- Total 16,695 15,250 37,060 28,917 COST OF SALES Products and services 10,748 9,304 19,849 17,712 Sale of manufacturing license -- -- 400 -- -------- --------- -------- -------- Total 10,748 9,304 20,249 17,712 -------- --------- -------- -------- Gross profit 5,947 5,946 16,811 11,205 OPERATING EXPENSES Research and development 1,663 1,529 3,078 2,921 Selling, marketing and service 3,976 3,968 7,451 7,499 General and administrative 1,356 1,266 3,579 2,624 Restructuring provision (Note 7) 750 -- 750 -- -------- --------- -------- -------- Total operating expenses 7,745 6,763 14,858 13,044 -------- --------- -------- -------- (LOSS) INCOME FROM OPERATIONS (1,798) (817) 1,953 (1,839) Interest expense (129) (59) (409) (113) Interest income 12 16 69 46 Other (expense) income, net (46) (124) (224) (197) -------- --------- -------- -------- (LOSS) INCOME BEFORE INCOME TAXES (1,961) (984) 1,389 (2,103) Benefit for income taxes -- -- -- -- -------- --------- -------- -------- NET (LOSS) INCOME $ (1,961) $ (984) $ 1,389 $ (2,103) ======== ========= ======== ======== NET (LOSS) INCOME PER SHARE Basic $ (0.28) $ (0.14) $ 0.20 $ (0.30) ======== ========= ======== ======== Diluted $ (0.28) $ (0.14) $ 0.17 $ (0.30) ======== ========= ======== ======== SHARES USED TO CALCULATE (LOSS) INCOME PER SHARE Basic 7,029 6,980 7,029 6,980 ======== ========= ======== ======== Diluted 7,029 6,980 7,944 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)
Six Months Ended ----------------------------- July 4, June 29, 1999 1998 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 1,389 $ (2,103) -------- -------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Noncash sale of manufacturing license (6,200) -- Restructuring provision 750 -- Depreciation 1,077 1,130 Amortization of intangible assets 279 344 Provision for doubtful accounts 20 (112) Provision for excess and obsolete inventories 453 428 Sales and retirements of assets -- 103 Foreign exchange losses 187 43 Restructuring payments (754) (340) Other changes in current assets and liabilities-- Decrease in trade accounts receivable 35 196 Decrease (Increase) in inventories 3,891 (3,302) Decrease (Increase) in prepaid expenses and other current assets 264 (219) Decrease in deferred costs and other assets 383 129 (Decrease) Increase in trade accounts payable (316) 543 Decrease in accrued salaries and wages (153) (289) (Decrease) Increase in customer deposits (81) 1,546 Increase in accrued warranty and installation costs 505 132 Decrease in deferred service revenue (324) (117) Increase (Decrease) in other current liabilities 175 (96) Other (50) (7) -------- -------- Total adjustments 141 112 -------- -------- Net cash provided by (used in) operating activities 1,530 (1,991) ======== ======== CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (380) (410) -------- -------- Net cash used in investing activities (380) (410) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sales of common stock, net 90 132 Net borrowings under line of credit agreement (965) -- Repayments of long-term debt (119) (141) -------- -------- Net cash used in financing activities (994) (9) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 24 72 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 180 (2,338) CASH AND CASH EQUIVALENTS, beginning of period 929 3,439 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 1,109 $ 1,101 ======== ========
The accompanying notes are an integral part of these financial statements. 5 FISCHER IMAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) GENERAL In management's opinion, the accompanying unaudited consolidated balance sheets and statements of operations and cash flows contain all adjustments, consisting only of normal recurring items, necessary to present fairly the financial position of Fischer Imaging Corporation (the "Company") on July 4, 1999, its results of operations for the three and six months ended July 4, 1999 and June 29, 1998 and its cash flows for the six months ended July 4, 1999 and June 29, 1998. Results of operations and cash flows for the interim periods may not be indicative of the results of operations and cash flows for the full fiscal year. These unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by generally accepted accounting principles. The financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company's latest annual report on Form 10-K for the year ended December 31, 1998. Typically, and for the year ending December 31, 1999, the Company closes its first three fiscal quarters as of the Sunday closest to the end of March, June and September. In 1998, to more evenly distribute the days between quarters, the first three fiscal quarters were closed as of the Monday closest to quarter- end. (2) INVENTORIES Inventories include costs of materials, direct labor and manufacturing overhead. Inventories are priced at the lower of cost (using primarily the last-in, first- out ("LIFO") method of valuation) or market. Writedowns for excess or obsolete inventories are charged to expense in the period in which conditions giving rise to the writedowns are first recognized. Inventories consisted of the following components (in thousands):
July 4, December 31, 1999 1998 ----------- ------------- FIFO cost-- Raw materials $ 13,463 $ 14,684 Work in process and finished goods 11,086 14,099 LIFO valuation adjustment (520) (520) ----------- ------------- Total before valuation reserves 24,029 28,263 Less valuation reserves (6,500) (6,240) ----------- ------------- Inventories, net $ 17,529 $ 22,023 =========== =============
(3) OTHER CURRENT LIABILITIES Other current liabilities consisted of the following (in thousands):
July 4, December 31, 1999 1998 ------------ ------------- Accrued sales, property, and other state and local taxes $ 293 $ 594 Legal and contractual accruals 1,662 615 Other 185 406 ------------ ------------- Total other current liabilities $ 2,140 $ 1,615 ============ =============
6 FISCHER IMAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) (4) NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consisted of the following (in thousands):
July 4, December 31, 1999 1998 ---------- -------------- Borrowing under bank revolving line of credit $ 5,607 $ 6,572 Capitalized lease obligations 706 827 Other 28 26 ------- ------- 6,341 7,425 Less--Current maturities (5,891) (6,838) ------- ------- Long-term debt $ 450 $ 587 ======= =======
In July 1999, the Company and its lender amended the terms of their month-to- month line of credit facility by reducing the maximum borrowing level from $15.0 million to $10.0 million and increasing the percentage which may be borrowed against qualified inventories (the "advance rate"). If these changes had been in effect as of July 4, 1999, the amount of unused borrowing capacity would have been reduced from $5.5 million to $4.4 million. See "Management's Discussion & Analysis - Liquidity and Capital Resources" for further discussion of the Company's line of credit. (5) NET (LOSS) INCOME PER SHARE Basic income or loss per share is computed by dividing the net income or loss by the weighted average number of shares of common stock outstanding. Diluted income or loss per share is determined by dividing the net income or loss by the sum of: (1) the weighted average number of common shares outstanding; (2) if dilutive, the number of shares of convertible preferred stock as if converted upon issuance; and (3) if dilutive, the effect of outstanding stock options determined utilizing the treasury stock method. A reconciliation between the number of securities used to calculate basic and, if dilutive, diluted income per share is as follows (in thousands):
Three Months Ended Six Months Ended -------------------- -------------------- July 4, June 29, July 4, June 29, 1999 1998 1999 1998 --------- --------- --------- --------- Weighted average number of common shares outstanding (Shares used in Basic Earnings Per Share Computation) ............. 7,029 6,980 7,029 6,980 --------- --------- --------- --------- Shares of convertible preferred stock (as if converted) ........... 507 1,333 915 1,333 Effect of stock options (treasury stock method) ................... -- -- -- 5 --------- --------- --------- --------- Shares used in Diluted Earnings Per Share Computation, if dilutive.. 7,536 8,313 7,944 8,318 ========= ========= ========= =========
For the three months ended July 4, 1999 and for the three and six months ended June 29, 1998, the effects of the convertible preferred stock and stock options were excluded from the calculation of diluted income per share in the accompanying Consolidated Statements of Operations since the result would have been anti-dilutive. As of July 4, 1999 and June 29, 1998, there were, respectively, 1,058,925 and 956,175 outstanding options to purchase shares of Common Stock under the Company's current stock option plans. 7 FISCHER IMAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) (6) SALE OF MANUFACTURING LICENSE By an agreement effective March 24, 1999, General Electric Company, on behalf of GE Medical Systems, exchanged 826,666, or 62%, of the 1,333,333 shares of Convertible Preferred Stock then owned by GE Medical Systems ("GEMS") for a non- exclusive right to manufacture the Tilt-C system, which the Company has manufactured for GEMS since 1994. The Company expects to continue manufacturing for GE Medical Systems through at least December 1999, the original expiration date of its manufacturing agreement with GEMS. Completion of this transaction reduced GEMS' ownership of the Company from 15.9% to 6.7%, on a diluted basis. (7) RESTRUCTURING PROVISION AND PAYMENTS During the third quarter of 1997, the Company decided to close its Addison, Illinois manufacturing facility and, accordingly, recorded a $2.9 million restructuring provision for the remaining lease obligations (net of estimated sublease payments), facility closing costs, severance and other non-recurring costs associated with this decision. In January 1999, the Company fulfilled its remaining facility obligations by agreeing to a $1.0 million lease buyout, over an eight month period, completing the closure within the original $2.9 million provision. During the second quarter of 1999, the Company decided to discontinue a product line previously produced in its Addison facility. Accordingly, the Company accrued an additional $750,000 provision for the closure of the Addison facility, principally for the discontinuing of this product line and related product acceptance issues. During the six months ended July 4, 1999 and June 29, 1998, the Company's restructuring payments were approximately $754,000 and $340,000, respectively including, in 1999, required payments under the lease buyout. (8) COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of an enterprise other than the change resulting from investments by or distributions to its owners. For the Company, comprehensive income includes only net earnings or loss and foreign currency translation adjustments, as follows:
Three Months Ended Six Months Ended ----------------------------------- -------------------------------- July 4, June 29, July 4, June 29, 1999 1998 1999 1998 -------------- -------------- -------------- -------------- Net (loss) income $ (1,961) $ (984) $ 1,389 $ (2,103) Foreign currency translation adjustments 73 43 210 115 ------ ---- ------ -------- Comprehensive (loss) income $ (1,888) $ (941) $ 1,599 $ (1,988) ====== ==== ====== ========
8 FISCHER IMAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) (9) OPERATING AND GEOGRAPHIC SEGMENT INFORMATION The Company operates in a single industry segment: the design, manufacture, and marketing of x-ray imaging systems. Because of differences in distribution costs, strategies, and aftermarket potential, the Company separately manages and reports operating results for products sold by the Company (proprietary) from those manufactured for sale to other medical products companies under Original Equipment Manufacturer ("OEM") contracts. The Company's manufacturing and most distribution activities are in the United States, including export sales to Europe, primarily, and elsewhere. The Company also has marketing operations in Europe and Australia. The following is a summary of the Company's operations by segment (in thousands):
United States International ---------------------------------------- ------------------- Internal Proprietary OEM Export Total Australia Europe Sales Total ----------- ------- ------- --------- ---------- ------- --------- ---------- Three Months Ended July 4, 1999 - ------------------------------- Revenues: Product........................ $ 8,131 $2,542 $3,413 $14,086 $ -- $ 116 $(180) $14,022 Service........................ 2,447 -- -- 2,447 53 173 -- 2,673 ------- ------- ------- ------- ----- ----- ----- ------- 10,578 2,542 3,413 16,533 53 289 (180) 16,695 ------- ------- ------- ------- ----- ----- ----- ------- Costs of sales: Product........................ 4,339 1,677 2,808 8,824 -- 96 (160) 8,760 Service........................ 566 -- -- 566 20 10 (20) 576 ------- ------- ------- ------- ----- ----- ----- ------- Allocated...................... 4,905 1,677 2,808 9,390 20 106 (180) 9,336 ------- ------- ------- Unallocated.................... 1,412 -- -- -- 1,412 ------- ----- ----- ----- ------- 10,802 20 106 (180) 10,748 ------- ----- ----- ----- ------- Gross profit.................... 5,731 33 183 -- 5,947 Operating expenses, including restructuring provision...... 7,639 124 (18) -- 7,745 ------- ----- ----- ----- ------- (Loss) income from operations... (1,908) (91) 201 -- (1,798) Interest expense................ (75) -- (54) -- (129) Interest income................. 10 2 -- -- 12 Other expense, net.............. (6) 120 (160) -- (46) Income taxes.................... -- -- -- -- -- ------- ----- ----- ----- ------- Net (loss) income............... $(1,979) $ 31 $ (13) $ $(1,961) ======= ===== ===== ===== ======= Three Months Ended June 29, 1998 - -------------------------------- Revenues: Product....................... $ 8,524 $3,830 $ 696 $13,050 $ 32 $ 142 $ (53) $13,171 Service....................... 2,014 -- -- 2,014 36 29 -- 2,079 ------- ------- ------- ------- ----- ----- ----- ------- 10,538 3,830 696 15,064 68 171 (53) 15,250 ------- ------- ------- ------- ----- ----- ----- ------- Costs of sales: Product....................... 4,810 2,477 391 7,678 26 56 (45) 7,715 Service....................... 378 -- -- 378 36 30 (8) 436 ------- ------- ------- ------- ----- ----- ----- ------- Allocated..................... 5,188 2,477 391 8,056 62 86 (53) 8,151 ------- ------- ------- Unallocated................... 1,153 -- -- -- 1,153 ------- ----- ----- ----- ------- 9,209 62 86 (53) 9,304 ------- ----- ----- ----- ------- Gross profit.................... 5,855 6 85 -- 5,946 Operating expenses.............. 6,459 126 178 -- 6,763 ------- ----- ----- ----- ------- Loss from operations............ (604) (120) (93) -- (817) Interest expense................ (58) -- (1) -- (59) Interest income................. 9 4 3 -- 16 Other expense, net.............. (16) (160) 52 -- (124) Income taxes.................... -- -- -- -- -- ------- ----- ----- ----- ------- Net loss........................ $ (669) $(276) $ (39) $ -- $ (984) ======= ===== ===== ===== =======
9 FISCHER IMAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited)
United States International ----------------------------------------- ------------------- Internal Proprietary OEM Export Total Australia Europe Sales Total ----------- ------- ------- --------- --------- ------ --------- ---------- Six Months Ended July 4, 1999 - ----------------------------- Revenues: Product ........................... $13,971 $6,226 $5,638 $25,835 $ 21 $ 231 $(354) $25,733 Service ........................... 4,716 -- -- 4,716 92 319 -- 5,127 Sale of manufacturing license ..... 6,200 -- -- 6,200 -- -- -- 6,200 ------- ------- ------- ------- ----- ----- ----- ------- 24,887 6,226 5,638 36,751 113 550 (354) 37,060 ------- ------- ------- ------- ----- ----- ----- ------- Costs of sales: Product .......................... 7,404 4,333 3,964 15,701 13 159 (278) 15,595 Service .......................... 1,122 -- -- 1,122 44 30 (76) 1,120 Sale of manufacturing license .... 400 -- -- 400 -- -- -- 400 ------- ------- ------- ------- ----- ----- ----- ------- Allocated ........................ 8,926 4,333 3,964 17,223 57 189 (354) 17,115 ------- ------- ------- Unallocated ...................... 3,134 -- -- -- 3,134 ------- ----- ----- ----- ------- 20,357 57 189 (354) 20,249 ------- ----- ----- ----- ------- Gross profit ....................... 16,394 56 361 -- 16,811 Operating expenses, including restructuring provision ......... 14,578 216 64 -- 14,858 ------- ----- ----- ----- ------- Income (loss) from operations ...... 1,816 (160) 297 -- 1,953 Interest expense ................... (304) -- (105) -- (409) Interest income .................... 66 3 -- -- 69 Other expense, net ................. (31) 199 (392) -- (224) Income taxes ....................... -- -- -- -- -- ------- ----- ----- ----- ------- Net income (loss) ................. $ 1,547 $ 42 $(200) $ $ 1,389 ======= ===== ===== ===== ======= Other information: Identifiable assets .............. $43,171 $ 996 $ 610 $44,777 Capital expenditures ............. 380 -- -- 380 Depreciation ..................... 1,064 13 -- 1,077 Six Months Ended June 29, 1998 - ---------------------------------------- Revenues: Product .......................... $15,887 $7,275 $1,586 $24,748 $ 70 $ 380 $(341) $24,857 Service .......................... 3,913 -- -- 3,913 71 76 -- 4,060 ------- ------- ------- ------- ----- ----- ----- ------- 19,800 7,275 1,586 28,661 141 456 (341) 28,917 ------- ------- ------- ------- ----- ----- ----- ------- Costs of sales: Product .......................... 9,148 4,754 905 14,807 72 187 (326) 14,740 Service .......................... 725 -- -- 725 71 39 (15) 820 ------- ------- ------- ------- ----- ----- ----- ------- Allocated ........................ 9,873 4,754 905 15,532 143 226 (341) 15,560 ------- ------- ------- Unallocated ...................... 2,152 -- -- -- 2,152 ------- ----- ----- ----- ------- 17,684 143 226 (341) 17,712 ------- ----- ----- ----- ------- Gross profit ....................... 10,977 (2) 230 -- 11,205 Operating expenses ................. 12,527 233 284 -- 13,044 ------- ----- ----- ----- ------- Loss from operations ............... (1,550) (235) (54) -- (1,839) Interest expense ................... (112) -- (1) -- (113) Interest income .................... 38 5 3 -- 46 Other expense, net ................. (25) (116) (56) -- (197) Income taxes ....................... -- -- -- -- -- ------- ----- ----- ----- ------- Net loss ........................... $(1,649) $(346) $(108) $ $(2,103) ======= ===== ===== ===== ======= Other information: Identifiable assets .............. $47,449 $ 758 $ 942 $49,149 Capital expenditures ............. 410 -- -- 410 Depreciation ..................... 1,111 6 13 1,130
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 financial condition and results of operations should be read in conjunction with the company's Consolidated Financial Statements and Notes thereto appearing in the company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "Form 10-K"). This Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, statements contained herein that are not statements of historical fact may be considered forward-looking statements. Without limiting the foregoing, the words "believes", "expects", "anticipates", "plans", "estimates", and similar words and expressions are intended to identify such statements. These forward-looking statements include statements about: . resolutions of deficiencies noted by the FDA; . the adequacy of financial resources; . future revenues, expenses, and other operating results; . sales under the company's strategic alliances, marketing arrangements, and other agreements pertaining to Mammotest, digital radiography, and other products; . the status of SenoScan and other new products in development; . the size and growth of the company's markets; . the effectiveness of efforts to transfer production activities from the company's Addison, Illinois manufacturing facility; . the success of efforts to reduce manufacturing and other costs; . manufacturing capacity and capabilities; . submissions to the FDA and receipt of FDA approvals and clearances; . the costs and risks associated with becoming Year 2000 compliant; . the availability of raw materials and components; and . other matters. These forward-looking statements involve risks and uncertainties. The actual results that the company achieves may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties set forth: (1) in the Business section of the Form 10-K under the headings: "Risks Associated with OEM Agreements," "Sales and Marketing," "International Operations," "Strategic Alliances," "Risks of Technological Change and New Products," "Risks of New Product Development and Market Acceptance," "Competition," "Government Regulation," "Government Reimbursement," `Manufacturing and Operating Risks," "Product Liability, Market Withdrawal, and Product Recalls," "Patents and Intellectual Property," "Risk of Dependence on Key Personnel," in the Market for Registrant's Common Equity and Related Stockholder Matters under the headings "Risk of Price Volatility of Common Stock," `Risks of Fluctuations in Quarterly Results of Operations," "Risks of Fluctuations in Quarterly Results of Operations," Risks Associated with Shares Eligible for Future Sale," "Risks Associated with Control by Management and Certain Stockholders," and "Certain Anti- Takeover Effects," 11 (2) 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, (3) elsewhere in the Business, MD&A, and other sections of the Form 10- K, and (4) in this Form 10-Q under the "Overview" section of MD&A and elsewhere. Overview Risk of Continued Losses The company designs, manufactures and markets specialty and general purpose medical imaging systems for the diagnosis and treatment of disease. The company's newer products are directed towards medical specialties, such as diagnosing and treating breast cancer, heart disease and vascular disease, in which image-guided, minimally invasive therapies are replacing open surgical procedures. The company also designs and manufactures specialty x-ray imaging components and subsystems for several leading medical product companies and sells general radiology systems for use in hospitals, clinics and physicians' offices. Except for the last nine months of 1995, the first nine months of 1996, and excluding the first quarter 1999 one-time gain from the sale of a manufacturing license, the company has experienced significant losses since 1993. Significant factors giving rise to these losses include: costs associated with excessive manufacturing capacity; intense competition for some of the company's products; declining margins and demand for OEM products; and a general slowdown in capital expenditures by hospitals. The company cannot predict when it will return to profitability, although it has taken significant steps to reduce costs and improve sales, including: . entering into distribution partnerships in 1997 and 1998 with Ethicon Endo- Surgery for the marketing and sale of Mammotest breast biopsy systems in the United States and in Europe; . entering into a strategic alliance with Direct Radiography Corp. for the development and marketing of digital radiography products; . closure of the company's Addison, Illinois manufacturing facility; and . other actions to reduce operating expenses and manufacturing costs. Improvement in the company's results of operations will depend on many factors, including: . sufficient demand for the company's products to offset the effects of planned reductions in OEM business; . the adequacy of financial resources; . the company's ability to improve gross margins; . the effectiveness of efforts to control manufacturing and other costs; . effective negotiation and implementation of product distribution arrangements; . effective implementation of domestic and international marketing and sales strategies; and . the development and introduction of new products that compete successfully . Because improved factory utilization was believed to be a key factor in returning to profitability, the company decided in the third quarter of 1997 to close its Addison, Illinois manufacturing facility and outsource or transfer Addison production. Not all production has been successfully transferred, however, and, in the second quarter of 1999, the company accrued an additional 12 $750,000 provision for the Addison closure, principally for the discontinuing of a product line formerly produced in that facility, including related acceptance issues. See Note 7 to Notes to Consolidated Financial Statements. The company expects continued significant fluctuations in quarterly and annual in revenues, operating results and net income, depending on factors such as: . delays in the development of new products; . the timing issues with respect to the receipt, manufacture, and shipment of OEM and large system product orders; . new product introductions or marketing initiatives by the company or its competitors; . the effects of managed healthcare on capital expenditures and reimbursement; . increases in marketing, research, and other costs in relation to sales; . regulatory clearance of new products; . the effect of general economic conditions on the company's markets; and . seasonal patterns and other timing issues affecting customer purchasing decisions. These factors can occur unexpectedly and, because many of its costs are fixed, the company may not be able to sufficiently reduce costs in periods when revenues are less than anticipated and may, as a result, suffer unexpected losses or lower income. Over the past several years, the company has attempted to expand its international sales and marketing efforts, which has resulted in losses from its international operations. The company can expect to continue to incur losses until sufficient levels of international revenues are reached. 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: (1) generally requiring payments in U.S. dollars; (2) using letters of credit; and (3) requiring advance deposits and through other means. There can be no assurance that international sales efforts will be successful or that the associated risks can be minimized. International revenues declined substantially in 1998 and 1997, but increased significantly during the six months of 1999 as compared to the six months of 1998. Sales of the company's Mammotest breast biopsy systems have fluctuated significantly in recent years, based on changes in competitive conditions. For example, Mammotest sales were lower in 1997 as compared to 1996, due in part to aggressive competition within the surgical stereotactic core needle breast biopsy market from U. S. Surgical, which was then selling breast biopsy systems purchased from Trex Medical, the company's principal competitor in this market. The company's sales in this market improved in 1998, in part due to its marketing partnership with Ethicon Endo-Surgery. In December 1998, U. S. Surgical decided to cease distributing breast biopsy systems and, therefore, terminated its supply agreement with Trex Medical. While U. S. Surgical's decision may improve long-term competitive conditions for Mammotest, there could be unfavorable near-term impacts, depending on inventory conditions and other factors. The company's partner in developing digital imaging products for the general radiography market is Direct Radiography Corp. In early 1999, the Agfa-Gevaert Group acquired Direct Radiography's parent company, Sterling Diagnostic Imaging, Inc. Direct Radiography was not included in this acquisition, but was later sold to Hologic Corporation in June 1999. The company expects to continue its partnership with Direct Radiography under its new ownership. 13 Year 2000 Update General The company uses software and related technologies in its products and in product development and manufacturing that may be impacted by the Year 2000. The Year 2000 issue exists because many computer systems and applications use two-digit date fields to designate a year. As a result, date-sensitive systems may recognize the Year 2000 as 1900, or not at all. This factor could cause systems to incorrectly process critical financial and operational information. Year 2000 Project The company is evaluating its products, computer hardware, and operating software, and third party suppliers for possible Year 2000 problems. This project is organized as follows:
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 Complete * II. Primary business software: Upgrade to Year 2000 compliant version Complete Under $25,000 Perform testing Complete * Provide user training Complete * Update customized reporting/features Complete * III. Other software applications: Major payroll and Engineering applications Obtain certification of Year 2000 compliance Complete Other applications Evaluate and/or obtain certifications 3rd qtr 1999 * IV. Hardware: Networks Confirm Year 2000 compliance Complete * Personal computers Confirm Year 2000 compliance Complete * Replace or upgrade as necessary Complete Under $100,000 V. Third party suppliers: Establish evaluation criteria Complete * Send initial survey to suppliers Complete * Re-survey suppliers, as necessary 3rd qtr 1999 * Re-source as necessary 4th qtr 1999 *
* No significant out-of-pocket costs 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. 14 Costs The cost to be incurred in conjunction with the Year 2000 project is expected to be less than $200,000, for anticipated upgrades to existing desk-top personal computers and for the assistance of outside consultants in upgrading the company's primary business system. This amount is not considered material to the company's financial position. Unanticipated problems could cause this amount to be exceeded, however, and no assurance can be given that, under such circumstances, the amount would not be material. Most Year 2000 Project activities are being performed with internal resources. Consequently, Year 2000 activities may delay new information systems development and other projects. Such delays are not, however, expected to materially impact the company's results of operations. Risks The failure to correct a material Year 2000 problem could result in interruption or failure of normal business activities. The Year 2000 problem involves inherent uncertainty, in part because of uncertainty regarding the Year 2000 readiness of third-party suppliers and customers. Therefore, the company cannot state with certainty whether the consequences of Year 2000 failures will have a material impact on the company's results of operations, liquidity or financial condition. The Year 2000 Project is expected to significantly reduce the company's level of uncertainty about the Year 2000 problem, particularly with respect to the Year 2000 readiness of its third-party suppliers. The company believes that the possibility of significant interruptions of normal operations should be significantly reduced by the implementation of upgraded business systems and the completion of the Year 2000 project as scheduled. Based on its assessment to date, the company believes that few of its current products will be affected by the Year 2000 problem. Of those that may be affected, the only significant risk appears to be the possible inaccurate dating of patient records. The remedial actions to correct dating problems that may occur appear to be either: . the customer being able to reset the date (on a one-time basis) to prevent future occurrences; or . implementation of modifications, made by the company or third-party suppliers, that are currently available. The company has completed its evaluation of earlier versions of current products and has not identified any issues that cannot be easily addressed. If such problems are identified at a later date, however, disruption of customers' operations could conceivably occur, potentially resulting in legal actions being taken against the company, even though Year 2000 problems are not expressly covered by product warranties. Readers are cautioned that forward-looking statements contained in the Year 2000 Update should be read in conjunction with the company's cautionary statement regarding forward-looking statements elsewhere in this Form 10-Q, which is provided under the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. 15 FDA Regulation The company is subject to periodic inspections by the Food and Drug Administration, whose primary purpose is to audit the company's compliance with Good Manufacturing Practices, which include testing, quality control and documentation procedures. In March 1995, the company's Denver facility received a Warning Letter from the FDA concerning documentation and other deficiencies. The company rectified these deficiencies and resolved this matter with the FDA in June 1995. In December 1996, following an inspection of the Denver facility, the FDA issued Inspectional Observations Form 483 and a subsequent Warning Letter regarding manufacturing practices. As required, the company responded as to planned corrective actions and obtained a favorable third-party certification of manufacturing and quality systems. In October 1998, following a subsequent inspection, the FDA issued a Form 483 regarding possible deficiencies in manufacturing, quality, and documentation practices. The company submitted its response to the Form 483 and is instituting corrective actions. Failure to satisfy FDA requirements can result in: (1) the company's inability be awarded federal government contracts; (2) an inability to receive new product marketing or export clearances; or (3) FDA enforcement actions including, among other things, product seizure, injunction, and/or criminal or civil proceedings which could be initiated without further notice. The issuance of the most recent Form 483 increases the possibility that one or more of these sanctions could be imposed. Although the company strives to operate within FDA requirements, there can be no assurance that deficiencies can be corrected or that the company can satisfy future FDA compliance concerns. Sanctions resulting from FDA compliance reviews or related delays in product clearances could have a material adverse effect on the company. 1999 Results of Operations, Excluding Restructuring Charge and Other One-Time Items The company's results of operations for the three and six months ended July 4, 1999 included a restructuring charge and other items of a one-time nature, are as follows (in thousands):
Increase (Decrease) ----------------------------------------------------------------- Gross Operating Net Income Revenues Profit Expenses (Loss) -------- ------ ---------- ---------- Three Months Ended July 4, 1999: Reported results of operations $16,695 $ 5,947 $ 7,745 $(1,961) Restructuring provision (1) -- -- (750) 750 ------- ------- ------- ------- Proforma results of operations $16,695 $ 5,947 $ 6,995 $(1,211) ======= ======= ======= ======= Six Months Ended July 4, 1999: Reported results of operations $37,060 $16,811 $14,858 $ 1,389 Restructuring provision (1) -- -- (750) 750 Sale of manufacturing license (2) (6,200) (5,800) -- (5,800) Accruals for contractual issues (3) -- -- (886) 886 ------- ------- ------- ------- Proforma results of operations $30,860 $11,011 $13,222 $(2,775) ======= ======= ======= =======
(1) During the second quarter of 1999, the Company decided to discontinue a product line previously produced in its Addison, Illinois manufacturing facility and recorded an additional facility closing charge of $750,000, primarily for related product acceptance issues. See Note 7 to these unaudited consolidated financial statements. (2) During the first quarter of 1999, the company sold to G. E. Medical Systems a non-exclusive right to manufacture the Tilt-C system, in exchange for 826,666 shares of Series D Convertible Preferred Stock previously owned by G.E. Medical Systems. See Note 6 to Notes to Consolidated Financial Statements. 16 (3) Based upon legal activities occurring during the first quarter of 1999, the company concluded that it is probable that the company will incur settlement costs to resolve contractual issues with respect to two product installations. The remainder of Management's Discussion and Analysis of Results of Operations will be based on proforma results of operations for the three and six months ended July 4, 1999. Results of Operations Overview. Second quarter 1999 revenues and proforma net loss were $16,695,000 and $1,211,000, respectively, as compared to revenues of $15,250,000 and a net loss of $984,000 for the second quarter of 1998. The revenue increase reflected a substantial increase in electrophysiology product shipments, primarily a large order shipped to China, and a significant increase in high margin service revenues, offset by planned reductions in OEM product shipments. Gross margin as a percent of revenues decreased from 39.0% in the second quarter of 1998 to 35.6% in the second quarter of 1999, primarily due the unfavorable margin associated with the China order, which was priced low to establish a basis for future orders in that country. Operating expenses were modestly higher in the second quarter of 1999 as compared to the second quarter of 1998, due to higher research and development costs related to digital radiography product development and slightly higher legal expense. As a result of these factors, the net loss increased from $984,000 in the second quarter 1998 to $1,211,000 in the second quarter of 1999, excluding the restructuring charge. The following table sets forth the percentage of revenues represented by certain data included in the company's statements of operations for the periods indicated:
Three Months Ended Six Months Ended --------------------------------- ------------------------------------ July 4, June 29, July 4, June 29, 1999* 1998 1999* 1998 ------------- -------------- -------------- --------------- Revenues 100.0 % 100.0 % 100.0 % 100.0 % Gross margin 35.6 39.0 35.7 38.7 Research and development 10.0 10.0 10.0 10.1 Selling, marketing and service 23.8 26.0 24.1 25.9 General and administrative 8.1 8.3 8.7 9.1 Loss from Operations (6.3) (5.4) (7.2) (6.4) Benefit for income taxes -- -- -- -- Net loss (7.3) (6.5) (9.0) (7.3)
* Based on proforma results of operations. See "1999 Results of Operations, Excluding Restructuring Charge and Other One-Time Items" on Page 17 of this Form 10-Q. Revenues. Second quarter 1999 revenues were $16,695,000, a 9% increase from first quarter 1998 revenues of $15,250,000. The increase reflects a more than doubling of electrophysiology product sales, primarily due to a large order shipped to China, and a significant increase in high margin service revenues, partly offset by planned reductions in OEM product shipments. The increase was in the international direct channel of distribution, partly offset by a decline in the OEM and U. S. dealer sales channels. For the six months ended July 4, 1999, proforma revenues were $30,860,000, or about 7% greater than revenues of $28,917,000 for the six months ended June 29, 1998. This increase reflected increases in service, electrophysiology, general radiography, and mammography 17 revenues, partly offset by a reduction in OEM revenues. The increases in product sales were in the international direct and dealer and U. S. direct channels of distribution, partly offset by declines in U. S. dealer and OEM channels. Gross Profit. For the second quarter of 1999, gross profit expressed as a percentage of revenues was 35.6%, as compared to 39.0% for the second quarter of 1998. The decrease in gross profit as a percentage of revenues was primarily due to the impact of the unfavorable margin on a large order shipped to China. Without this shipment, gross margin as a percentage of revenues would have approximated 40%, an increase from the second quarter of 1998 reflective of the shift in product mix to higher margin mammography and service revenues, from relatively lower margin OEM revenues. For the six months ended July 4, 1999, proforma gross profit as a percentage of revenues was 35.7%, as compared to 38.7% for the six months ended June 29, 1998. This decrease was due to higher manufacturing variances as a percentage of revenues as well as the unfavorable impact of the large China order shipped in the second quarter. Research and Development Expenses. Research and development expenses for the second quarters of 1999 and 1998 were $1,663,000 and $1,529,000, respectively, or 10.0% of revenues in both years. For the six months ended July 4, 1999 and June 29, 1998, research and development expenses were $3,078,000 and $2,921,000, respectively, or 10.0% and 10.1%, respectively, of revenues. The modest increases in the three and six month periods ended July 4, 1999 as compared to 1998's three and six month periods ended June 29, 1998 were due to expenditures related to digital general radiography product development. Other key product development focus continues to be on digital mammography and ultrasound for mammography. Selling, Marketing and Service Expenses. Selling, marketing and service expenses for the second quarters of 1999 and 1998 were $3,976,000 and $3,968,000, respectively, or 23.8% and 26.0%, respectively, of revenues. For the six months ended July 4, 1999 and June 29, 1998, selling, marketing and service expenses were $7,451,000 and $7,499,000, respectively, or 24.1% and 25.9%, respectively, of revenues. As compared to the same three and six month periods in 1998, selling, marketing and service expense increased in the three months ended July 4, 1999 and decreased in the six months ended July 4, 1999 as a result of lower marketing and international sales expenditures, as the company has increased its reliance on the marketing outlays and international distribution efforts of its marketing and distribution partners. These reductions were largely or more than offset by higher domestic service expenses associated with higher service revenues. The lowering of selling, marketing and service expense as percent of revenues was primarily due to the higher revenue levels for the three and six month periods ended July 4, 1999. General and Administrative Expenses. General and administrative expenses for the second quarters of 1999 and 1998 were $1,356,000 and $1,266,000, respectively, or 8.1% and 8.3%, respectively, of revenues. For the six months ended July 4, 1999 and June 29, 1998, general and administrative expenses were $2,693,000 on a proforma basis, and $2,624,000, respectively, or 8.7% and 9.1% of revenues, respectively. For both the three and six month periods, the modest increases in 1999 were due to higher legal costs; whereas, the decreases as a percent of revenues were due to the higher revenue levels in the 1999 three and six month periods. 18 Interest Expense / Interest Income. Interest expense for the second quarters ended July 4, 1999 and June 29, 1998 was $129,000 and $59,000, respectively and, for the six month periods then ended was $409,000 and $113,000, respectively. Interest income for the second quarters of 1999 and 1998 was $12,000 and $16,000, respectively, and for the six month periods ended July 4, 1999 and June 29, 1998 was $69,000 and $46,000, respectively. The increase in interest expense, net of interest income, in the three and six month periods ended July 4, 1999 as compared to the three and six month periods ended June 29,1998 is due primarily to higher levels of borrowings under the company's working capital line of credit, primarily due to the funding of cash operating losses, net of reductions in required investment in inventory. Restructuring Provision. During the second quarter of 1999, the company decided to discontinue product support and marketing for a product line previously produced in its Addison, Illinois manufacturing facility. Accordingly, the company accrued an additional $750,000 provision for the closure of the Addison facility, primarily related to product acceptance issues. See Note 7 to Notes to Consolidated Financial Statements. Net Loss. The company's proforma net loss for the second quarter of 1999 was $1,211,000, as compared to the second quarter 1998 net loss of $984,000. For the six months ended July 4, 1999 the company's proforma net loss was $2,775,000 as compared to the $2,103,000 net loss for the six months ended June 29, 1998. For the three and six months ended July 4, 1999, the net loss increased relative to the three and six month periods ended June 29, 1998 primarily as the result of a large order shipped to China at a low price, the unfavorable effects of lower levels of production hours and material purchases on absorption of manufacturing costs, and the effects of planned reductions in OEM product shipments. These unfavorable effects were partly offset the favorable effects of increases in service revenues and shipments of mammography product. Income Taxes The company's estimated effective tax rate for the year ended December 31, 1999 is currently 0%. Accordingly, no income tax benefit or provision has been recorded for the three or six month periods ended July 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 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 six months ended July 4, 1999 was $1.5 million compared to $2.0 million used in operations in the comparable six month period of 1998. The cash provided by operations was due to a $3.5 million decrease in working capital, partly offset 19 by $2.0 million used to fund cash operating results (net income excluding non- cash expenses and the non-cash sale of a manufacturing license). The working capital decrease consisted of a $3.9 million decreased investment in inventories and other minor working changes netting to a $0.4 million favorable result, partly offset by $0.8 million of restructuring-related expenditures (see Note 7 to Notes to Consolidated Financial Statements). Net cash used in investing activities was $0.4 million for the six months ended July 4, 1999, or essentially the same as the comparable six month period in 1998. Net cash used in financing activities for the six months ended July 4, 1999 was $1.0 million, principally resulting from the reduction in borrowings under the company's bank revolving line of credit, made possible by the decreased investment in working capital. As of July 4, 1999, the company had $1.1 million in cash and cash equivalents, working capital of $15.8 million, and a $15.0 million bank revolving line of credit facility, which is subject to restrictions as to availability based on eligible receivables and inventory, as defined. As of July 4, 1999, $5.5 million was available under the line. The agreement is secured by the company's accounts receivable, inventories, and fixed assets and may be called by the lender upon 30 days notice. The agreement is renewable monthly and such renewals are subject to a fee of $5,000 per month. The borrowings under the agreement are subject to interest at one percent over the bank's prime rate of interest, or 9.5%, at July 4, 1999. In late July 1999, the company and its lender amended the terms of their month- to-month line of credit facility by reducing the maximum borrowing level from $15.0 million to $10.0 million, but increasing the percentage which may be borrowed against qualified inventories (the "advance rate"). If these changes had been in effect as of July 4, 1999, the amount of unused borrowing capacity would have been reduced from $5.5 million to $4.4 million. Inventory balances do not typically fluctuate during the production cycle as much as accounts receivable and other components of the borrowing base. Therefore, the increase in advance rate against inventories may provide the company with improved access to funds during all phases of its operating cycle, although no assurance can be given to that effect. The company's losses and negative cash flows from operations over the past several years have depleted substantially all of its cash and have resulted in borrowing levels at times approaching the maximum amounts available. Further, as noted above, the principal lender could withdraw the revolving credit facility at any time upon 30 days notice. Any such withdrawal, or any occurrence of liquidity needs exceeding its available borrowing capacity, would have a material adverse impact on the company's operations. The company has, however, taken significant actions to reduce the level of operating losses and fixed cash requirements. See "Overview" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. The company has no present plans for capital expenditures in 1999 materially different from recent years. The company believes its current cash and cash equivalent balances and its available borrowings under the line of credit will satisfy its liquidity needs for 1999. The company may need to obtain additional debt or equity capital to fund long-term growth needs. 20 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 July 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 July 4, 1999, approximately $5.6 million was outstanding with an interest rate of 9.5% (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 July 4, 1999 and June 29, 1998 on the company's line of credit had been twice the rates in effect, the company would have incurred additional interest expense of approximately $129,000, or $.02 per share, and $59,000, 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 in 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 July 4, 1999 and June 29, 1998. The company therefore does not believe that foreseeable near-term changes in exchange rates will have in a material effect on future earnings, fair values or cash flows of the company and has chosen not to enter into foreign currency hedging instruments. There can be no assurance that such an approach will prove to have been successful, especially in the event of a significant and sudden decline in the value of any of the applicable local currencies. 21 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders: - ------------------------------------------------------------- At the Annual Meeting of Stockholders, held on June 2, 1999, the following matter was submitted to a vote of stockholders and approved: (1) Election of two Class II directors to the Board of Directors: Name For Withheld --------------------- -------------- ------------- David G. Bragg, M. D. 5,830,054 254,709 Thomas J. Cable 5,830,054 254,709 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 July 4, 1999 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/ Principal Accounting and Financial Officer August 12, 1999 22 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule 23 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JUL-04-1999 1,109 0 17,192 700 17,529 35,964 15,765 11,003 44,777 20,207 450 0 5 70 23,845 44,777 16,695 16,695 10,748 10,748 6,995 750 129 (1,961) 0 (1,961) 0 0 0 (1,961) (.28) (.28)
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