Film digitizer firm Lumisys hit with class-action lawsuit

Film digitizer firm Lumisys hit with class-action lawsuit

Company also reports dip in quarterly revenues

A day after reporting a 10% decrease in quarterly revenues, x-ray film digitizer market leader Lumisys was hit with a class-action lawsuit by a group of shareholders upset with a recent decline in the company's stock.

The litigation, filed in the U.S. District Court for the Northern District of California on July 11, was ostensibly filed to recover damages for purchasers of Lumisys stock during the period between Nov. 15, 1995 and July 11, 1996. During that period, Lumisys shares went from about $7 a share at the time of the company's initial public offering, to as high as $30 a share, and then to around $15 a share by July 1996, before dropping even further.

The complaint alleges that Lumisys and its controlling shareholders, insiders, and investment bankers misrepresented the state of the company's business and its future prospects.

The lawsuit was filed by two law firms, one of which is Milberg Weiss Bershad Hynes & Lerach. Milberg Weiss did not return calls seeking further comment, but details of the suit were issued in a press release.

The firm alleged that Lumisys and the other defendants created a trading market in the company's stock so high that when it reached $30 per share, certain members of the company's insiders and controlling shareholders could sell over one million shares of stock at a price as high as $26.50 per share.

As evidence for its charges, Milberg Weiss cited the company's 1996 second-quarter earnings report, in which Lumisys stated that problems with new products at its Imagraph subsidiary would lead to a $1.5 million to $2 million revenue shortfall for the year. Later, the law firm alleged, Lumisys reported that demand for its core digitizer products had softened and the growth rate of its business had slowed dramatically. Milberg Weiss also claimed that in the second half of 1996 and thus far in 1997, the company reported much lower revenue and earnings per share growth than it had forecasted during the class period. As of July 22, Lumisys was trading at $7.63 per share, about $2 above its 52-week low.

Although Lumisys would not discuss details of the case, the vendor believes the lawsuit is without merit and will vigorously oppose it, said Craig Klosterman, COO and CFO.

Just prior to the filing of the lawsuit, Lumisys reported financial results for the second quarter of 1997 (end-June 30), with sales of $5.3 million, compared with $5.9 million for the same period in 1996. Net income was $512,000, compared with $896,000 in the second quarter of 1996.

For the first six months of 1997, revenues were $11.1 million, up 1% compared with $11 million for the same period in 1996. Net income, however, was $1.3 million, compared with $1.6 million reported in the second quarter of 1996.

Lumisys executives attributed the financial performance to its lower backlog entering the quarter and market softness during the first few months of the year (PNN 5/97). The vendor did report a strengthening of orders in the second half of the quarter, with backlog increasing by $300,000, Klosterman said.

"We believe that there was a slowdown in the marketplace, more or less a breather taking place, where people were absorbing what they had bought and getting used to the equipment," he said. "Now they are starting to place additional orders."

Lumisys believes the rebound will lead to increasing revenues in the third and fourth quarters. Growth rates in the future will also likely be in the 15% to 20% range, in line with the overall PACS market, Klosterman said.

In the quarterly announcement, the vendor said that it had repurchased 90,000 shares of common stock during the quarter, as part of its plan to repurchase up to 500,000 shares over a 12-month period.