Fischer delays earnings report as SEC deadline approaches

Company cites revenue declines, change in accountant

Just one day before the deadline for executives of large U.S. companies to vouch for their firms' financial results, Fischer Imaging postponed indefinitely the release of its second-quarter 2002 earnings report.

The postponement came more than three weeks after Fischer scheduled an investor conference call for Aug. 14 to announce earnings. The planned announcement was canceled on Aug. 13, the day before hundreds of publicly held companies were required to file documents certifying their results. Most of them complied.

"Obviously, it's in our best interest to get these out," said Al Palombo, vice president of corporate communications and investor relations for Fischer.

The company cited several reasons for the postponement, most notably the inability of Ernst & Young, the accounting firm it hired in July to replace beleaguered Arthur Anderson, to review the company's second-quarter earnings by the planned announcement date. Palombo called that "the pivotal factor." But there were others.

During the second quarter, Fischer created a new division for its noncore products, including general radiography and electrophysiology. Those products, including all of Fischer's cardiac specialty imaging systems and its VersaRad analog and digital radiography systems, experienced substantial revenue declines in recent quarters. A hefty write-down of inventory is anticipated due to these declines, said Palombo, who added that Fischer's noncore product line once represented about 40% of its revenues, dropping to 30% in the first quarter of this year.

"Now, it's kind of evaporated," he said.

E. William Ward, an imaging consultant based in Chicago, speculated that Fischer's downturn may simply be a result of the slumping economy and the wait-and-see attitude of buyers with regard to the purchase of expensive new systems.

"Most times, healthcare is not affected by recessions and economic downturns," he said. "In this one, hospitals may be affected. If they are, people are looking at capital budgets and delaying purchases. It would not be uncommon for people to delay purchasing decisions."

But Fischer is dealing with more than just macroeconomic woes. The company has cited "new leadership," specifically the appointment of Gerald Knudson as CEO in April and the resulting reassessment of the business, as a reason for the postponement. Knudson was brought in following the resignation of his predecessor, Lou Rivelli.

"The board had to take a step back and ask, 'What's the next step? What's act II?'" Palombo said. "Act II is a marketing act. The board felt they needed someone with different skills than Lou to go forward."

How and when this drama will play out has yet to be determined. Fischer Imaging stock dove from $8 to $5 Aug. 14 when earnings were delayed. The stock closed at $4.60 Aug. 19, awaiting details about earnings. When they will be released is still up in the air.

"That's the magic question," Palombo said. "The answer lies in when we can get our hands on Arthur Anderson's working papers."

Another reason for the postponement, ironically, was some good news--how to account for a $25 million cash settlement from Trex Medical in connection with a patent infringement lawsuit. When the settlement was reached in June, Fischer announced the company would recognize it over the original 17-year patent life, resulting in a one-time gain of about $19.2 million and future annual license fees of about $1.9 million attributable to the remaining life of the underlying patents. Whether that method will finally be employed, however, is not certain.

The postponement and its timing were as glaring as Fischer's report that revenues for its noncore x-ray-based equipment were down significantly. Other vendors have not reported revenue problems in these areas. Hologic, which focuses heavily on radiographic and RF equipment in general, for example, has seen no decline in sales.

"Our sales have increased steadily throughout the fiscal year, and we're expecting continued growth into our FY 2003," said Glenn P. Muir, chief financial officer for Hologic.

Hologic participates in the radiography segments of the market, which Fischer singled out as loss leaders in explaining its falling revenues, but not in the electrophysiology segment, where Fischer also reported running into trouble. Siemens Medical Solutions, however, is a major player in this segment, and the German company reports strong demand for its EP products.

"I believe that's where we've seen the strongest increase," said Manfred Fink, division manager for Siemens' U.S. angiography/x-ray division. "It's up about 30%."

A shift in market dynamics may be the reason for Fischer's recent difficulties, he said.

"EP was a domain of Fischer's in the past, but I believe they've lost the market. They had some very inexpensive equipment, and big companies such as Siemens didn't even try to compete," he said. "But in the meantime there have been some improvements in reimbursement for EP procedures, and people are now buying sophisticated equipment. As a result, that's again the domain of the big companies, including Siemens and Philips."