UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 29, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-9428
ADAC LABORATORIES
(Exact name of registrant as specified in its charter)
California 94-1725806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
540 Alder Drive
Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
(408) 321-9100
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock, no par value, outstanding at May 8, 1998,
19,600,767
<PAGE>
ADAC LABORATORIES
QUARTERLY REPORT ON FORM-10Q/A
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three-Month
And Six-Month Periods Ended March 29, 1998 and March 30, 1997 3
Condensed Consolidated Balance Sheets at March 29, 1998 and
September 29, 1997 4
Condensed Consolidated Statements of Cash Flows for the Six-Month
Periods Ended March 29, 1998 and March 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II. Other Information
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
10.21 Amendment No. 7 to 1992 Stock Option Plan
10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994)
27 Financial Data Schedule
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES, NET:
Product $56,584 $52,922 $112,437 $104,526
Service 20,794 17,054 40,464 33,815
----------- ----------- ----------- -----------
77,378 69,976 152,901 138,341
----------- ----------- ----------- -----------
COST OF REVENUES:
Product 31,046 30,222 62,385 60,262
Service 13,388 10,766 25,664 21,564
Discontinued product -- -- 3,500 --
----------- ----------- ----------- -----------
44,434 40,988 91,549 81,826
----------- ----------- ----------- -----------
Gross Profit 32,944 28,988 61,352 56,515
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Marketing and sales 11,549 10,784 23,150 21,521
Research and development 3,704 3,548 8,065 6,797
General and administrative 4,830 4,424 9,115 8,670
Goodwill amortization 428 198 803 396
Discontinued product -- -- 12,900 --
----------- ----------- ----------- -----------
20,511 18,954 54,033 37,384
----------- ----------- ----------- -----------
Operating Income 12,433 10,034 7,319 19,131
Interest and other
expense, net 951 1,318 1,900 2,420
----------- ----------- ----------- -----------
Income before provision
for income taxes 11,482 8,716 5,419 16,711
Provision for income taxes 4,478 3,164 2,113 6,066
----------- ----------- ----------- -----------
Net income $7,004 $5,552 $3,306 $10,645
=========== =========== =========== ===========
Net income:
Basic $0.36 $0.30 $0.17 $0.59
=========== =========== =========== ===========
Diluted $0.35 $0.29 $0.17 $0.55
=========== =========== =========== ===========
Number of shares used in
per share calculations:
Basic 19,195 18,246 19,082 18,071
=========== =========== =========== ===========
Diluted 20,192 19,434 20,015 19,303
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 29, September 28,
1998 1997
(UNAUDITED)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $5,106 $5,088
Accounts receivable 112,871 99,495
Inventories 32,901 27,534
Prepaid expenses and other current assets 8,567 10,155
------------ ------------
Total current assets 159,445 142,272
------------ ------------
Service parts 18,573 17,278
Fixed assets 10,814 11,555
Capitalized software 11,004 14,007
Goodwill 20,891 10,110
Deferred income taxes 10,172 8,249
Other assets 3,064 3,524
------------ ------------
Total Assets $233,963 $206,995
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $29,704 $22,217
Accounts payable 17,363 10,543
Deferred revenues 10,013 11,561
Customer deposits and advance billings 2,140 2,841
Accrued compensation 6,232 7,522
Other accrued liabilities 19,102 11,115
------------ ------------
Total current liabilities 84,554 65,799
------------ ------------
Deferred income taxes 9,532 11,103
Liabilities and deferred credits 3,630 3,596
------------ ------------
Total Liabilities 97,716 80,498
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none; - -
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 19,427 shares at
March 29, 1998 and 18,812 shares at
September 28, 1997 130,701 123,269
Retained earnings 8,899 5,593
Translation adjustment (3,353) (2,365)
------------ ------------
Total Shareholders' Equity 136,247 126,497
------------ ------------
Total Liabilities and Shareholders' Equity $233,963 $206,995
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
March 29, March 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,306 $10,645
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 5,443 4,890
Provision for product returns and doubtful
accounts 1,886 1,276
Deferred income taxes (3,499) 1,047
Inventory allowance (141) 3,701
Discontinued products 16,400
Changes in assets and liabilities:
Accounts receivable (20,388) (9,993)
Inventories (7,827) 406
Prepaid expenses and other current assets 1,596 556
Service parts (1,824) (1,358)
Accounts payable 6,155 (3,638)
Deferred revenues (1,960) (2,203)
Customer deposits and advance billings (154) (922)
Accrued compensation (701) (411)
Other accrued liabilities (1,290) 738
Non-current liabilities and deferred credits 6,723 2,072
----------- -----------
Cash provided by operating activities 3,725 6,806
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,630) (2,600)
Increase in other assets (11,155) (3,434)
Acquisitions, net of cash acquired (1,493)
----------- -----------
Cash used in investing activities (14,278) (6,034)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short-term
debt arrangements, net 6,929 (427)
Dividends paid (2,137)
Proceeds from issuance of common stock, net 4,630 5,271
----------- -----------
Cash provided by financing activities 11,559 2,707
----------- -----------
Effect of exchange rates on cash (988) (1,152)
----------- -----------
Net increase in cash and cash equivalents 18 2,327
Cash and cash equivalents, at beginning of
the period 5,088 3,081
----------- -----------
Cash and cash equivalents, at end of the
period $5,106 $5,408
=========== ===========
Supplemental cash flow disclosure:
Interest paid $1,983 $1,999
Income taxes paid $2,668 $1,602
Noncash investing activities:
Issuance of common stock pursuant to the acquisition of SCI (see Note 1
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed interim consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for annual
financial statements. In the opinion of management, the condensed
interim consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the information
required to be included. Operating results for the three- and
six-month periods ended March 29, 1998 are not necessarily indicative
of the results that may be expected for any future periods, including
the full fiscal year. Reference should also be made to the Annual
Consolidated Financial Statements, Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for
the fiscal year ended September 28, 1997.
The previous year-end's balance sheet data was derived from
audited financial statements but does not include all disclosures
required by generally accepted accounting principles.
2. Net Income Per Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, (SFAS
128), Earnings per Share (EPS). SFAS 128 requires dual presentation of
basic EPS and diluted EPS on the face of all income statements, for
all entities with complex capital structures. Basic EPS is computed
as net income divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. This statement
also requires a reconciliation of the numerator and denominator of the
diluted EPS computation. EPS data for the period ended March 29, 1998
and all prior periods have been restated to conform with the
provisions of this statement.
The following is a reconciliation of the numerator (net
income) and denominator (number of shares) used in the basic and
diluted EPS calculation:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollar amounts in thousands, March 29, March 30, March 29, March 30,
except per share data) 1998 1997 1998 1997
- - ---------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS: Net Income $7,004 $5,552 $3,306 $10,645
Denominator: Weighted Average
Common Shares Outstanding 19,195 18,246 19,082 18,071
----------- ----------- ----------- -----------
Basic EPS $ .36 $ .30 $ .17 $ .59
=========== =========== =========== ===========
Diluted EPS: Net Income $7,004 $5,552 $3,306 $10,645
Denominator: Weighted Average
Common Shares Outstanding 19,195 18,246 19,082 18,071
Options 997 1,188 933 1,232
----------- ----------- ----------- -----------
Total Shares 20,192 19,434 20,015 19,303
----------- ----------- ----------- -----------
Diluted EPS $ .35 $ .29 $ .17 $ .55
=========== =========== =========== ===========
</TABLE>
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Depreciation and Amortization
Depreciation and amortization was approximately $2.5 million and $2.4
million for the three-month periods ended March 29, 1998 and March 30, 1997,
respectively.
4. Inventories
<TABLE>
<CAPTION>
March 29, September 28,
(Dollar amounts in thousands) 1998 1997
- - ----------------------------------- ------------ ------------
<S> <C> <C>
Purchased parts and
sub-assemblies $16,874 $14,327
Work in process 4,417 3,175
Finished goods 11,610 10,032
------------ ------------
$32,901 $27,534
============ ============
</TABLE>
5. Fixed Assets
<TABLE>
<CAPTION>
March 29, September 28,
(Dollar amounts in thousands) 1998 1997
- - ----------------------------------- ------------ ------------
<S> <C> <C>
Production and test equipment $3,991 $9,144
Field service equipment 1,238 2,443
Office and demonstration
equipment 13,521 16,932
Leasehold improvements 1,033 1,181
------------ ------------
19,783 29,700
Less accumulated depreciation
and amortization (8,969) (18,145)
------------ ------------
$10,814 $11,555
============ ============
</TABLE>
6. Other Accrued Liabilities
<TABLE>
<CAPTION>
March 29, September 28,
(Dollar amounts in thousands) 1998 1997
- - ----------------------------------- ------------ ------------
<S> <C> <C>
Accrued customer service costs $7,682 $4,495
Other accrued expenses 11,420 6,620
------------ ------------
$19,102 $11,115
============ ============
</TABLE>
7. Discontinued product charges
On February 10, 1998, the Company decided to discontinue the
LabStat product while retaining the laboratory support and maintenance
business. The decision was made after it was determined that
continuing development and marketing of LabStat was not in the best
interest of the Company and its shareholders and that all meaningful
discussions with possible strategic partners had ceased.
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's decision to discontinue LabStat resulted in a
one-time discontinued product charge of $12.9 million in the first
quarter of fiscal 1998. The charge was a consequence of the Company
determining that certain assets utilized in the development and
marketing of LabStat had become impaired as a result of the
discontinuation. The discontinued product charge, consisting
principally of non-cash charges, included the write-off of $6.3
million of receivables, $5.7 million of capitalized software and $.9
million of fixed assets that were specifically utilized in the LabStat
product. The Company did not incur any material costs in the second
quarter of fiscal 1998 in relation to these activities.
In connection with the Company's evaluation of its laboratory
information systems business, the Company also conducted an analysis
of the recoverability of certain assets utilized in the Company's
Digital Subtraction Angiography (DSA) business and determined it was
appropriate to write off certain of these assets. Accordingly, the
Company included an impairment charge for these assets of $3.5 million
in its results of operations for the first quarter of fiscal 1998. The
decision to write off the DSA assets, consisting principally of
inventory, was a result of steadily declining revenues and the
Company's decision to no longer market the product. The combined
one-time write-off for LabStat and DSA in the first quarter of fiscal
1998 was $16.4 million.
8. Income Taxes
The Company uses the deferral method to account for income
taxes. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
The provisions for income taxes for each of the six-month
periods ended March 29, 1998 and March 30, 1997 are based on the
estimated effective income tax rates for the fiscal years ending
September 27, 1998 and September 28, 1997 of 39.0% and 36.3%,
respectively, excluding with respect to fiscal 1997 the effects of the
one-time charge for in-process research and development and other
acquisition costs and expenses.
9. Credit and Borrowing Arrangements
The Company has a $60 million revolving credit facility with a
bank syndicate. The credit facility offers borrowings in either U.S.
dollars or in foreign currencies and expires July 30, 1999. The
Company pays interest and commitment fees on its borrowings based on
its debt level in relation to its cash flow. Commitment fees range
from 0.25% to 0.475% of unused commitment and interest rates are based
on the bank's prime rate or Libor plus rates ranging from 0.875% to
1.5%. Borrowings are generally repaid within 90 days. At March 29,
1998, the Company had $30.3 million available for borrowing under this
facility.
10. Litigation
The Company is a defendant in various legal proceedings
incidental to its business. While it is not possible to determine the
ultimate outcome of these actions at this time, management is of the
opinion that any unaccrued liability resulting from these claims would
not have a material adverse effect on the Company's consolidated
financial position or results of operations.
11. Acquisitions
In October 1997, the Company acquired substantially all of the
assets of Southern Cats, Inc. and its affiliates (Southern Cats) in
exchange for 139,131 shares of the Company's common stock. Southern
Cats was an independent provider of computed tomography and X-ray
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
equipment refurbishment and service. The acquisition was accounted for
using the purchase method of accounting.
In January 1998, the Company acquired CT Solutions, Inc. and
O.N.E.S. Medical Services, Inc. (ONES) for cash. CT Solutions was an
independent provider of computed tomography refurbished equipment and
service. ONES was a provider of nuclear medicine service and
refurbished equipment. The acquisitions were accounted for using the
purchase method of accounting.
None of the acquisitions discussed above is material to the
financial position or results of operations of the Company.
12. Recent Pronouncements
In June 1997, Financial Accounting Standard 130, "Reporting
Comprehensive Income" ("FAS 130"), was issued and is effective for
fiscal years commencing after December 15, 1997. The Company will
comply with the requirements of FAS 130 in fiscal year 1999. The
Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially
impact the Company's results of operations.
In June 1997, Financial Accounting Standard 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS 131"),
was issued and is effective for fiscal years commencing after December
15, 1997. The Company will comply with the requirements of FAS 131 in
fiscal year 1999. The Company is evaluating alternative formats for
presenting this information, but does not expect this pronouncement to
materially impact the Company's results of operations.
In October 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position ("SOP 97-2"),
"Software Revenue Recognition". This SOP supersedes "SOP 91-1",
Software Revenue Recognition. The Company will comply with the
requirements of "SOP 97-2" in fiscal year 1999. The Company is
currently assessing the implications of this new statement and the
impact of its implementation on the Company's consolidated financial
statements.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related Notes thereto
contained elsewhere within this document. Operating results for the three-month
and six-month periods ended March 29, 1998 are not necessarily indicative of the
results that may be expected for any future periods, including the full fiscal
year. Reference should also be made to the Annual Consolidated Financial
Statements, Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended September 28, 1997.
RESULTS OF OPERATIONS
The Three-Month and Six-Month Periods Ended March 29, 1998 Compared to the
Three-Month and Six-Month Periods Ended March 30, 1997
Revenues for the second quarter of fiscal 1998 increased 11%, or $7.4 million,
over the second quarter fiscal 1997 revenues of $70.0 million. Revenues are
primarily generated from the sale and servicing of medical imaging products.
Medical Systems revenues represented 87% and 88% of the Company's total revenues
for the second quarter of fiscal 1998 and 1997, respectively. The Company's
Healthcare Information Systems revenues represented approximately 13% and 12% of
the Company's total revenues for the second quarter of fiscal 1998 and 1997,
respectively.
<PAGE>
Year-to-date revenues increased 11%, or $14.6 million, over the $138.3
million for the same period in fiscal 1997. Excluding the discontinued
product charge associated with the write-off of the DSA assets in the
first quarter of fiscal 1998, gross profit for the first six months of
fiscal 1998 was $64.9 million, a 15% increase over the $56.5 million
generated in the same period in fiscal 1997. Including this charge,
gross profit was $61.4 million for the first six months of fiscal 1998.
See Note 7 of the Notes to Condensed Consolidated Financial Statements.
Medical Systems
Medical Systems includes revenues from the sale of the Company's
nuclear medicine, RTP and ADAC Medical Technologies (AMT) products, as
well as customer service related to those products. Summary
information related to Medical Systems' product and service revenues
and gross profit margins for the three-month and six-month periods
ended March 29, 1998 compared to the corresponding periods in fiscal
1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
March 29, March 30, March 29, March 30,
(Dollar Amounts in Thousands) 1998 1997 1998 1997
- - ----------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product $50,480 $48,759 $102,673 $93,771
Service 16,587 13,080 32,170 25,843
Geographical mix:
North America 84.8% 78.9% 80.4% 78.4%
Europe 12.1% 9.6% 13.4% 12.5%
Latin America, Japan and Asia 3.1% 11.5% 6.2% 9.1%
Gross margin before discontinued
product charge
Product 45.6% 43.1% 45.5% 42.7%
Service 32.1% 33.3% 33.7% 32.3%
Gross margin after discontinued
product charge
Product 45.6% 43.1% 42.1% 42.7%
Service 32.1% 33.3% 33.7% 32.3%
</TABLE>
Medical Systems' product revenues for the three- and six-month periods
ended March 29, 1998 increased 4% and 9%, respectively, over the same
periods in fiscal 1997. Product revenue growth was driven principally
by sales of the Company's RTP product, Pinnacle3(TM), and, to a lesser
extent, by sales of refurbished equipment through AMT, and the
company's newest business initiative ADAC Multi-Modality Services
(AMMS). RTP product revenues for the three-month and six-month periods
ended March 29, 1998 increased 74% and 95%, respectively, over the
same periods in fiscal 1997. These increases were partially offset by
a decline in nuclear revenues of 10% and 4% over the corresponding
periods in fiscal 1997. Nuclear medicine revenues decreased largely as
a result of weaker Asian and Latin American markets as well as, a
decline in unit sales of MCD for the three- and six-month periods
ended March 31, 1998 compared to the corresponding periods in fiscal
1997. See "Business Considerations -- Dependence on New Products and
Product Enhancements".
Excluding the effects of the discontinued product charge associated
with the write-off of the DSA assets in the first quarter of fiscal
1998, gross profit margins for Medical Systems products increased to
45.5% in the first six months of fiscal 1998. Including this charge,
gross profit margins were 42.1% for this period. This compares with
gross profit margins of 42.7% for the first six months of fiscal 1997.
Margins before the discontinued product charge increased primarily due
to sales of Pinnacle3 and reductions in product cost.
<PAGE>
Medical Systems service revenues for the three-month and six-month
periods ended March 29, 1998 increased 27% and 24%, respectively, over
the same periods in fiscal 1997. These increases resulted from the
Company's acquisition of two multi-modality service businesses as well
as an increase in the number of customers under service contracts,
economies of scale related to more effective coverage of field service
support costs and improved product reliability.
Healthcare Information Systems (HCIS)
HCIS has historically generated revenues from the sale of
laboratory, radiology and cardiology information systems, which
include hardware and software, as well as from the provision of
service for these products. In the first quarter of fiscal 1998, the
Company took a one-time charge of $12.9 million to discontinue
development and marketing of its LabStat product. See Note 7 of Notes
to Condensed Consolidated Financial Statements. As a result, in the
future HCIS revenues will be derived primarily from the sale and
support of radiology information systems. All of the Company's HCIS
revenues are generated in North America. Summary information related
to HCIS' product and service revenues and gross profit margins for the
three- and six-month periods ended March 29, 1998 compared to the
corresponding periods in fiscal 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
March 29, March 30, March 29, March 30,
(Dollar Amounts in Thousands) 1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product $6,104 $4,040 $9,764 $10,508
Service 4,208 3,974 8,295 7,972
Gross margin:
Product 41.1% 38.4% 34.6% 37.6%
Service 50.0% 48.7% 47.9% 48.9%
</TABLE>
HCIS' product revenues for the second quarter of fiscal 1998
increased 51% over the same quarter of fiscal 1997 due to increased
sales of the Company's radiology information system (QuadRIS)(TM).
Product gross margins also increased over the same period due to an
increase in QuadRIS sales and cost reductions associated with the
LabStat(TM) write-off. See Note 7 of Notes to Condensed Consolidated
Financial Statements. The results for the six-month period ended March
29, 1998 were significantly impacted by the LabStat write-off and
accordingly, the Company does not believe these results are indicative
of the future financial performance of HCIS.
HCIS service revenues increased slightly for the three- and
six-month periods ended March 29, 1998 from the corresponding periods
in fiscal 1997 due principally to higher radiology service revenues.
However, service gross margins decreased year-to-date due to lower
dollar volume in service renewals from HCIS' legacy client base and
increased personnel and support costs. Weaker margins from the first
quarter of fiscal 1998 were partially offset by higher margins in the
second quarter of fiscal 1998.
<PAGE>
Operating and Other Expenses:
As a percentage of total revenue, the Company's operating and other expenses
for the three- and six-month periods ended March 29, 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING EXPENSES:
Marketing and sales 14.9% 15.4% 15.1% 15.6%
Research and development 4.8% 5.1% 5.3% 4.9%
General and administrative 6.2% 6.3% 6.0% 6.3%
Goodwill amortization 0.6% 0.3% 0.5% 0.3%
Discontinued product charge 0.0% 0.0% 8.4% 0.0%
----------- ----------- ----------- -----------
26.5% 27.1% 35.3% 27.1%
=========== =========== =========== ===========
Interest and other expense, net 1.2% 1.9% 1.2% 1.8%
</TABLE>
Marketing and sales expenses for the three-month and six-month
periods ended March 29, 1998 increased $0.8 and $1.6 million, but
decreased as a percentage of revenue, over the corresponding periods
in the prior fiscal year as a result of higher compensation costs
associated with increasing revenues and orders.
Research and development expenditures, net of software
capitalization, totaled $3.7 million and $3.5 million in the second
quarter of fiscal 1998 and 1997, respectively. Year-to-date research
and development expenditures, net of software capitalization, were
$8.1 million and $6.8 million in fiscal 1998 and 1997, respectively.
Research and development expenses for the three- and six-month periods
ended March 29, 1998 increased on a gross basis, as a percentage of
revenue, when compared to the same periods in the prior fiscal year.
These increases resulted primarily from additional investments by the
Company to maintain and enhance its radiology and nuclear medicine
products. These additional investments were partially offset by the
decrease in costs associated with the discontinuation of the Company's
LabStat product. See Note 7 of Notes to Condensed Consolidated
Financial Statements. The increases in gross research and development
expenses were partially offset by an increase in capitalized software
costs to $2.3 million in the second quarter of fiscal 1998 from $1.1
million in the corresponding quarter in fiscal 1997.
General and administrative expenses increased in dollar volume
for the three- and six-month periods ended March 29, 1998, but
decreased as a percentage of revenue due to higher sales. Goodwill
amortization increased as a percentage of revenue in the three-month
and six-month periods of fiscal 1998 compared to the corresponding
periods of fiscal 1997. The increases in general and administrative
expenses and amortization of goodwill resulted principally from the
acquisitions made in fiscal 1998. See Note 11 of Notes to Condensed
Consolidated Financial Statements.
The Company took a one-time charge to operating expense of $12.9
million in the first quarter of fiscal 1998 in connection with its
decision to discontinue its LabStat product. See Note 7 of Notes to
Condensed Consolidated Financial Statements.
Interest and other expense, net, which primarily consists of interest
expense and foreign currency transaction gains and losses, decreased as a
percentage of revenue for the quarter and on a year to date basis due primarily
to foreign currency gains during the second quarter of fiscal 1998.
Income Taxes:
The effective tax rate as a percentage of pretax income was 39.0%
for the first six months of fiscal 1998, compared with 36.3% for the
first six months of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its available cash resources, generated
primarily from operations, lease financing and credit lines will
provide adequate funds to finance the Company's operations in fiscal
1998.
The Company's ratio of current assets to current liabilities was
1.9 to one, while working capital for the first six months of fiscal
1998 decreased $1.8 million to $74.9 from $76.7 for the same period in
fiscal 1997.
Cash and cash equivalents at the end of the second quarter of
fiscal 1998 were unchanged from the end of the fourth quarter of
fiscal 1997, compared to an increase of $2.3 million for the
corresponding period in fiscal 1997. The fiscal 1998 activity
consisted primarily of (i) an increase in accounts receivable; (ii) an
increase in goodwill; and (iii) an increase in borrowing compared with
the same period in fiscal 1997. The increase in accounts receivable
resulted from higher revenues, the lengthening of customer payment
terms to meet competitive conditions, and an increase in international
business, as well as delays in product installations and
implementations due to customer site preparation and other factors,
which delayed final acceptance payments. These items were partially
offset by lower prepaid expense and an increase in accounts payable and
accrued liabilities, all of which resulted from increased purchasing
to support the higher sales volume.
Cash of 12.7 million was used for investing activities in the
first six months of fiscal 1998. This activity consisted principally of
the acquisitions of CT Solutions and ONES.
Financing activities provided $11.6 million of cash in the first
six months of fiscal 1998. This was primarily attributable to
increased borrowings for the purchase of CT Solutions and ONES and
common stock issued to employees under the Company's employee stock
purchase and option plans.
The Company's liquidity is affected by many factors, some based
on the normal ongoing operations of the business and others related to
the uncertainties of the industry and global economies. Although the
Company's cash requirements will fluctuate based on the timing and
extent of these factors, management believes that cash generated from
operations, together with the liquidity provided by existing cash
balances and borrowing capability, will be sufficient to satisfy
commitments for capital expenditures and other cash requirements for
the next fiscal year. However, the Company may need to increase its
sources of capital through additional borrowings or the sale of
securities in response to changing business conditions or to pursue
new business opportunities. There can be no assurance that such
additional sources of capital will be available on terms favorable to
the Company, if at all.
BUSINESS CONSIDERATIONS
From time to time, the Company may disclose, through press
releases, filings with the SEC or otherwise, certain matters that
constitute forward looking statements within the meaning of the
Federal securities laws. Such statements are subject to a number of
risks and uncertainties, which could cause actual results to differ
materially from those projected, including without limitation those
set forth below. The Company expressly disclaims any obligation to
update any forward looking statements.
Competition
The markets served by the Company are characterized by rapidly
evolving technology, intense competition and pricing pressure. There
are a number of companies that currently offer, or are in the process
of developing, products that compete with products offered by the
<PAGE>
Company. Some of the Company's competitors have substantially greater
capital, engineering, manufacturing and other resources than the
Company. These competitors could develop technologies and products
that are more effective than those currently used or marketed by the
Company or that could render the Company's products obsolete or
noncompetitive. The introduction by certain of the Company's nuclear
medicine competitors of new products in fiscal 1997 resulted in a
decrease in the Company's market share for that year and for the
six-month period ended March 31, 1998. In the future, these products
may continue to have an adverse effect on the Company's market share.
Dependence on New Products and Product Enhancements
ADAC's success is dependent upon the successful development, introduction
and commercialization of new products and the development of enhancements to
existing products. Because the nuclear medicine market is highly competitive,
the Company must continue to develop and successfully commercialize innovative
new products and product enhancements such as MCD and MCD/AC in order to pursue
its growth strategy. Failure of the Company to develop, market and sell its
products effectively in future periods could have a material adverse effect on
the Company's results of operations.
The development of new products and product enhancements entails
considerable time and expense, including research and development
costs, and the time, expense and uncertainty involved in obtaining any
necessary regulatory clearances. The success of MCD depends on a
number of factors, including the commercial availability of,
fluoro-deoxy-glucose ("FDG") and the establishment by the Health Care
Financing Administration of reimbursement amounts for MCD scans.
Continued uncertainty concerning the commercial supply of FDG and the
timing and amount of reimbursement could have an adverse effect on
sales of MCD, which could have a material adverse effect on the
Company's results of operations.
Government Regulation
There has been a trend in recent years, both in the United
States and abroad, toward more stringent regulation and enforcement of
requirements applicable to medical device manufacturers. The
continuing trend of more stringent regulatory oversight in product
clearance and enforcement activities has caused medical device
manufacturers to experience longer approval cycles, more uncertainty,
greater risk, and higher expenses. There can be no assurance that any
necessary clearance or approval will be granted the Company or that
FDA review will not involve delays adversely affecting the Company. In
addition, a failure to comply with FDA requirements relating to
medical device testing, manufacture, packaging, labeling,
distribution, promotion, record keeping, and reporting of adverse
events could result in enforcement actions including Warning Letters,
such as the one issued to Cortet in August 1997, as well as civil
penalties, injunctions, suspensions or losses of regulatory
clearances, product recalls, seizure or administrative detention of
products, operating restrictions through consent decrees or otherwise,
and criminal prosecution. The Company is also subject to FTC
restrictions on advertising and numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing
practices, environmental protection and disposal of hazardous
substances. Changes in existing requirements, adoption of new
requirements or failure to comply with applicable requirements could
have a material adverse effect on the Company.
Future Operating Results
The Company's future operating results may vary substantially
from period to period. The timing and amount of revenues are subject
to a number of factors that make estimation of revenues and operating
results prior to the end of the quarter very uncertain. The timing of
revenues can be affected by delays in product introductions, shipments
and installations, as well as general economic and industry
conditions. Furthermore, of the orders received by the Company in any
fiscal quarter, a disproportionately large percentage has typically
been received and shipped toward the end of that quarter.
<PAGE>
Accordingly, results for a given quarter can be adversely affected if
there is a substantial order shortfall late in that quarter. In
addition, although both the Company's bookings and revenue have
increased in recent periods, the Company's bookings and backlog cannot
necessarily be relied upon as an accurate predictor of future revenues
as the timing of such revenues is dependent upon completion of customer
site preparation and construction, installation scheduling, receipt of
applicable regulatory approvals, and other factors. Accordingly,
there can be no assurance that the orders will mature into revenue.
Risks Related to Acquisitions
In the past fiscal year, the Company has acquired a number of
small businesses, and anticipates that it may continue to acquire
businesses whose products and services complement the Company's
business. Acquisitions involve numerous risks, including, among other
things, difficulties in successfully integrating the businesses
(including products and services, as well as sales and marketing
efforts), failure to retain existing customers of or attract new
customers to the acquired business operations, failure to retain key
technical and management personnel, coordinating geographically
separated organizations, and diversion of ADAC management attention.
These risks, as well as liabilities of any acquired business (whether
known or unknown at the time of acquisition), could have a material
adverse effect on the results of operations and financial condition of
the Company, including adverse short-term effects on its reported
operating results. The Company seeks to mitigate these risks by taking
reserves when appropriate in connection with these acquisitions. In
addition, the Company has in the past and may in the future issue
stock as consideration for acquisitions. Future sales of shares of
the Company's stock issued in such acquisitions could adversely affect
or cause fluctuations in the market price of the Company's Common
Stock.
Year 2000 Compliance
Many currently installed computer systems and software products
are coded to accept only 2 digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept
4 digit entries to distinguish 21st century dates from 20th century
dates. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. As a result, in
two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such Year 2000 requirements. The
Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its internal systems, for Year 2000
compliance. Management is in the process of assessing the Year 2000
compliance expense and any related potential effect on the Company's
earnings.
In addition, the Company is currently seeking to ensure that the
software included in its nuclear medicine, healthcare information and
other systems is Year 2000 compliant. Failure (or perceived failure)
of such products to be Year 2000 compliant could significantly
adversely affect sales of such products, which could have a material
adverse effect on the Company's results of operations and financial
condition. In addition, the Company believes that the purchasing
patterns of customers and potential customers may be affected by Year
2000 issues in a variety of ways. Many potential customers may choose
to defer purchasing Year 2000 compliant products until they believe it
is absolutely necessary, thus resulting in potentially stalled market
sales within the industries in which the Company competes.
Conversely, Year 2000 issues may cause other companies to accelerate
purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for the Company's products.
Additionally, Year 2000 issues could cause a significant number of
companies, including current Company customers, to reevaluate their
current system needs, and as a result consider switching to other
systems or suppliers. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and
financial condition.
<PAGE>
Health Care Reform; Reimbursement and Pricing Pressure
There is significant concern today about the availability and
rising cost of healthcare in the United States. Cost containment
initiatives, market pressures and proposed changes in applicable laws
and regulations may have a dramatic effect on pricing or potential
demand for medical devices, the relative costs associated with doing
business and the amount of reimbursement by both government and third
party payors, which could have a material adverse effect on the
Company's results of operations.
Intellectual Property Rights
The Company's success depends in part on its continued ability to
obtain patents, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. There can be no
assurance that pending patent applications will mature into issued
patents or that third parties will not make claims of infringement
against the Company's products or technologies or will not be issued
patents that may require payment of license fees by the Company or
prevent the sale of certain products by the Company.
Reliance on Suppliers
Certain components used by the Company to manufacture its
products such as the sodium iodide crystals used in the Company's
nuclear medicine systems are presently available from only one
supplier. The Company also relies on several significant vendors for
hardware and software components for its healthcare information systems
products. The loss of any of these suppliers, including any
single-source supplier, would require obtaining one or more
replacement suppliers as well as potentially requiring a significant
level of hardware and software development to incorporate the new parts
into the Company's products. Although the Company has obtained
insurance to protect against loss due to business interruption from
these and other sources, there can be no assurance that such coverage
would be adequate.
Product Liability
Although the Company maintains product liability insurance
coverage in an amount that it deems sufficient for its business, there
can be no assurance that such coverage will ultimately prove to be
adequate or that such coverage will continue to remain available on
acceptable terms, if at all.
Volatility of Stock Price
The market price of the Company's Common Stock is and is expected
to continue to be subject to significant fluctuations in response to
variations in anticipated or actual operating results, market
speculation, announcements of new products or technology by the
Company or its competitors, changes in earnings estimates by the
Company's analysts, trends in the health care industry in general
and other factors, many of which are beyond the control of the
Company. In addition, broad market fluctuations as well as general
economic or political conditions or initiatives, such as health care
reform, may adversely impact the market price of the Common Stock
regardless of the Company's operating results.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
(c) On March 26, 1998, the Company issued 43,404 shares of common
stock to Bain & Company, Inc. ("Bain") upon the exercise by Bain of a
warrant to purchase 60,000 shares of Company common stock granted Bain
in August 1994 (the "Warrant"). The exercise price of $390,000 was paid
by the surrender of 16,596 shares under the Warrant. The shares were
offered and sold to Bain pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Act"),
provided by Section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 1998 Annual Meeting of Shareholders on March 5, 1998
(the "Annual Meeting").
(b) At the Annual Meeting, the following directors were duly elected: Stanley
D. Czerwinski, R. Andrew Eckert, Graham O. King, David L. Lowe, Edmund H.
Shea, Jr. and F. David Rollo.
(c) At the Annual Meeting, the following votes were cast for each of the items
voted upon at the meeting:
1) Election of Directors:
In Favor Withheld
Stanley D. Czerwinski 16,135,010 816,204
R. Andrew Eckert 16,462,343 488,871
Graham O. King 16,469,222 481,992
David L. Lowe 16,462,701 488,513
F. David Rollo 16,469,022 482,192
Edmund H. Shea, Jr. 16,465,011 486,203
2) Proposal to approve an amendment to the Company's 1992
Stock Option Plan to increase the number of shares authorized thereunder by
847,000 shares: FOR - 10,567,703; AGAINST - 2,079,618; ABSTAIN - 273,074; and
BROKER NON-VOTES - 4,030,819.
3) Proposal to approve an amendment to the Company's Employee
Stock Purchase Plan to increase the shares authorized thereunder by 100,000
shares: FOR - 11,872,589; AGAINST - 797,828; ABSTAIN - 249,976; and BROKER
NON-VOTES - 4,030,821.
4) Proposal to ratify the adoption by the Company's
subsidiary, ADAC Healthcare Information Systems, Inc., of its 1997 Stock
Option Plan: FOR - 7,775,906; AGAINST - 4,879,914; ABSTAIN - 264,572; and
BROKER NON-VOTES - 4,030,822.
Item 5. Other Information
Not applicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.21 Amendment No. 7 to 1992 Stock Option Plan
10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994)
27 Financial Data Schedule
(b) Form 8-K Reports:
None filed during the fiscal quarter described in this
Report on Form 10-Q.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 16, 1998
ADAC Laboratories
(Registrant)
BY: /s/ P. Andre' Simone
P. Andre' Simone
Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
10.21 Amendment No. 7 to 1992 Stock Option Plan
10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994)
27 Financial Data Schedule
AMENDMENT NO. 7
TO
ADAC LABORATORIES
1992 STOCK OPTION PLAN
The 1992 Stock Option Plan (the "Plan") of ADAC Laboratories, a
California corporation (the "Company"), is hereby amended in the following
respects:
1. Stock Subject to the Plan. Section 3, entitled "Stock Subject to
the Plan," is hereby amended to delete the first sentence and to add a new
first sentence as follows:
Subject to the provisions of Section 11 and Section 4(b)(xi)
below, the maximum aggregate number of shares that may be
optioned and sold under the Plan is 5,360,000 shares of
Common Stock.
This amendment reflects an increase in the number of authorized shares by
847,000 shares.
2. Effective Date. Except as amended above, in all other respects
the Plan is hereby ratified and confirmed. The amendment to the Plan herein
set forth was approved by the Board of Directors on November 10, 1997 and
by the shareholders on March 5, 1998.
By Order of the Board of Directors:
By: /s/ Karen L. Masterson
Karen L. Masterson
Secretary
AMENDMENT NO. 2
TO
ADAC LABORATORIES
EMPLOYEE STOCK PURCHASE PLAN (1994)
The Employee Stock Purchase Plan (1994) (the "Plan") of ADAC
Laboratories, a California corporation (the "Company"), is hereby amended
in the following respects:
1. Number of Shares to be Offered. The first sentence of Section 4,
entitled "Number of Shares to be Offered," is deleted in its entirety and the
following sentence is substituted in its place:
The maximum aggregate number of shares which shall be offered
under the Plan shall be 370,000 shares of Stock, subject to
adjustment as provided in Section 8 hereof.
This amendment reflects an increase in the number of shares authorized for
issuance under the Plan by 100,000 shares.
2. Effective Date. Except as amended above, in all other respects
the Plan is hereby ratified and confirmed. The amendment of the Plan, as
set forth above, was approved by the Board of Directors on November 10, 1997
and by the shareholders on March 5, 1998.
By Order of the Board of Directors:
By: /s/ Karen L. Masterson
Karen L. Masterson
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 5,106
<SECURITIES> 0
<RECEIVABLES> 112,871
<ALLOWANCES> 0
<INVENTORY> 32,901
<CURRENT-ASSETS> 159,445
<PP&E> 10,814
<DEPRECIATION> 0
<TOTAL-ASSETS> 233,963
<CURRENT-LIABILITIES> 84,554
<BONDS> 0
0
0
<COMMON> 130,701
<OTHER-SE> 5,546
<TOTAL-LIABILITY-AND-EQUITY> 233,963
<SALES> 56,584
<TOTAL-REVENUES> 77,378
<CGS> 31,046
<TOTAL-COSTS> 44,434
<OTHER-EXPENSES> 20,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,482
<INCOME-TAX> 4,478
<INCOME-CONTINUING> 7,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,004
<EPS-PRIMARY> $0.36
<EPS-DILUTED> $0.35
</TABLE>
