UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 28, 1997
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
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(Address of principal executive offices) (Zip Code)
(408) 321-9100
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(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 February 5, 1998,
19,009,938
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
December 28, September 28,
1997 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,808 $5,088
Accounts receivable, net 104,535 99,495
Inventories 24,979 27,534
Prepaid expenses and other current assets 8,304 10,155
------------ ------------
Total current assets 142,626 142,272
------------ ------------
Service parts, net 16,756 17,278
Fixed assets, net 11,473 11,555
Capitalized software, net 9,331 14,007
Goodwill, net 14,149 10,110
Deferred income taxes 6,444 8,249
Other assets, net 3,993 3,524
------------ ------------
Total Assets $204,772 $206,995
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $22,662 $22,217
Accounts payable 12,277 10,543
Deferred revenues 11,179 11,561
Customer deposits and advance billings 3,053 2,841
Accrued compensation 7,894 7,522
Other accrued liabilities 8,855 11,115
------------ ------------
Total current liabilities 65,920 65,799
------------ ------------
Non-current deferred income taxes 11,696 11,103
Non-current liabilities and deferred credits 1,360 3,596
------------ ------------
Total Liabilities 78,976 80,498
------------ ------------
SHAREHOLDERS' EQUITY
Capital stock 127,008 123,269
Retained earnings 1,895 5,593
Translation adjustment (3,107) (2,365)
------------ ------------
Shareholders' Equity 125,796 126,497
------------ ------------
Total Liabilities and Shareholders' Equity $204,772 $206,995
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
December 28, December 29,
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Product $55,853 $51,604
Service 19,670 16,761
----------- -----------
75,523 68,365
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COST OF REVENUES
Product 31,339 30,040
Service 12,276 10,798
Discontinued product 3,500
----------- -----------
47,115 40,838
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GROSS MARGIN 28,408 27,527
----------- -----------
OPERATING EXPENSES
Marketing and sales 11,601 10,737
Research and development 4,361 3,249
General and administrative 4,285 4,246
Goodwill amortization 375 198
Discontinued product 12,900
----------- -----------
33,522 18,430
----------- -----------
OPERATING INCOME/(LOSS) (5,114) 9,097
Other expense (949) (1,102)
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES (6,063) 7,995
Provision (benefit) for income taxe (2,365) 2,902
----------- -----------
NET INCOME/(LOSS) ($3,698) $5,093
=========== ===========
Net income/(loss) per share:
Basic ($0.19) $0.28
=========== ===========
Diluted ($0.19) $0.27
=========== ===========
Number of shares used in
per share calculations:
Basic 19,060 18,049
=========== ===========
Diluted 19,060 19,057
=========== ===========
</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>
THREE MONTHS ENDED
------------------------
December 28, December 29,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($3,698) $5,093
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Depreciation and amortization 2,726 2,119
Provision for product returns and doubtful
accounts 1,164 473
Deferred income taxes 2,393 2,692
Inventory allowance (915) (146)
Discontinued products 16,400
Changes in assets and liabilities
Accounts receivable (12,087) (6,541)
Inventories 229 (3,918)
Prepaid expenses and other current assets 1,851 (344)
Service parts 216 (189)
Accounts payable 1,176 2,373
Deferred revenues (623) (1,511)
Customer deposits and advance billings 212 (744)
Accrued compensation 372 49
Other accrued liabilities (3,312) 1,306
Non-current liabilities and deferred credits (2,424) (437)
----------- -----------
Cash provided by
operating activities 3,680 275
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,715) (777)
Increase in other assets (2,363) (448)
Cash received from acquisition 36
----------- -----------
Cash used in investing activities (4,042) (1,225)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short-term
debt arrangements, net (113) 4,974
Dividends paid (2,137)
Proceeds from issuance of common stock, net 937 989
----------- -----------
Cash provided by financing activities 824 3,826
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Effect of exchange rates on cash (742) (270)
----------- -----------
Net increase/(decrease) in cash and cash
equivalents (280) 2,606
Cash and cash equivalents, at beginning of
the period 5,088 3,081
----------- -----------
Cash and cash equivalents, at end of the
period $4,808 $5,687
=========== ===========
Supplemental cash flow disclosure:
Interest paid $907 $914
Income taxes paid $201 $148
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
(AMOUNTS IN THOUSANDS)
(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-month period
ended December 28, 1997 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 (Loss) 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 issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is
computed as net income (loss) 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. At December 28, 1997, the
dilutive effects of the options have been excluded because the
calculation was anti-dilutive. This statement also requires a
reconciliation of the numerator and denominator of the diluted
EPS computation. EPS data for the period ended December 28,
1997 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:
December 28, December 29,
(Dollar amounts in thousands) 1997 1996
- ----------------------------------- ------------ ------------
Basic EPS: Net Income/(Loss) ($3,698) $5,093
Denominator: Average Common
Shares Outstanding 19,060 18,049
------------ ------------
Basic EPS ($0.19) $0.28
============ ============
Diluted EPS: Net Income/(Loss) ($3,698) $5,093
Denominator: Average Common
Shares Outstanding 19,060 18,049
Options 1,008
------------ ------------
Total Shares 19,060 19,057
============ ============
Basic EPS ($0.19) $0.27
============ ============
3. Depreciation and Amortization
Depreciation and amortization was approximately $2.7
million and $2.1 million for the three-month periods ended
December 28, 1997 and December 29, 1996, respectively.
4. Inventories
-----------
December 28, September 28,
(Dollar amounts in thousands) 1997 1997
- ----------------------------------- ------------ ------------
Purchased parts and
sub-assemblies $13,025 $14,327
Work in process 3,636 3,175
Finished goods 8,318 10,032
------------ ------------
$24,979 $27,534
============ ============
5. Fixed Assets
-------------
December 28, September 28,
(Dollar amounts in thousands) 1997 1997
- ----------------------------------- ------------ ------------
Production and test equipment $2,823 $9,144
Field service equipment 1,790 2,443
Office and demonstration
equipment 13,668 16,932
Leasehold improvemments 1,073 1,181
------------ ------------
19,354 29,700
Less accumulated depreciation
and amortization (7,881) (18,145)
------------ ------------
$11,473 $11,555
============ ============
6. Other Accrued Liabilities
-------------------------
December 28, September 28,
(Dollar amounts in thousands) 1997 1997
- ----------------------------------- ------------ ------------
Accrued customer service
costs $5,307 $4,495
Other accrued expenses 3,548 6,620
------------ ------------
$8,855 $11,115
============ ============
7. Discontinued product charges
In January 1998, the Company announced in a press release
that it had commenced an in-depth evaluation of the laboratory
information systems segment of the HCIS business and its fit
with the balance of the HCIS business. The Company indicated
it was considering a number of strategic alternatives,
including a possible sale or other disposition of LabStat?.
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. The Company believes that this
decision will have a positive effect on the future
profitability of both HCIS and ADAC as a whole.
The Company's decision to discontinue LabStat resulted in
a one-time discontinued product charge of $12.9 million. The
charge is a consequence of the Company determining that certain
assets utilized in the development and marketing of LabStat
became impaired as a result of the Company's decision. The
discontinued product charge, consisting principally of non-cash
charges, includes the write-off of $6.3 million of
receivables, $5.7 million of capitalized software and $.9
million of fixed assets, which were specifically utilized in
the LabStat product. The costs of exiting the LabStat business
and continuing restructuring activities of the HCIS business
are considered to be immaterial and will be included in the
Company's second quarter financial results.
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
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 has included an
impairment charge of $3.5 million in its results of operations
for the first quarter for these assets. 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 is $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 provision (benefit) for income taxes for each of the
three-month periods ended December 28, 1997 and December 29,
1996 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 December
28, 1997, the Company had $37.3 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. Acquisition
On October 30, 1997, the Company acquired substantially
all of the assets of Southern Cats, Inc. (SCI) and its
affiliates in exchange for 139,131 shares of the Company's
common stock. SCI is one of the largest independent providers
of computed tomography and X-ray equipment refurbishment and
service. The acquisition was accounted for using the purchase
method of accounting. SCI is not material to the financial
position or results of operations of the Company.
12. Subsequent Events
On December 31, 1997, the Company acquired CT Solutions,
Inc. for cash. CT Solutions is a respected provider of computed
tomography refurbished equipment and service. The acquisition
was accounted for using the purchase method of accounting.
On January 23, 1998, the Company acquired O.N.E.S.
Medical Services, Inc. (ONES) for cash. ONES is one of the
largest independent providers of nuclear medicine service and
refurbished equipment in the United States. The acquisition was
accounted for using the purchase method of accounting.
Neither of the acquisitions discussed above is material
to the financial position or results of operations of the
Company.
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 period ended December
28, 1997 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 Period Ended December 28, 1997 Compared to The Three-
Month Period Ended December 29, 1996
Revenues for the first quarter of fiscal 1998 increased 11%, or
$7.2 million, over the first quarter fiscal 1997 revenues of $68.4
million. Revenues are primarily generated from the sale and servicing
of medical imaging products. Medical Systems revenues represented 90%
and 85% of the Company's total revenues for the first quarter of
fiscal 1998 and 1997, respectively. The Company's Healthcare
Information Systems revenues represented approximately 10% and 15% of
the Company's total revenues for the first quarter of fiscal 1998 and
1997, respectively. Excluding the discontinued product charge
associated with the write-off of the DSA assets, gross profit for the
first quarter of fiscal 1998 was $31.9 million, a 16% increase over
the $27.5 million generated in the same period in fiscal 1997.
Including this charge, gross profit was $28.4 million for the first
quarter 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 first quarter of fiscal
1998 compared to the same period of fiscal 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
December 28, December 29,
(Dollar amounts in thousands) 1997 1996
- ------------------------------------- ------------ ------------
<S> <C> <C>
Revenues:
Product $52,193 $45,012
Service $15,583 $12,763
Geographical mix:
North America 78.7% 75.3%
Europe 12.1% 16.2%
Latin America,
Japan and Asia 9.2% 8.5%
Gross margin before discontinued
product charge
Product 45.3% 42.3%
Service 35.4% 31.4%
Gross margin after discontinued
product charge
Product 38.6% 42.3%
Service 35.4% 31.4%
</TABLE>
Medical Systems' product revenues increased 16% for the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997
due to continued customer acceptance of the Company's nuclear
medicine, RTP and AMT products, including new product introductions
and enhancement options. Product revenue growth was driven
principally by the sale of higher priced dual head products and MCD,
as well as the Company's RTP product, Pinnacle3?, which received
510(k) clearance from the United States Food and Drug Administration
(FDA) in April 1997. In the first quarters of fiscal 1998 and 1997,
Medical Systems' revenues increased in dollar volume in all of the
Company's geographical markets. The growth rate was highest in the
Latin America market in the first three months of fiscal 1998, and in
North America during the same period in fiscal 1997. Excluding the
effects of the discontinued product charge associated with the write-
off of the DSA assets, gross profit margins for Medical Systems
products increased to 45.3% in the first quarter of fiscal 1998.
Including this charge gross profit margins were 38.6% for this
period. This compares with gross profit margins of 42.3% for the
first quarter of fiscal 1997. Margins before the discontinued product
charge increased primarily due to reductions in product cost and
sales of Molecular Coincidence Detection (MCD?) and Pinnacle3.
The increase in Medical Systems' service revenues and the
improvement in service gross profit margins from first quarter fiscal
1997 to the first quarter fiscal 1998 resulted from 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. Service revenues for the period
increased 21% over the same period in fiscal 1997. The higher growth
rate in first quarter of fiscal 1998 primarily resulted from an
increase in the Company's installed customer base as well as the
acceleration of the Company's multi-vendor service business through
acquisition.
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 $15.1 million to discontinue
development and marketing of its LabStat product. See Note 7 of the
Notes to Condensed Consolidated Financial Statements. 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 first quarter of fiscal 1998 compared to the
first quarter of fiscal 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
December 28, December 29,
(Dollar amounts in thousands) 1997 1996
- ------------------------------------- ------------ ------------
<S> <C> <C>
Revenues:
Product $3,660 $6,468
Service $4,087 $3,998
Gross margin:
Product 23.7% 37.1%
Service 46.1% 49.1%
</TABLE>
HCIS' product revenues decreased 43% from the first quarter of
fiscal 1997 to the first quarter of fiscal 1998. This decrease
resulted primarily from a $3.3 million decline in sales of LabStat.
These revenues declined as customers delayed their purchases of
LabStat in anticipation of the next release which was delayed for
more than one year. Product gross profit margins decreased from the
first quarter of fiscal 1997 to fiscal 1998 due to higher levels of
hardware in the revenue/cost mix for laboratory and radiology sales,
combined with increased laboratory implementation costs, increased
personnel costs and increased amortization expense of capitalized
software costs for all product lines.
HCIS service revenues increased slightly in the first quarter
of fiscal 1998 from the first quarter of fiscal 1997 due principally
to higher radiology service revenues. However, margins decreased due
to lower dollar volume in service renewals from HCIS' legacy client
base and increased personnel and support costs.
Operating and Other Expenses:
Summary information showing the Company's operating and other
expenses as a percentage of revenue is as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------
December 28, December 29,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING EXPENSES
Marketing and sales 15.4% 15.7%
Research and development 5.8% 4.8%
General and administrative 5.7% 6.2%
Goodwill amortization 0.5% 0.3%
Discontinued product charge 17.0%
----------- -----------
44.4% 27.0%
=========== ===========
Other expense 1.3% 1.6%
</TABLE>
Marketing and sales expenses increased $0.9 million over the
same period in the prior year as a result of higher compensation
costs associated with increasing revenues and orders, but decreased
as a percentage of revenue.
Research and development expenditures, net of software
capitalization, totaled $4.4 million and $3.3 million in the first
quarters of fiscal 1998 and 1997, respectively. Research and
development expenses, on both a gross and net basis, increased as a
percentage of revenue for the quarter compared to the same quarter in
the prior fiscal year. The increase resulted primarily from
additional investments made by the Company to accelerate the
development of the Company's laboratory product and to maintain and
enhance the Company's radiology product. Research and development
expenditures, net of software capitalization, increased by $1.1
million from the first quarter of fiscal 1997 to the first quarter of
fiscal 1998 as a result of these increased expenditures. Capitalized
software costs were $1.9 million and $1.1 million in the first
quarter of fiscal 1998 and 1997, respectively.
General and administrative expenses remained essentially
constant as a percentage of revenue from the first quarter of fiscal
1997 to the first quarter of fiscal 1998 but decreased as a
percentage of revenue due to higher sales.
Goodwill amortization increased slightly as a percentage of
revenue from the first quarter of fiscal 1997 to the first quarter of
fiscal 1998 as a result of the amortization of expenses associated
with the acquisition of SCI in October 1997.
The Company took a one-time charge to operating expense of
$12.9 million in connection with its decision to discontinue its
LabStat product in the first quarter of fiscal 1998. (See Note 7 of
the Notes to Condensed Consolidated Financial Statements).
Other expense, net, which primarily consists of interest
expense and foreign currency transaction gains and losses, decreased
slightly as a percentage of revenue from the first quarter of fiscal
1997 to the first quarter of fiscal 1998 due to the Company's
decreased level of bank borrowings during the quarter.
Income Taxes:
The effective tax rate as a percentage of pretax income was
39.0% for the first three months of fiscal 1998, compared with 36.3%
for the first three 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 financial condition remained unchanged from the
fourth quarter of fiscal 1997 to the first quarter of fiscal 1998.
The Company's ratio of current assets to current liabilities was
constant at 2.2 to one, while working capital increased $.2 million
to $76.7 million in the first quarter of fiscal 1998 from $76.5
million in the fourth quarter of fiscal 1997.
Cash and cash equivalents for the first quarter of fiscal 1998
decreased by $0.3 million compared to an increase of $2.6 million for
the corresponding period in fiscal 1997 This decrease was primarily
the result of (i) an increase in accounts receivable; (ii) an
increase in capital expenditures; and (iii) decreased borrowing
compared with the fourth quarter 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. 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 $4.0 million was used for investing activities in the
first quarter of fiscal 1998 and consisted of capital expenditures
for office, manufacturing and research and development equipment and
capitalized software research and development costs in both the
Medical Systems and HCIS business units.
Financing activities provided $0.8 million in cash in the first
quarter of fiscal 1998. This was primarily attributable to common
stock issued to employees under the Company's employee stock option
and stock purchase 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
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. In fiscal 1997 the introduction by
certain of the Company's nuclear medicine competitors of new products
resulted in a decrease in the Company's market share for that year.
In the future, these products may continue to have an adverse effect
on the Company's market share.
Dependence on Development and Commercialization of 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 relatively mature, and from time to time
in recent years has experienced a decline, the Company must continue
to develop and successfully commercialize innovative new products and
product enhancements such as MCD, and the current updates to the
Company's products in order to pursue its growth strategy. Failure
of the Company to 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, fleuro-deoxy-glucose ("FDG"). At this time, the infrastructure
for the commercial supply of FDG is not well developed. Continued
uncertainty surrounding MCD 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. Failure of the Company to
address adequately the concerns raised by the FDA in the Cortet
Warning Letter could have a material adverse effect on Cortet's
business and cause fluctuations in the market price for the Company's
common stock. 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.
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 has not yet assessed
the year 2000 compliance expense and 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.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
(c) On October 28, 1997, the Company issued 139,131 shares of
common stock in connection with the acquisition by the Company
of substantially all of the assets of SCI and its affiliates.
See Note 11 of Notes to Condensed Consolidated Financial
Statements. The shares were offered and sold to SCI and its
affiliates pursuant to the exemption from the registration
requirements of the Securities Act provided by Section 4(2) of
the Securities Act.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Form 8-K Reports:
None filed during the fiscal quarter described in this
Report on Form 10-Q.
EXHIBIT INDEX
27 Financial Data Schedule
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: February 10, 1998
ADAC Laboratories
-----------------
(Registrant)
BY: /s/ P. Andre' Simone
------------------------
P. Andre' Simone
Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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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> DEC-28-1997
<CASH> 4,808
<SECURITIES> 0
<RECEIVABLES> 104,535
<ALLOWANCES> 0
<INVENTORY> 24,979
<CURRENT-ASSETS> 142,626
<PP&E> 11,473
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<TOTAL-ASSETS> 204,772
<CURRENT-LIABILITIES> 65,920
<BONDS> 0
0
0
<COMMON> 127,008
<OTHER-SE> (1,212)
<TOTAL-LIABILITY-AND-EQUITY> 204,772
<SALES> 55,853
<TOTAL-REVENUES> 75,523
<CGS> 31,339
<TOTAL-COSTS> 47,115
<OTHER-EXPENSES> 20,622
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,063)
<INCOME-TAX> (2,365)
<INCOME-CONTINUING> (3,698)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,698)
<EPS-PRIMARY> ($0.19)
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