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 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
(This document contains a total of 18 pages)
<PAGE>
ADAC LABORATORIES
QUARTERLY REPORT ON FORM-Q
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 29, 1998 and
September 29, 1997 3
Condensed Consolidated Statements of Operations for the Three-Month
and Six-Month Periods Ended March 29, 1998 and March 30, 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 10-15
Part II. Other Information
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 18,533 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 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 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 (used in) operations:
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/(decrease) 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 11)
</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 six-month period 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 basis and diluted EPS
calculation:
<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>
Basic EPS: Net Income $7,004 $5,552 $3,306 $10,645
Denominator: Average Common
Shares Outstanding 19,195 18,246 19,082 18,071
------------ ------------ ------------ ------------
Basic EPS $0.36 $0.30 $0.17 $0.59
============ ============ ============ ============
Diluted EPS: Net Income $7,004 $5,552 $3,306 $10,645
Denominator: 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
============ ============ ============ ============
Basic EPS $0.35 $0.29 $0.17 $0.55
============ ============ ============ ============
</TABLE>
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>
<PAGE>
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.
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. Acquisition
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 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.
Year-to-date revenues also 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, 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 25,842
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 As 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>
<PAGE>
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:
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 (AMM).
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.
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, and to a lesser extent,
cardiology 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 (QuadRISTM).
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, 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.
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 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 8.4%
----------- ----------- ----------- -----------
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 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 first quarter of fiscal 1998 in connection with its decision
to discontinue its LabStat product. 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 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 the
acquisitions of Southern Cats, CT Solutions and ONES in the first six
months of fiscal 1998.
Financing activities provided $11.6 million in 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 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.
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.
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 n assurance that pending
patent applications will mature into issued patent or that third parties will
not make claims of infringement against the Company's products or technologies
or will not be issued patents that ma 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 product 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.
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.
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: May 13, 1998
ADAC Laboratories
(Registrant)
BY: /s/ P. Andre' Simone
P. Andre' Simone
Vice President and Chief
Financial Officer
EXHIBIT INDEX
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.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> DEC-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
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<TOTAL-ASSETS> 233,963
<CURRENT-LIABILITIES> 84,554
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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
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