<PAGE>
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 January 3, 1999
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 No X
--- ---
Number of shares of common stock, no par value, outstanding at February 1,
1999, 20,450,067
(This document contains a total of 22 pages)
<PAGE>
ADAC LABORATORIES
QUARTERLY REPORT ON FORM - 10Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three
Month Periods Ended January 3, 1999 and December 28, 1997 3
Condensed Consolidated Balance Sheets at January 3, 1999 and
September 27, 1998 4
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended January 3, 1999 and December 28, 1997 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
---------------------------------------------------
JANUARY 3, 1999 DECEMBER 28,1997
(Amounts in thousands, except per share data) (Restated)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES, NET:
Product $70,906 $48,019
Service 23,373 19,419
------- -------
94,279 67,438
------- -------
COST OF REVENUES:
Product 39,085 27,160
Service 16,579 11,843
Discontinued product -- 14,494
------- -------
55,664 53,497
------- -------
Gross Profit 38,615 13,941
------- -------
OPERATING EXPENSES:
Marketing and sales 15,463 11,558
Research and development 4,366 5,318
General and administrative 8,339 4,587
Goodwill amortization 488 492
Restructuring charge 2,500 --
------- -------
31,156 21,955
------- -------
OPERATING INCOME/(LOSS) 7,459 (8,014)
------- -------
Interest and other expense, net 1,240 963
------- -------
INCOME/(LOSS) BEFORE PROVISION
FOR INCOME TAXES 6,219 (8,977)
Provision (benefit) for income taxes 2,363 (3,501)
------- -------
NET INCOME/(LOSS) $ 3,856 $(5,476)
------- -------
------- -------
NET INCOME/(LOSS) PER SHARE
Basic $ .19 $ (.29)
------- -------
------- -------
Diluted $ .18 $ (.29)
------- -------
------- -------
NUMBER OF SHARES USED IN PER SHARE CALCULATION
Basic 20,300 18,967
------- -------
------- -------
Diluted 21,118 18,967
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 3, 1999 SEPTEMBER 27, 1998
(AMOUNTS IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,545 $ 4,869
Trade receivables, net of allowance for returns and
doubtful accounts of $2,615 in 1999 and $2,319 in 1998 79,295 55,316
Tax and other receivable 7,198 7,294
Inventories,net 74,111 78,311
Prepaid expenses and other current assets 6,838 4,928
-------- --------
TOTAL CURRENT ASSETS 168,987 150,718
Service parts, net 19,219 18,063
Fixed assets, net 13,916 11,007
Capitalized software, net 14,093 11,770
Intangibles, net 25,008 25,336
Deferred income taxes 24,167 24,167
Other assets, net 932 2,748
-------- --------
TOTAL ASSETS $266,322 $243,809
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 38,294 $ 23,396
Accounts payable 16,763 22,887
Deferred revenues 15,994 11,591
Customer deposits and advance billings 3,763 2,004
Accrued compensation 9,441 8,903
Warranty and installation 4,115 6,595
Other accrued liabilities 18,502 14,423
-------- --------
TOTAL CURRENT LIABILITIES 106,872 89,799
Non-current deferred income taxes 14,026 14,026
Non-current liabilities and deferred credits 3,072 3,082
-------- --------
TOTAL LIABILITIES 123,970 106,907
-------- --------
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: 20,420 shares at January 03, 1999
and 20,253 shares at September 27, 1998 151,162 149,599
Accumulated deficit (6,410) (10,266)
Accumulated other comprehensive loss (2,400) (2,431)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 142,352 136,902
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $266,322 $243,809
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
JANUARY 3, 1999 DECEMBER 28, 1997
(Amounts in thousands) (Restated)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 3,856 $ (5,476)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,041 3,383
Provision for product returns and doubtful
Accounts 705 1,927
Deferred income taxes -- 2,393
Inventory allowance 726 (341)
Discontinued products -- 14,494
Restructuring charge 2,500 --
Change in operating assets and liabilities:
Trade receivables (24,684) (4,426)
Tax and other receivables 96 324
Inventories 3,474 (4,998)
Prepaid expenses and other current assets (1,910) 310
Service parts (2,475) (477)
Accounts payable (6,124) 1,176
Deferred revenues 4,403 (211)
Customer deposits and advance billings 1,759 62
Accrued compensation 538 442
Warranty and installations and other accrued liabilities (903) (3,839)
Non-current liabilities and deferred credits (11) (2,394)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used) in operating activities (14,009) 2,349
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,019) (1,487)
Increase in other assets (1,368) (1,311)
Intangibles (422) 25
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,809) (2,773)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short term
debt arrangements, net 14,899 (112)
Proceeds from issuance of common stock, net 1,564 997
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,463 885
- -------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash 31 (741)
- -------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,324) (280)
Cash and cash equivalents, at beginning of the period 4,869 5,088
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of the period $ 1,545 $ 4,808
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 1,370 $ 907
Income taxes paid $ 432 $ 201
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for annual
financial statements. In the opinion of management, the condensed
interim consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the information
required to be included. Operating results for the three-month period
ended January 3, 1999 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 27, 1998.
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. The results from operations
and balance sheet detail for December 28, 1997 have been restated,
see Note 14 "Restatement of Financial Statements"
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share has been computed using the weighted
average number of common shares outstanding. Diluted net income per share
includes the dilutive effect of common stock options and warrants using the
treasury stock method. The calculation of basic and diluted earnings per
share (EPS) for the quarter ending January 3, 1999 and December 28, 1997 are
as follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data) JANUARY 3, 1999 DECEMBER 28, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS: Net Income/(Loss) $ 3,856 $(5,476)
Denominator: Average Common
Shares Outstanding 20,300 18,967
------- -------
Basic EPS $ .19 $ (.29)
------- -------
------- -------
Diluted EPS: Net Income/(Loss) $ 3,856 $(5,476)
Denominator: Average Common
Shares Outstanding 20,300 18,967
Options 818 --
------- -------
Total Shares 21,118 18,967
------- -------
------- -------
Diluted EPS $ .18 $ (.29)
------- -------
------- -------
</TABLE>
3. DEPRECIATION AND AMORTIZATION
Depreciation and amortization was approximately $4.0 million and $3.4
million for the three-month periods ended January 3, 1999 and December 28,
1997, respectively.
6
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
4. INVENTORIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JANUARY 3, 1999 SEPTEMBER 27, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Inventories consist of:
Purchased parts and sub-assemblies $ 21,938 $ 22,020
Work in process 8,091 1,145
Finished goods 47,851 59,217
- --------------------------------------------------------------------------------------------
77,880 82,382
Less reserves (3,769) (4,071)
- --------------------------------------------------------------------------------------------
$ 74,111 $ 78,311
- --------------------------------------------------------------------------------------------
</TABLE>
5. SERVICE PARTS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JANUARY 3, 1999 SEPTEMBER 27, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Service parts consist of:
Field service parts, at cost $ 28,803 $26,327
Less accumulated depreciation (9,584) (8,264)
- --------------------------------------------------------------------------------------------
$19,219 $18,063
- --------------------------------------------------------------------------------------------
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JANUARY 3, 1999 SEPTEMBER 27, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed assets, at cost, consist of:
Production and test equipment $ 5,448 $ 4,351
Field service equipment 1,187 1,168
Office and demonstration equipment 17,238 14,401
Leasehold improvements 1,329 1,261
- --------------------------------------------------------------------------------------------
25,202 21,181
Less accumulated depreciation and
Amortization (11,286) (10,174)
- --------------------------------------------------------------------------------------------
$ 13,916 $ 11,007
- --------------------------------------------------------------------------------------------
</TABLE>
7. INTANGIBLES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JANUARY 3, 1999 SEPTEMBER 27, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Intangibles consist of:
Goodwill $ 22,272 $ 21,849
Acquired technology 8,984 8,984
Other 510 510
- --------------------------------------------------------------------------------------------
31,766 31,343
Less accumulated amortization (6,758) (6,007)
- --------------------------------------------------------------------------------------------
$ 25,008 $ 25,336
- --------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
8. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JANUARY 3, 1999 SEPTEMBER 27, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Other accrued liabilities consist of:
Accrued cost of revenue $ 3,205 $ 3,354
Accrued legal and accounting 1,666 194
Accrued restructuring 2,500 --
Accrued royalties 899 956
Customer advances 2,364 2,775
Other accrued expenses 7,868 7,144
- --------------------------------------------------------------------------------------------
$ 18,502 $ 14,423
- --------------------------------------------------------------------------------------------
</TABLE>
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 January 3, 1999, the Company
had $21.7 million available for borrowing under this facility. The
Company's delay in delivering financial statements and related
information to its banks in connection with the restatement constituted
a default under the facility. The banks have waived the default and
consented to an extension of the time required to provide the
information. The Company expects to deliver all required information
within the time period required by the banks.
10. LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits
were filed in federal court by or on behalf of stockholders who
purchased Company stock between January 10, 1996 and December 28, 1998.
These actions name as defendants the Company and certain of its present
officers and directors. The complaints allege various violations of the
federal securities laws in connection with restatement of the Company's
financial statements and seek unspecified but potentially significant
damages. The Company intends to contest these actions vigorously. A
stockholder derivative action, purportedly on behalf of the Company and
naming as defendants Company officers and directors was also filed in
state court seeking recovery for the Company based on stock sales by
these defendants during the above time period. The Company is also 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, results of
operations or cash flow.
11. 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 January 3, 1999 and
December 28, 1997 are based on the estimated effective income tax rates for
the fiscal years ending October 3, 1999 and September 27, 1998 of 38% and
39%, respectively.
8
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
12. NON-ORDINARY ITEMS
On September 27, 1998, the Company concluded a comprehensive review of
its operations and decided to restructure its international organizations.
As a result, the Company took a charge in the fiscal first quarter of 1999
of $2.5 million. The Company believes these actions will position the
Company well to expand its international profitability.
On February 10, 1998, the Company decided to discontinue the HCIS
business unit's LabStat product while retaining the laboratory support
and maintenance business. The decision was made after the Company's
Board of Directors 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. This decision has allowed the Company to
increase its focus on the radiology business resulting in greater
profitability for both HCIS and ADAC as a whole.
The Company's decision to discontinue LabStat resulted in a
non-ordinary discontinued product charge of $11.6 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 became impaired as a result of the Company's
decision. The discontinued business charge consisted principally of
non-cash charges, including the write off of $4.9 million of
capitalized software, $4.7 million of deferred product costs, $0.9
million of fixed assets that were specifically utilized in the LabStat
product, $1.0 million in legal and other expenses that were accrued as
part of the write-off and $0.1 million in receivables.
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 of $2.9 million in its results of
operations for the first quarter of fiscal 1998 related to these
assets. The decision to write off the DSA assets, consisting primarily
of inventory, was a result of the Company's decision to no longer
market the product due to steadily declining revenues. The combined
non-ordinary write off for LabStat and DSA was $14.5 million.
13. RECENT PRONOUNCEMENTS
In 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. This
statement expands or modifies disclosures and will have no impact on the
Company's consolidated financial position, results of operations or cash
flows.
In 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP 98-9"), " Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions". This
SOP amends "SOP 97-2", Software Revenue Recognition. The Company will
comply with the requirements of SOP 98-9 in fiscal year 2000. The Company
is currently assessing the implications of this new statement and the
impact of its implementation on the financial statements
9
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
14. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the Company's announcement on November 5, 1998 of the
results of operations for its fourth fiscal quarter and fiscal year
ending September 27, 1998, the Company commenced a review of its
accounting principles and their historic application. On December 29,
1998, the Company announced that its financial results for fiscal years
1996, 1997 and the first three quarters of fiscal 1998 would be
restated and that its previously announced results for the fourth
fiscal quarter would change.
The Company completed an extensive and critical review of revenue
recorded for each year of fiscal 1996 through 1998. In deciding when
revenue would be recognized, the Company applied a more stringent revenue
recognition policy than it had in the past. The items recognized and
restated were primarily certain sales transactions by the Company's Medical
Systems business unit where products sold had been shipped to a destination
other than their final installation location. The primary impact of the
revenue restatement was to move revenue and associated costs forward to
future periods, including fiscal 1999. Costs, expenses and return reserves
associated with the restated revenues were also adjusted.
The Company adjusted a number of non-ordinary charges taken during the
restated periods. The adjustments included a reduction in the acquired
in-process research and development charge taken in the third quarter of
fiscal 1997 to reflect recent SEC interpretations. The Company also reduced
the non-ordinary international restructuring charge taken in the fourth
quarter of fiscal 1998 and moved it forward to fiscal 1999 due to a delay
in implementing certain aspects of the plan. In addition, the Company
adopted completed contract accounting for the LabStat product, which
resulted in the Company's reversing approximately $6 million of revenues
(together with associated costs) previously recognized in fiscal 1996 and
1997, and correspondingly reducing the non-ordinary charge for the
discontinuation of the LabStat product previously taken in the first
quarter of fiscal 1998.
The Company also undertook a review of its asset carrying values, accruals
and expenses, financial instruments and financial statements in each
restated period and made certain adjustments to these items throughout
those periods. The Company also restated the Geometrics acquisition from
pooling accounting to purchase accounting.
15. COMPREHENSIVE INCOME
Effective September 28, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
displaying income and its components (revenue, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires the classification of items of comprehensive income
by their nature in a financial statement and the accumulated balance of
other comprehensive income separately accumulated other comprehensive
income in the in the equity section of the balance sheet. The Company's
accumulated other comprehensive income consists solely of translation
adjustments. Comprehensive income (loss) for the first three months of
fiscal 1999 and fiscal 1998 was $31,000 and $(741,000), respectively.
Net income (loss) including comprehensive income (loss) for the first
three months of fiscal 1999 and fiscal 1998 was $3,887,000 and
$(6,217,000), respectively.
10
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
A summary of the effects of the restatement follows:
<TABLE>
<CAPTION>
DECEMBER 28, 1997
----------------------------------------------------------
(Amounts in thousands, except per share data) Restated As Originally Reported
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES, NET:
Product $48,019 $55,853
Service 19,419 19,670
- ----------------------------------------------------------------------------------------------------------------
67,438 75,523
- ----------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Product 27,160 31,339
Service 11,843 12,276
Discontinued product 14,494 3,500
- ----------------------------------------------------------------------------------------------------------------
53,497 47,115
- ----------------------------------------------------------------------------------------------------------------
Gross profit 13,941 28,408
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing and sales 11,558 11,601
Research and development 5,318 4,361
General and administrative 4,587 4,285
Goodwill amortization 492 375
Discontinued product -- 12,900
- ----------------------------------------------------------------------------------------------------------------
21,955 33,522
- ----------------------------------------------------------------------------------------------------------------
Operating loss (8,014) (5,114)
- ----------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Interest and other, net 963 949
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (8,977) (6,063)
Benefit for income taxes (3,501) (2,365)
- ----------------------------------------------------------------------------------------------------------------
Net loss $(5,476) $(3,698)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Net income per share
Basic $ (.29) $ (.19)
Diluted $ (.29) $ (.19)
Number of shares used in per share calculations
Basic 18,967 19,060
Diluted 18,967 19,060
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
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 January 3, 1999 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 27, 1998.
RESULTS OF OPERATIONS
THE THREE-MONTH PERIOD ENDED JANUARY 3, 1999 COMPARED TO THE THREE-MONTH
PERIOD ENDED DECEMBER 28, 1997.
Prior to the third quarter of fiscal 1998, the results of the Company's RTP
division were considered immaterial and were therefore included as part of
Medical Systems for the purposes of Management's Discussion and Analysis.
However, due to RTP's continued growth, its results are now presented with
the Company's other software business, HCIS. All historical data and
comparisons have been restated to reflect this change
Revenues for the first quarter fiscal 1999 were $94.3 million, a 40% increase
over the first quarter of fiscal 1997 revenues of $67.4 million. Medical
Systems revenues represented 79% and 80% of the Company's total revenues for
the first quarter of fiscal 1998 and 1997, respectively. The Company's
Software business revenues represented approximately 21% and 20% of the
Company's total revenues in the fist quarters of fiscal 1999 and 1998,
respectively. Gross profit for the first quarter of fiscal 1999 totaled
$38.6 million, an increase of 36% over gross profit of $28.4 million in the
first quarter of fiscal 1998, when factoring out the effect of the
discontinued product charge of $14.5 million. See Note 12 "Non-Ordinary
Items" of Notes to Condensed Consolidated Financial Statements.
MEDICAL SYSTEMS
Medical Systems includes revenues from the Company's nuclear medicine
business unit as well as, AMT and ARS, the Company's nuclear and CT
refurbishing business units. Medical Systems also includes 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 1999 compared to the first quarter of fiscal 1998, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JANUARY 3, 1999 DECEMBER 28, 1997
(Dollar amounts in thousands) (Restated)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Product $55,053 $38,789
Service 19,272 15,333
------- -------
Total $74,325 $54,122
Geographical mix:
North America 88.6% 82.7%
Europe 5.7% 12.2%
Latin America, Japan and Asia 5.7% 5.1%
Gross profit:
Product $22,120 $13,094
Service 4,546 5,695
------- -------
Total $26,666 $18,789
Gross margin:
Product 40.2% 33.8%
Service 23.6% 37.1%
------- -------
Total 35.9% 34.7%
</TABLE>
12
<PAGE>
Medical Systems' product revenues increased 42% from the first quarter of fiscal
1998 to the first quarter of fiscal 1999. The product revenue increase in the
first quarter of fiscal 1999 was due to strong sales of the Company's nuclear
refurbishing business (AMT) and the CT refurbishing business (ARS) and the
timing of delivery for installations. Geographically this growth occurred
principally in the North American market. Latin America also showed an increase
in revenues, which offset declines in European revenues.
Product gross profit margins were 40% for the first quarter of fiscal 1999.
Margins increased primarily due to higher margins and sales of Molecular
Coincidence Detection (MCD-TM-). Additionally, margins in the first quarter of
fiscal 1998 were negatively impacted by a non-ordinary discontinued product
charge for DSA. See Note 12 "Non-Ordinary Items" of Notes to Condensed
Consolidated Financial Statements.
Medical Systems service revenues increased 26% from the first quarter of fiscal
1998 to the first quarter of fiscal 1999. This increase resulted from a higher
number of customers under service contracts and, to a lesser extent from the
Company's launch of the ARS business in fiscal 1998. Service margins decreased
for the first quarter of fiscal 1999, when compared to the first quarter of
fiscal 1998, due to increased staffing, higher retro-fit costs and the lower
margins associated with the ARS business.
SOFTWARE BUSINESS
ADAC's Software Business includes RTP and HCIS. RTP revenues are generated
primarily from the sale and support of the Company's Pinnacle3(-TM-) radiation
therapy planning system. HCIS historically generated revenues from the sale of
radiology, laboratory and cardiology information systems as well as from
providing support for these products. In the first quarter of fiscal 1998, the
Company took a one-time charge of $11.6 million to discontinue the development
and marketing of LabStat, its laboratory information system product. As a
result, the Company was able to increase its focus on the radiology business
resulting in greater profitability for both HCIS and ADAC as a whole. See Note
12 "Non-Ordinary Items" of Notes to Condensed Consolidated Financial Statements.
HCIS' current revenues are derived from the sale and support of radiology and
cardiology information systems and the support of the Company's legacy
laboratory information systems. Summary information related to the Software
Business product and support revenues and gross profit margins for the first
quarter of fiscal 1999 compared to the first quarter of fiscal 1998 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JANUARY 3, 1999 DECEMBER 28, 1997
(Dollar amounts in thousands) (Restated)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Product $15,852 $ 9,230
Service 4,102 4,086
------- -------
Total $19,954 $13,316
Gross profit:
Product $ 9,701 $(6,729)
Service 2,248 1,881
------- -------
Total $11,949 $(4,848)
Gross margin:
Product 61.2% (72.9%)
Service 54.8% 46.0%
------- -------
Total 59.9% (36.4%)
</TABLE>
Software Business product revenues increased 72% from the first quarter of
fiscal 1998 to the first quarter of fiscal 1999. The increase from fiscal
1998 was due mainly to an increase in sales of Pinnacle3 and the Company's
radiology information system, QuadRIS-TM-. The growth of Pinnacle3 and
QuadRIS-TM- reflects greater penetration of the commercial sector by both
these products. Product gross margins also improved over the prior year same
period, which gross margin was 52.8% excluding the effects of the
discontinued product charge associated with the write-off of the LabStat
assets. The improvement to gross margin was due to increased sales of the
higher margined Pinnacle3 and QuadRIS-TM- products, and cost reduction
associated with the LabStat write-off in fiscal 1998. See Note 12
"Non-Ordinary Items" Notes to Condensed Consolidated Financial Statements.
13
<PAGE>
The Software Business support revenues remained relatively unchanged in
the first quarter of fiscal 1999 compared with the first quarter of
fiscal 1998. Gross margins on support revenues were higher for fiscal 1999
due to an increase in the QuadRIS installed base, partially offset by
fewer support contract renewals from the Company's legacy client base.
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
------------------
JANUARY 3, 1999 DECEMBER 28, 1997
(Restated)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating costs and expenses:
Marketing and sales 16.4% 17.1%
Research and development,
net of software capitalization 4.6% 7.9%
General and administrative 8.8% 6.8%
Goodwill amortization 0.5% 0.7%
Restructuring charge 2.7% --
-------- --------
33.0% 32.5%
-------- --------
-------- --------
Other expense, net 1.3% 1.4%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Marketing and sales expenses decreased as a percentage of revenue from the
first quarter on fiscal 1998 to the same quarter in fiscal 1999 due to the
increase in sales. Marketing and sales expenses increased in dollar volume
from the first quarter of fiscal 1998 to the first quarter of fiscal 1999
primarily due to an increase in RTP and HCIS sales representatives.
Research and development expenditures, net of software capitalization,
totaled $4.4 million and $5.3 million in the first quarter of fiscal 1999 and
1998, respectively. Research and development expenditures, net of software
capitalization, decreased by $0.9 million in the first quarter of fiscal
1999 from the same quarter in fiscal 1998 as a result of increased
capitalized software costs. Capitalized software costs were $3.0 million and
$1.5 million in the first quarter of fiscal 1999 and 1998 respectively.
General and administrative expenses increased as a percentage of sales and
increased in dollar volume from the first quarter of fiscal 1998 to the first
quarter of fiscal 1999 due to increased bad debt expenses ($.5 million)
related to the devaluation of Brazilian currency and outside service expense
($1.6 million) relating to the restatement of the financial statements. See
Note 14 of Notes to Consolidated Financial Statements.
Goodwill amortization expense was relatively flat from the first quarter
of fiscal 1998 to the first quarter of fiscal 1999, but decreased as a
percentage of sales volume due to increased sales.
In the first quarter of fiscal 1999, the Company recognized Non-ordinary,
pre-tax charge of approximately $2.5 million to restructure its international
operation. See Note 12 "Non-ordinary Items" of Notes to Condensed
Consolidated Financial Statements.
In the first quarter of fiscal 1998, the Company recognized a $11.6
million one-time, pre-tax charge in connection with its decision to
discontinue its LabStat product. See Note 12 "Non-Ordinary Items" of
Notes to Condensed Consolidated Financial Statements.
Interest and other expense, net, which primarily consists of interest
expense and foreign currency transaction gains and losses, remained
relatively unchanged as a percentage of revenue for the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998. The dollar
volume of interest and other expense increased in the first quarter of
fiscal 1999 from the same quarter in fiscal 1998 due primarily to increased
interest on higher borrowings, partially offset by foreign currency gains.
14
<PAGE>
INCOME TAXES:
The effective tax rate as a percentage of pretax income was 38.0% for the
first three months of fiscal 1999, compared with 39.0% for the first three
months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its available cash resources, generated primarily from
operations and credit lines, will provide adequate funds to finance the
Company's operations in fiscal 1999. If necessary the Company will seek to
increase its credit line to support the Company's future growth.
The Company's ratio of current assets to current liabilities was 1.6 to one
and 1.7 to one at the end of the first quarter of fiscal 1999 and the fourth
quarter of fiscal 1998, respectively. Working capital increased $1.2 million
to $62.1 in the first quarter of fiscal 1999 from $60.9 million in the fourth
quarter of fiscal 1998.
The primary uses of cash in the first quarter of fiscal 1999 were a $24.7
million increase in accounts receivable and a decrease of $6.1 million in
accounts payable. Accounts receivable increased due to higher sales and
slower collections, while accounts payable increased due to the timing of
payments to vendors.
Cash used for investing activities for the first quarter of fiscal 1999 of
$5.8 million included capital expenditures for office, manufacturing and
research and development equipment and capitalized software research and
development costs in both the Medical Systems and Software Business units.
Financing activities provided $16.5 million in cash in the first quarter of
fiscal 1999. This was primarily attributable the increase in bank loans. The
Company had $38.3 million of borrowings outstanding under the Company's lines
of credit at January 3, 1999 compared to $23.4 million at September 27, 1998.
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. These
statements, including the forward looking statements contained in this Form
10-Q, 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.
LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits were
filed in federal court by or on behalf of stockholders who purchased Company
stock between January 10, 1996 and December 28, 1998. These actions name as
defendants the Company and certain of its present officers and directors. The
complaints allege various violations of the federal securities laws in
connection with restatement of the Company's financial statements and seek
unspecified but potentially significant damages. The Company intends to
contest these actions vigorously. A stockholder derivative action,
purportedly on behalf of the Company and naming as defendants Company
officers and directors was also filed in state court seeking recovery for the
Company based on stock sales by these defendants during the above time
period. The Company is also a defendant in various legal proceedings
incidental to its business.
15
<PAGE>
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, results of operations or cash
flow.
GOVERNMENT REGULATION
The design, clinical activities, manufacturing, labeling, distribution, sale,
marketing, advertising and promotion of the Company's products are subject to
extensive and rigorous governmental regulation in the United States and foreign
countries. In the United States and certain foreign countries, the process of
obtaining and maintaining required regulatory clearances or approvals is
lengthy, expensive and uncertain. There can be no assurance that any necessary
clearance or approval will be granted the Company or that FDA or other
regulatory agency review will not involve delays adversely affecting the
Company. In addition, a failure to comply with applicable regulatory
requirements could result in enforcement actions including Warning Letters, 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, which could have a material adverse effect upon the Company.
Following an inspection in mid-1997, Cortet, Inc., which the Company acquired in
May 1997, received a Warning Letter from the FDA concerning inspectional
observations relating to the adequacies of Cortet's quality assurance system.
Cortet responded to the observations and the Warning Letter and received
correspondence from the FDA's Florida District Office indicating that Cortet's
responses appeared to adequately address the FDA's concerns. In mid-1998, the
State of California, under a contract with the FDA, completed a routine
inspection of ADAC's facility in Milpitas, California. The state investigator
issued a FDA Form 483 containing observations of non-compliance of the recently
implemented QSR. The state investigator also placed a temporary shipment hold on
Pinnacle3 pending the Company satisfactorily responding to the State's concerns
regarding the Company's quality systems. The Company promptly responded to the
FDA and the State and initiated a number of corrective actions. The State lifted
the Pinnacle3 shipment hold on August 28, 1998 and, in September 1998, ADAC
received a letter from the FDA indicating that the Company had adequately
responded to the FDA's concerns. Although the Company was deemed to have
adequately responded to the State and FDA following the foregoing inspections,
the Company is responsible for the full implementation of all corrective
actions. In addition, as all companies are, the Company remains subject to
periodic inspections in the future and there can be no assurance as to the
timing or outcome of any subsequent inspection. The scope of any re-inspection
could be more comprehensive than the inspections of Cortet and the Company's
Milpitas facility, and there can be no assurance that the FDA, upon
re-inspection, will deem the Company's corrective actions to be adequate or that
additional corrective action, in areas not addressed in the Warning Letter or
the Form 483, will not be required. Any failure by the Company to fully
implement the required corrective actions or to comply with any other applicable
regulatory requirements could have a material adverse effect on the Company's
ability to continue to manufacture and distribute its products, and in more
serious cases, could result in seizure, recall, injunction and/or civil fines.
Any of the foregoing, would have a material adverse effect on the Company.
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.
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, which could have a material adverse effect on the
Company's business.
16
<PAGE>
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 markets in which the Company competes are
highly competitive, the Company must continue to develop and successfully
commercialize innovative new products and product enhancements such as Forte,
MCDPET, MCD/ACPET and ENVOI in order to pursue its growth strategy. 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. Failure of the Company to develop, market and sell new products
and enhancements effectively in future periods could have a material adverse
effect on the Company's results of operations and financial condition.
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 installation scheduling, 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, which
is typical for the industry. 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, customer financing and other factors. Accordingly,
there can be no assurance that orders will mature into revenue. The Company
has accounts receivable due from customers in Latin America. Recent changes
in economic conditions in that region, including the devaluation of Brazilian
currency, may adversely affect the Company's ability to collect these
accounts receivable. If the Company were unable to collect a substantial
majority of these accounts receivable, the Company's results of operations
for a quarterly period could be adversely affected.
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 businesses.
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 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
The following statements are a "Year 2000 Readiness Disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure
Act. 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 one year, 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. Although management is
continuing to assess the expense associated with internal Year 2000
compliance, the Company does not believe such compliance will have a
material adverse effect on the Company's results of operations or
financial condition.
17
<PAGE>
The Company has completed an assessment and analysis of its internal
information technology systems, software and manufacturing equipment. The
Company has implemented plans to correct its internal Year 2000 issues, and
expects to have its remediation process substantially completed by early
1999. While the Company currently expects that the Year 2000 will not pose
significant internal operational problems, delays in the implementation of
new information systems, or a failure to fully identify all Year 2000
dependencies in the Company's systems, could have a material adverse effect
on the Company's results of operations.
The Company has established a program to assess its products to ensure that
they are Year 2000 compliant. To monitor this program and to inform
customers about the Year 2000 issues with respect to its products, the
Company has created a website at www.adaclabs.com/about/year20001.html. This
website identifies the status of Year 2000 compatibility of its products,
including products that are Year 2000 compliant, products that need free
software updates, products that require hardware upgrades, and products that
cannot be made Year 2000 compliant. This list is periodically updated as
analysis of additional products is completed.
The Company will sell, or provide under warranty or service contracts,
software license upgrades to update the majority of its installed base to
make the products Year 2000 compliant, and anticipates completing development
of such upgrades in mid-1999. For older equipment which the Company no
longer manufactures, the Company will sell hardware upgrades to its customers
which will address the Year 2000 compliance where possible. The Company is
contacting by mail customers which require computer hardware upgrades, and is
also posting information relating to Year 2000 compliance for its products on
the Company's website as described above.
The Company is gathering information from its suppliers and vendors to
determine the extent to which the Company's capabilities are vulnerable
to failure by those third parties to remedy their own Year 2000 issues.
The Company is currently receiving responses to those inquiries and
anticipates that the analysis of this information will be completed by
mid-1999. The Company will proceed with further analysis or testing of
its vendors' systems as needed. However, there is no guarantee that the
systems and products of other companies on which the Company relies will be
timely converted or that they will not have a material adverse effect on the
Company.
The Company is in the process of developing a contingency plan. This plan is
expected to be in place in the first half of mid-1999. The inability of the
Company to develop and implement a contingency plan could result in a material
adverse effect on the Company.
The Company currently estimates that total Year 2000 costs will be approximately
$1.2 million, of which $0.2 million has already been incurred. These cost
estimates do not include any potential costs related to any customer or other
claim. In addition, these cost estimates are based on current assessments of the
ongoing activities described above, and are subject to changes as the Company
continuously monitors these activities. The Company believes any modifications
deemed necessary will be made on a timely basis and does not believe that the
costs of such modifications will have a material adverse effect on the Company's
operating results; however, the Company's expectations as to the extent and
timeliness of any modifications required in order to achieve Year 2000
compliance and the costs related thereto are forward-looking statements subject
to risks and uncertainties. Actual results may vary as a result of number of
factors, including those described herein. There can be no assurance that the
Company will be able to successfully modify on a timely basis such products,
services and systems to comply with Year 2000 requirements, which failure could
have a material adverse effect on the Company's operating results.
In addition, the Company is currently seeking to ensure that the software
included in its products 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.
18
<PAGE>
HEALTH CARE REFORM; REIMBURSEMENT AND PRICING PRESSURE
There is significant concern today about the availability and rising cost of
healthcare in the United States. Cost containment initiatives, market
pressures and proposed changes in applicable laws and regulations may have a
dramatic effect on pricing or potential demand for medical devices, the
relative costs associated with doing business and the amount of reimbursement
by both government and third party payors, which could have a material
adverse effect on the Company's results of operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part on its continued ability to obtain
patents, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. There can be no assurance that pending
patent applications will mature into issued patents or that third parties
will not make claims of infringement against the Company's products or
technologies or will not be issued patents that may require payment of
license fees by the Company or prevent the sale of certain products by the
Company.
RELIANCE ON SUPPLIERS
Certain components used by the Company to manufacture its products such as
the sodium iodide crystals used in the Company's nuclear medicine systems are
presently available from only one supplier. The Company also relies on
several significant vendors for hardware and software components for its
healthcare information systems products. The loss of any of these suppliers,
including any single-source supplier, would require obtaining one or more
replacement suppliers as well as potentially requiring a significant level of
hardware and software development to incorporate the new parts into the
Company's products. Although the Company has obtained insurance to protect
against loss due to business interruption from these and other sources, there
can be no assurance that such coverage would be adequate.
PRODUCT LIABILITY
Although the Company maintains product liability insurance coverage in an
amount that it deems sufficient for its business, there can be no assurance
that such coverage will ultimately prove to be adequate or that such coverage
will continue to remain available on acceptable terms, if at all.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is and is expected to continue to
be subject to significant fluctuations in response to variations in anticipated
or actual operating results, market speculation, announcements of new products
or technology by the Company or its competitors, changes in earnings estimates
by the Company's analysts, trends in the health care industry in general and
other factors, many of which are beyond the control of the Company. In addition,
broad market fluctuations as well as general economic or political conditions or
initiatives, such as health care reform, may adversely impact the market price
of the Common Stock regardless of the Company's operating results.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
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.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 26, 1999
ADAC Laboratories
-----------------
(Registrant)
BY: /s/ P. Andre Simone
-------------------
P. Andre Simone
Vice President and Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> JAN-03-1999
<CASH> 1,545
<SECURITIES> 0
<RECEIVABLES> 81,910
<ALLOWANCES> (2,615)
<INVENTORY> 74,111
<CURRENT-ASSETS> 168,987
<PP&E> 25,202
<DEPRECIATION> 11,286
<TOTAL-ASSETS> 266,322
<CURRENT-LIABILITIES> 106,872
<BONDS> 0
0
0
<COMMON> 151,162
<OTHER-SE> (8,810)
<TOTAL-LIABILITY-AND-EQUITY> 266,322
<SALES> 70,906
<TOTAL-REVENUES> 94,279
<CGS> 39,085
<TOTAL-COSTS> 55,664
<OTHER-EXPENSES> 31,156
<LOSS-PROVISION> 705
<INTEREST-EXPENSE> 1,173
<INCOME-PRETAX> 6,219
<INCOME-TAX> 2,363
<INCOME-CONTINUING> 3,856
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,856
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
