<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-9428
ADAC LABORATORIES
-----------------
(Exact name of registrant as specified in its charter)
California 94-1725806
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
540 Alder Drive
Milpitas, California 95035
-------------------- -----
(Address of principal executive offices) (Zip Code)
(408) 321-9100
--------------
(Registrant's telephone number including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---
As of February 1, 1999, Registrant had outstanding 20,450,067 shares of
Common Stock, no par value.
(This document contains a total of 27 pages)
<PAGE>
ADAC LABORATORIES
QUARTERLY REPORT ON FORM 10-Q/A
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the 3
Three-Month and Six-Month Periods Ended March 29, 1998 and
March 30, 1997
Condensed Consolidated Balance Sheets at March 29, 1998 and September 28, 1997 4
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended 5
March 29, 1998 and March 30, 1997
Notes to Condensed Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-23
Part II. Other Information
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 26
Exhibit Index 27
27 Financial Data Schedule
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
1998 1997 1998 1997
(Amounts in thousands, except per share data) (Restated) (Restated) (Restated) (Restated)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, NET:
Product $ 53,801 $ 44,690 $ 101,820 $ 91,108
Service 20,721 16,865 40,140 33,526
-------- -------- --------- --------
74,522 61,555 141,960 124,634
-------- -------- --------- --------
COST OF REVENUES:
Product 28,990 24,235 56,150 54,258
Service 13,853 11,191 25,696 22,356
Discontinued product -- -- 14,494 --
-------- -------- --------- --------
42,843 35,426 96,340 76,614
-------- -------- --------- --------
GROSS PROFIT 31,679 26,129 45,620 48,020
-------- -------- --------- --------
OPERATING EXPENSES:
Marketing and sales 11,915 10,366 23,473 20,574
Research and development 3,963 3,589 9,281 6,899
General and administrative 5,473 4,700 10,060 8,253
Goodwill amortization 545 251 1,037 449
-------- -------- --------- --------
21,896 18,906 43,851 36,175
-------- -------- --------- --------
OPERATING INCOME 9,783 7,223 1,769 11,845
-------- -------- --------- --------
Interest and other expense, net 965 1,410 1,928 2,619
-------- -------- --------- --------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 8,818 5,813 (159) 9,226
Provision (benefit) for income tax 3,439 2,267 (62) 3,598
-------- -------- --------- --------
NET INCOME (LOSS) $ 5,379 $ 3,546 $ (97) $ 5,628
-------- -------- --------- --------
-------- -------- --------- --------
NET INCOME (LOSS) PER SHARE
Basic $ .28 $ .19 $ (.01) $ .31
-------- -------- --------- --------
-------- -------- --------- --------
Diluted $ .27 $ .18 $ (.01) $ .29
-------- -------- --------- --------
-------- -------- --------- --------
NUMBER OF SHARES USED IN PER SHARE CALCULATION
Basic 19,226 18,271 19,097 18,135
-------- -------- --------- --------
-------- -------- --------- --------
Diluted 20,223 19,456 19,097 19,363
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 29, SEPTEMBER 28,
1998 1997
(Unaudited)
(Amounts in thousands) (Restated) (Restated)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,106 $ 5,088
Accounts receivable, net 53,380 48,572
Inventories, net 60,630 52,672
Prepaid expenses and other current assets 3,579 3,570
- --------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 122,695 109,902
Service parts, net 17,706 16,469
Fixed assets, net 9,632 9,789
Capitalized software, net 8,988 12,265
Intangibles, net 31,542 21,703
Deferred income taxes 23,625 21,702
Other assets, net 2,451 3,269
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $216,639 $195,099
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 29,704 $ 22,217
Accounts payable 17,363 10,543
Deferred revenues 11,540 15,017
Customer deposits and advanced billings 1,952 2,826
Accrued compensation 7,077 7,567
Warranty and installation 6,926 3,713
Other accrued liabilities 10,886 7,222
- --------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 85,448 69,105
Deferred income taxes 12,259 13,830
Liabilities and deferred credits 4,240 4,073
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 101,947 87,008
- --------------------------------------------------------------------------------------------
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 135,793 128,109
March 29, 1998 and 18,812 shares at
September 28, 1997
Accumulated deficit (17,748) (17,652)
Translation adjustment (3,353) (2,366)
- --------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 114,692 108,091
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $216,639 $195,099
- --------------------------------------------------------------------------------------------
</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>
SIX MONTHS ENDED
----------------
MARCH 29, MARCH 30,
1998 1997
(Amounts in thousands) (Restated) (Restated)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (97) $ 5,628
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,216 5,204
Provision for product returns and doubtful accounts 2,530 (52)
Deferred income taxes (3,729) 4,338
Inventory allowance 433 3,701
Discontinued products 14,494 --
Changes in assets and liabilities:
Accounts receivable (9,908) 3,008
Inventories (15,548) (6,639)
Prepaid expenses and other current assets (1) 2,150
Service parts (1,746) (1,819)
Accounts payable 6,155 (3,638)
Deferred revenues (1,354) (898)
Customer deposits and advance billings (874) (411)
Accrued compensation (490) 342
Warranty and other accrued liabilities 4,919 (667)
Non-current liabilities and deferred credits (21) (904)
- ----------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 979 9,343
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,362) (3,400)
Increase in other assets (2,666) (2,106)
Intangibles (7,134) (7,264)
Acquisition assets, net 807 --
- ----------------------------------------------------------------------------------------------------
Cash used in investing activities (11,355) (12,770)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short term
debt arrangements, net 6,496 (427)
Dividends paid -- (2,137)
Proceeds from issuance of common stock, net 4,885 9,470
- ----------------------------------------------------------------------------------------------------
Cash provided by financing activities 11,381 6,906
- ----------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (987) (1,152)
- ----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 18 2,327
Cash and cash equivalents, at beginning of the period 5,088 3,081
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of the period $ 5,106 $ 5,408
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 1,928 $ 1,999
Income taxes paid $ 2,668 $ 1,602
NON-CASH INVESTING ACTIVITIES:
Issuance of common stock pursuant to the acquisition of SCI (see
Note 13)
</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/A and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for annual
financial statements. In the opinion of management, the condensed
interim consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the information
required to be included. Operating results for the three- and six-month
periods ended March 29, 1998 are not necessarily indicative of the
results that may be expected for any future periods, including the full
fiscal year. Reference should also be made to the Annual Consolidated
Financial Statements, Notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in
the Company's Annual Report on Form 10-K for the fiscal year ended
September 27, 1998.
The previous year-end's balance sheet data was derived from audited
financial statements but does not include all disclosures required by
generaly accepted accounting principles.
2. NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, (SFAS 128),
Earnings per Share (EPS). SFAS 128 requires dual presentation of basic
EPS and diluted EPS on the face of all income statements, for all
entities with complex capital structures. Basic EPS is computed as net
income divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options,
warrants and other convertible securities. This statement also requires
a reconciliation of the numerator and denominator of the diluted EPS
computation. EPS data for the period ended March 29, 1998 and all prior
periods have been restated to conform with the provisions of this
statement.
The following is a reconciliation of the numerator (net income) and
denominator (number of shares) used in the basic and diluted EPS
calculation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(Dollar amounts in thousands except MARCH 29, MARCH 30, MARCH 29, MARCH 30,
per share data) 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS: Net Income (loss) $ 5,379 $ 3,546 $ (97) $ 5,628
Denominator: Weighted Average
Common Shares Outstanding 19,226 18,271 19,097 18,135
--------- --------- --------- --------
Basic EPS $ .28 $ .19 $ (.01) $ .31
--------- --------- --------- --------
--------- --------- --------- --------
Diluted EPS: Net Income (loss) $ 5,379 $ 3,546 $ (97) $ 5,628
Denominator: Weighted Average
Common Shares Outstanding 19,226 18,271 19,097 18,135
Options 997 1,185 -- 1,228
--------- --------- --------- --------
Total Shares 20,223 19,456 19,097 19,363
--------- --------- --------- --------
--------- --------- --------- --------
Diluted EPS $ .27 $ .18 $ (.01) $ .29
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
3. DEPRECIATION AND AMORTIZATION
Depreciation and amortization was approximately $2.8 million and $2.6
million for the three-month periods ended March 29, 1998 and March 30, 1997,
respectively.
6
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVENTORIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Inventories consist of:
Purchased parts and sub-assemblies $17,960 $15,499
Work in process 4,701 3,435
Finished goods 42,108 38,594
--------------------------------------------------------------------------------
64,769 57,528
Less reserves (4,139) (4,856)
--------------------------------------------------------------------------------
$60,630 $52,672
--------------------------------------------------------------------------------
</TABLE>
5. SERVICE PARTS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Service parts consist of:
Field service parts, at cost $25,610 $23,844
Less accumulated depreciation (7,904) (7,375)
--------------------------------------------------------------------------------
$17,706 $16,469
--------------------------------------------------------------------------------
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Fixed assets, at cost, consist of:
Production and test equipment $ 3,923 $ 9,144
Field service equipment 1,054 2,443
Office and demonstration equipment 12,573 15,166
Leasehold improvements 1,033 1,181
--------------------------------------------------------------------------------
18,583 27,934
Less accumulated depreciation and
amortization (8,951) (18,145)
--------------------------------------------------------------------------------
$ 9,632 $ 9,789
--------------------------------------------------------------------------------
</TABLE>
7. INTANGIBLES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Intangibles consist of:
Goodwill $26,554 $15,140
Acquired technology 8,984 8,984
Other 510 510
--------------------------------------------------------------------------------
36,048 24,634
Less accumulated amortization (4,506) (2,931)
--------------------------------------------------------------------------------
$31,542 $21,703
--------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Other accrued liabilities consist of:
Accrued cost of revenue $ 671 $ 367
Accrued royalties 873 790
Other accrued expenses 9,342 6,065
--------------------------------------------------------------------------------
$10,886 $7,222
--------------------------------------------------------------------------------
</TABLE>
9. DISCONTINUED PRODUCT CHARGES
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. 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.
10. 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
and 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%.
8
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. 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.
12. 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.
13. ACQUISITIONS
In January 1998, the Company acquired CT Solutions, Inc. (CT Solutions)
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. CT Solutions and ONES are not material
to the financial position or results of operations of the Company.
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 valued at $2.8
million. 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.
Southern Cats is not material to the financial position or results of
operations of the Company.
9
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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.
10
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the effects of the restatement follows:
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
MARCH 29, 1998 MARCH 30, 1997
------------------------------------------------
As As
Originally Originally
(Amounts in thousands, except per share data) Restated Reported Restated Reported
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, NET:
Product $53,801 $56,584 $44,690 $52,922
Service 20,721 20,794 16,865 17,054
- --------------------------------------------------------------------------------------------------
74,522 77,378 61,555 69,976
- --------------------------------------------------------------------------------------------------
COST OF REVENUES:
Product 28,990 31,046 24,235 30,222
Service 13,853 13,388 11,191 10,766
- --------------------------------------------------------------------------------------------------
42,843 44,434 35,426 40,988
- --------------------------------------------------------------------------------------------------
Gross profit 31,679 32,944 26,129 28,988
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing and sales 11,915 11,549 10,366 10,784
Research and development 3,963 3,704 3,589 3,548
General and administrative 5,473 4,830 4,700 4,424
Goodwill amortization 545 428 251 198
- --------------------------------------------------------------------------------------------------
21,896 20,511 18,906 18,954
- --------------------------------------------------------------------------------------------------
Operating income 9,783 12,433 7,223 10,034
- --------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Interest and other, net 965 951 1,410 1,318
- --------------------------------------------------------------------------------------------------
Income before provision for income taxes 8,818 11,482 5,813 8,716
Provision for income taxes 3,439 4,478 2,267 3,164
- --------------------------------------------------------------------------------------------------
Net income $ 5,379 $ 7,004 $ 3,546 $ 5,552
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Net income per share
Basic $ .28 $ .36 $ .19 $ .30
Diluted $ .27 $ .35 $ .18 $ .29
Number of shares used in per share calculations
Basic 19,226 19,195 18,271 18,246
Diluted 20,223 20,192 19,456 19,396
- --------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------
MARCH 29, 1998 MARCH 30, 1997
------------------------------------------------
As As
Originally Originally
(Amounts in thousands, except per share data) Restated Reported Restated Reported
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, NET:
Product $101,820 $112,437 $ 91,108 $104,526
Service 40,140 40,464 33,526 33,815
- --------------------------------------------------------------------------------------------------
141,960 152,901 124,634 138,341
- --------------------------------------------------------------------------------------------------
COST OF REVENUES:
Product 56,150 62,385 54,258 60,262
Service 25,696 25,664 22,356 21,564
Discontinued product 14,494 3,500 -- --
- --------------------------------------------------------------------------------------------------
96,340 91,549 76,614 81,826
- --------------------------------------------------------------------------------------------------
Gross profit 45,620 61,352 48,020 56,515
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing and sales 23,473 23,150 20,574 21,521
Research and development 9,281 8,065 6,899 6,797
General and administrative 10,060 9,115 8,253 8,670
Goodwill amortization 1,037 803 449 396
Discontinued product -- 12,900 -- --
- --------------------------------------------------------------------------------------------------
43,851 54,033 36,175 37,384
- --------------------------------------------------------------------------------------------------
Operating income 1,769 7,319 11,845 19,131
- --------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Interest and other, net 1,928 1,900 2,619 2,420
- --------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (159) 5,419 9,226 16,711
Provision (benefit) for income taxes (62) 2,113 3,598 6,066
- --------------------------------------------------------------------------------------------------
Net income (loss) ($97) $ 3,306 $ 5,628 $ 10,645
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Net income (loss) per share
Basic ($.01) $ .17 $ .31 $ .59
Diluted ($.01) $ .17 $ .29 $ .55
Number of shares used in per share calculations
Basic 19,097 19,082 18,135 18,071
Diluted 19,097 20,015 19,363 19,303
- --------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 29, 1998 SEPTEMBER 28, 1997
---------------------------------------------------
As As
Originally Originally
(Amounts in thousands) Restated Reported Restated Reported
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,106 $ 5,106 $ 5,088 $ 5,088
Accounts receivable, net 53,380 112,871 48,572 99,495
Inventories, net 60,630 32,901 52,672 27,534
Prepaid expenses and other current assets 3,579 8,567 3,570 10,155
---------------------------------------------------
TOTAL CURRENT ASSETS 122,695 159,445 109,902 142,272
Service parts, net 17,706 18,573 16,469 17,278
Fixed assets, net 9,632 10,814 9,789 11,555
Capitalized software, net 8,988 11,004 12,265 14,007
Intangibles, net 31,542 20,891 21,703 10,110
Deferred income taxes 23,625 10,172 21,702 8,249
Other assets, net 2,451 3,064 3,269 3,524
---------------------------------------------------
TOTAL ASSETS $216,639 $233,963 $195,099 $206,995
---------------------------------------------------
---------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 29,704 $ 29,704 $ 22,217 $ 22,217
Accounts payable 17,363 17,363 10,543 10,543
Deferred revenues 11,540 10,013 15,017 11,561
Customer deposits and advance billings 1,952 2,140 2,826 2,841
Accrued compensation 7,077 6,232 7,567 7,522
Other accrued liabilities 17,812 19,102 10,935 11,115
---------------------------------------------------
TOTAL CURRENT LIABILITIES 85,448 84,554 69,105 65,799
Deferred income taxes 12,259 9,532 13,830 11,103
Liabilities and deferred credits 4,240 3,630 4,073 3,596
---------------------------------------------------
TOTAL LIABILITIES 101,947 97,716 87,008 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, 1997 and 18,812 shares at
September 28, 1997 135,793 130,701 128,109 123,269
Retained earnings/accumulated deficit (17,748) 8,899 (17,652) 5,593
Translation adjustment (3,353) (3,353) (2,366) (2,365)
---------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 114,692 136,247 108,091 126,497
---------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $216,639 $233,963 $195,099 $206,995
---------------------------------------------------
---------------------------------------------------
</TABLE>
13
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
15. 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.
14
<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 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
27, 1998.
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
Prior to fiscal 1998, the results of the Company's RTP division were 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 second quarter of fiscal 1998 are $74.5 million, a 21%
increase, or $13.0 million, over the second quarter fiscal 1997 revenues of
$61.6 million. Revenues are primarily generated from the sale and servicing
of medical imaging products. Medical Systems revenues represented 77% and 84%
of the Company's total revenues for the second quarter of fiscal 1998 and
1997, respectively. The Company's Software Business revenues represented
approximately 23% and 16% of the Company's total revenues for the second
quarter of fiscal 1998 and 1997, respectively.
Year-to-date revenues increased 14%, or $17.3 million, over the $124.6
million for the same period in fiscal 1997. Excluding the discontinued
product charge associated with the write-off of the LabStat-TM- and DSA
assets in the first quarter of fiscal 1998, gross profit for the first six
months of fiscal 1998 was $60.1 million, a 25% increase over the $48.0
million generated in the same period in fiscal 1997. Including this charge,
gross profit was $45.6 million for the first six months of fiscal 1998. See
Note 9 of the Notes to Condensed Consolidated Financial Statements.
15
<PAGE>
MEDICAL SYSTEMS
Medical Systems includes revenues from the sale of the Company's nuclear
medicine 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 $40,634 $38,605 $ 79,423 $ 79,422
Service 16,514 12,891 31,847 25,554
------------------------------------------------------
Total $57,148 $51,496 $111,270 $104,976
Geographical mix:
North America 79.2% 78.7% 80.9% 79.0%
Europe 12.0% 10.6% 12.1% 12.9%
Latin America, Japan and Asia 8.8% 10.7% 7.0% 8.1%
Gross margin before discontinued
product charge
Product 43.4% 44.2% 42.4% 39.1%
Service 28.9% 29.0% 32.9% 28.5%
------------------------------------------------------
Total 39.3% 40.4% 39.7% 36.5%
Gross margin after discontinued
product charge
Product 43.4% 44.2% 38.7% 39.1%
Service 28.9% 29.0% 32.9% 28.5%
------------------------------------------------------
Total 39.3% 40.4% 37.0% 36.5%
</TABLE>
Medical Systems' product revenues for the three-month period ended March 29,
1998 increased 5% over the same period in fiscal 1997. Product revenue growth
was driven by sales of refurbished equipment through AMT, and the Company's
newest business initiative ADAC Multi-Modality Services (AMMS). Medical
Systems' product revenues for the six-month period ended March 29, 1998
remained unchanged from the same period 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 were 42.4% for the first six months of
fiscal 1998. Including this charge, gross profit margins were 38.7% for this
period. This compares with gross profit margins of 39.1% for the first six
months of fiscal 1997.
Medical Systems service revenues for the three-month and six-month periods
ended March 29, 1998 increased 28% and 25%, 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.
16
<PAGE>
SOFTWARE BUSINESS
ADAC's Software Business includes RTP and HCIS. RTP revenues are generated
primarily from the sale and support of the Company's Pinnacle(3)-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
development and marketing of its LabStat-TM- product. See Note 9 of the Notes
to Condensed Consolidated Financial Statements. Summary information related
to the Software Business 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 $13,167 $5,962 $22,397 $11,440
Service 4,207 3,974 8,293 7,972
------------------------------------------------------
Total $17,375 $9,936 $30,691 $19,412
Gross margin before discontinued
product charge
Product 54.4% 54.9% 53.6% 48.3%
Service 49.6% 48.7% 47.9% 48.9%
------------------------------------------------------
Total 53.2% 52.4% 52.0% 48.6%
Gross margin after discontinued
product charge
Product 54.4% 54.9% 1.9% 48.3%
Service 49.6% 48.7% 47.9% 48.9%
------------------------------------------------------
Total 53.2% 52.4% 14.3% 48.6%
</TABLE>
Software Business product revenues increased 121% and 96% for the three-month
and six-month periods ended March 29, 1998 over the same period in fiscal
1997. This increase resulted primarily from higher sales of the Company's RTP
product, Pinnacle(3)-TM- and radiology information system QuadRIS-TM-.
Excluding the effects of the discontinued product charge associated with the
write-off of the LabStat-TM- assets, gross profit margins for the Software
Business products were 53.6% for the first six months of fiscal 1998. See
Note 9 of Notes to Condensed Consolidated Financial Statements. Including
this charge, gross profit margins were 1.9% for this period. Margins before
the discontinued product charge increased primarily due to the higher margins
associated with sales of Pinnacle(3)-TM-.
Software Business service revenues increased slightly for the three- and
six-month periods ended March 29, 1998 from the corresponding periods in
fiscal 1997 due principally to higher radiology service revenues. However,
service gross margins decreased year-to-date due to lower dollar volume in
service renewals from HCIS' legacy client base and increased personnel and
support costs. Weaker margins from the first quarter of fiscal 1998 were
partially offset by higher margins in the second quarter of fiscal 1998.
17
<PAGE>
OPERATING AND OTHER EXPENSES:
Summary information showing the Company's operating and other expenses as a
percentage of revenue for the three- and six-month periods (as restated) are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating costs and expenses:
Marketing and sales 16.0% 16.8% 16.5% 16.5%
Research and development,
net of software capitalization 5.3% 5.8% 6.5% 5.5%
General and administrative 7.3% 7.6% 7.1% 6.6%
Goodwill amortization 0.7% 0.4% 0.7% 0.4%
------------------------------------------------------
29.4% 30.7% 30.9% 29.0%
------------------------------------------------------
------------------------------------------------------
Interest and other expense, net 1.3% 2.3% 1.4% 2.1%
</TABLE>
Marketing and sales expenses for the three-month and six-month periods ended
March 29, 1998 increased $1.5 million and $2.9 million over the corresponding
periods in the prior fiscal year as a result of higher compensation costs
associated with increasing the number of sales representatives.
Research and development expenditures, net of software capitalization,
totaled $4.0 million and $3.6 million in the second quarter of fiscal 1998
and 1997, respectively. Year-to-date research and development expenditures,
net of software capitalization, were $9.3 million and $6.9 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-TM- product. See
Note 9 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 $3.1 million in the second quarter
of fiscal 1998 from $2.2 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. Intangible 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 13
of Notes to Condensed Consolidated Financial Statements.
Interest and other expense, net, which primarily consists of interest expense
and foreign currency transaction gains and losses, decreased as a percentage
of revenue for the quarter and on a year to date basis due primarily to
foreign currency gains during the second quarter of fiscal 1998.
INCOME TAXES:
The effective tax rate as a percentage of pretax income was 39.0% for the
first six months of fiscal 1998 and fiscal 1997.
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 1998. 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 1.4 to one,
while working capital for the first six months of fiscal 1998 decreased $3.6
million to $37.2 million from $40.8 million in the fourth quarter of fiscal
1997.
18
<PAGE>
The primary uses of cash in 1998 were an $9.9 million increase in accounts
receivable and a $15.5 million increase in inventory. Inventory and accounts
receivable increased due to delays in product installations and
implementations due to customer site preparation and other factors. The
increase in accounts receivable was also attributable to higher revenues and
the lengthening of customer payment terms to meet competitive conditions.
Cash of $11.4 million was used for investing activities in the first six
months of fiscal 1998. This activity consisted principally of the
acquisitions of CT Solutions and ONES.
Financing activities provided $11.4 million of cash in the first six months
of fiscal 1998. This was primarily attributable to increased borrowings for
the purchase of CT Solutions and ONES and common stock issued to employees
under the Company's employee stock purchase and option plans.
The Company's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash requirements
will fluctuate based on the timing and extent of these factors, management
believes that cash generated from operations, together with the liquidity
provided by existing cash balances and borrowing capability, will be
sufficient to satisfy commitments for capital expenditures and other cash
requirements for the next fiscal year. However, the Company may need to
increase its sources of capital through additional borrowings or the sale of
securities in response to changing business conditions or to pursue new
business opportunities. There can be no assurance that such additional
sources of capital will be available on terms favorable to the Company, if at
all.
BUSINESS CONSIDERATIONS
From time to time, the Company may disclose, through press releases, filings
with the SEC or otherwise, certain matters that constitute forward looking
statements within the meaning of the Federal securities laws. Such statements
are subject to a number of risks and uncertainties, which could cause actual
results to differ materially from those projected, including without
limitation those set forth below. The Company expressly disclaims any
obligation to update any forward looking statements
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.
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 Development and Commercialization of New Products and Product
Enhancements
19
<PAGE>
ADAC's success is dependent upon the successful development, introduction and
commercialization of new products and the development of enhancements to
existing products. Because the nuclear medicine market is relatively mature,
and from time to time in recent years has experienced a decline, the Company
must continue to develop and successfully commercialize innovative new
products and product enhancements such as MCD, and the current updates to the
Company's products in order to pursue its growth strategy. Failure of the
Company to market and sell its products effectively in future periods could
have a material adverse effect on the Company's results of operations.
The development of new products and product enhancements entails considerable
time and expense, including research and development costs, and the time,
expense and uncertainty involved in obtaining any necessary regulatory
clearances. The success of MCD depends on a number of factors, including the
commercial availability of, fleuro-deoxy-glucose ("FDG"). At this time, the
infrastructure for the commercial supply of FDG is not well developed.
Continued uncertainty surrounding MCD could have an adverse effect on sales
of MCD, which could have a material adverse effect on the Company's results
of operations.
GOVERNMENT REGULATION
There has been a trend in recent years, both in the United States and abroad,
toward more stringent regulation and enforcement of requirements applicable
to medical device manufacturers. The continuing trend of more stringent
regulatory oversight in product clearance and enforcement activities has
caused medical device manufacturers to experience longer approval cycles,
more uncertainty, greater risk, and higher expenses. There can be no
assurance that any necessary clearance or approval will be granted the
Company or that FDA review will not involve delays adversely affecting the
Company. In addition, a failure to comply with FDA requirements relating to
medical device testing, manufacture, packaging, labeling, distribution,
promotion, record keeping, and reporting of adverse events could result in
enforcement actions including Warning Letters, such as the one issued to
Cortet in August 1997, as well as civil penalties, injunctions, suspensions
or losses of regulatory clearances, product recalls, seizure or
administrative detention of products, operating restrictions through consent
decrees or otherwise, and criminal prosecution. Failure of the Company to
address adequately the concerns raised by the FDA in the Cortet Warning
Letter could have a material adverse effect on Cortet's business and cause
fluctuations in the market price for the Company's common stock. The Company
is also subject to FTC restrictions on advertising and numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection and disposal of hazardous
substances. Changes in existing requirements, adoption of new requirements or
failure to comply with applicable requirements could have a material adverse
effect on the Company.
FUTURE OPERATING RESULTS
The Company's future operating results may vary substantially from period to
period. The timing and amount of revenues are subject to a number of factors
that make estimation of revenues and operating results prior to the end of
the quarter very uncertain. The timing of revenues can be affected by delays
in product introductions, shipments and 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.
20
<PAGE>
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.
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.
21
<PAGE>
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.
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. See Note 1 of Notes
to Consolidated Financial Statements.
22
<PAGE>
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.
23
<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:
<TABLE>
<CAPTION>
IN FAVOR WITHHELD
-------- --------
<S> <C> <C>
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
</TABLE>
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.
24
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.21 Amendment No. 7 to 1992 Stock Option Plan
10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994)
27 Financial Data Schedule
(b) Form 8-K Reports:
None filed during the fiscal quarter described in this Report on
Form 10-Q.
25
<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
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
27
<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> 6-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 5,106
<SECURITIES> 0
<RECEIVABLES> 57,321
<ALLOWANCES> (3,941)
<INVENTORY> 60,630
<CURRENT-ASSETS> 122,695
<PP&E> 18,583
<DEPRECIATION> 8,951
<TOTAL-ASSETS> 216,639
<CURRENT-LIABILITIES> 85,448
<BONDS> 0
0
0
<COMMON> 135,793
<OTHER-SE> (21,101)
<TOTAL-LIABILITY-AND-EQUITY> 216,639
<SALES> 101,820
<TOTAL-REVENUES> 141,960
<CGS> 56,150
<TOTAL-COSTS> 96,340
<OTHER-EXPENSES> 43,851
<LOSS-PROVISION> 2,530
<INTEREST-EXPENSE> 2,019
<INCOME-PRETAX> (159)
<INCOME-TAX> (62)
<INCOME-CONTINUING> (97)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
