<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 December 28, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-9428
ADAC LABORATORIES
------------------
(Exact name of registrant as specified in its charter)
California 94-1725806
---------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
540 Alder Drive
Milpitas, California 95035
-------------------- -----
(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 21 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 Three Month
Periods Ended December 28, 1997 and December 29, 1996 3
Condensed Consolidated Balance Sheets at December 28, 1997 and
September 29, 1997 4
Condensed Consolidated Statements of Cash Flows for the Three Month
Periods Ended December 28, 1997 and December 29, 1996 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-22
Part II. Other Information
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
DECEMBER 28, 1997 DECEMBER 29, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (RESTATED) (RESTATED)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES, NET:
Product $ 48,019 $ 46,418
Service 19,419 16,661
-------------------- --------------------
67,438 63,079
-------------------- --------------------
COST OF REVENUES:
Product 27,160 30,023
Service 11,843 11,165
Discontinued product 14,494 --
-------------------- --------------------
53,497 41,188
-------------------- --------------------
GROSS PROFIT 13,941 21,891
-------------------- --------------------
OPERATING EXPENSES:
Marketing and sales 11,558 10,208
Research and development 5,318 3,310
General and administrative 4,587 3,553
Goodwill amortization 492 198
-------------------- --------------------
21,955 17,269
-------------------- --------------------
OPERATING INCOME/(LOSS) (8,014) 4,622
-------------------- --------------------
Interest and other expense, net 963 1,209
-------------------- --------------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (8,977) 3,413
Provision (benefit) for income taxes (3,501) 1,331
-------------------- --------------------
NET INCOME/(LOSS) $ (5,476) $ 2,082
-------------------- --------------------
-------------------- --------------------
NET INCOME/(LOSS) PER SHARE
Basic $ (.29) $ .12
-------------------- --------------------
-------------------- --------------------
Diluted $ (.29) $ .11
-------------------- --------------------
-------------------- --------------------
NUMBER OF SHARES USED IN PER SHARE CALCULATION
Basic 18,967 17,942
-------------------- --------------------
-------------------- --------------------
Diluted 18,967 19,218
-------------------- --------------------
-------------------- --------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, 1997 SEPTEMBER 28, 1997
(AMOUNTS IN THOUSANDS) (UNAUDITED)
(RESTATED) (RESTATED)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,808 $ 5,088
Accounts receivable, net 47,661 48,572
Inventories, net 50,621 52,672
Prepaid expenses and other current assets 3,260 3,570
-------------------- --------------------
TOTAL CURRENT ASSETS 106,350 109,902
Service parts, net 16,640 16,469
Fixed assets, net 9,550 9,789
Capitalized software, net 7,476 12,265
Intangibles, net 25,271 21,703
Deferred income taxes 19,897 21,702
Other assets, net 3,276 3,269
-------------------- --------------------
TOTAL ASSETS $ 188,460 $ 195,099
-------------------- --------------------
-------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 22,662 $ 22,217
Accounts payable 12,277 10,543
Deferred revenues 12,512 15,017
Customer deposits and advance billings 2,888 2,826
Accrued compensation 8,009 7,567
Warranty and installation 6,651 3,713
Other accrued liabilities 1,500 7,222
-------------------- --------------------
TOTAL CURRENT LIABILITIES 66,499 69,105
Non-current deferred income taxes 14,423 13,830
Non-current liabilities and deferred credits 1,867 4,073
-------------------- --------------------
TOTAL LIABILITIES 82,789 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: 19,082 shares at December 28, 1997
and 18,812 shares at September 28, 1997 131,905 128,109
Accumulated deficit (23,127) (17,652)
Translation adjustment (3,107) (2,366)
-------------------- --------------------
TOTAL SHAREHOLDERS' EQUITY 105,671 108,091
-------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 188,460 $ 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>
THREE MONTHS ENDED
--------------------------------------------------------
DECEMBER 28, 1997 DECEMBER 29, 1996
(AMOUNTS IN THOUSANDS) (RESTATED) (RESTATED)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (5,476) $ 2,082
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,383 2,593
Provision for product returns and doubtful accounts 1,927 (857)
Deferred income taxes 2,393 5,983
Inventory allowance (341) (146)
Discontinued products 14,494 --
Change in operating assets and liabilities:
Accounts receivable (4,102) (961)
Inventories (4,998) (5,706)
Prepaid expenses and other current assets 310 1,373
Service parts (477) (286)
Accounts payable 1,176 2,372
Deferred revenues (211) (1,465)
Customer deposits and advance billings 62 49
Accrued compensation 442 1,264
Warranty, installation and other accrued liabilities (3,839) (2,136)
Non-current liabilities and deferred credits (2,394) --
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,349 4,159
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,487) (776)
Increase in other assets (1,311) (1,001)
Intangibles 25 (7,262)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,773) (9,039)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short-term
debt arrangements, net (112) 4,974
Dividends paid -- (2,137)
Proceeds from issuance of common stock, net 997 4,919
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 885 7,756
- -------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (741) (270)
- -------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (280) 2,606
Cash and cash equivalents, at beginning of the period 5,088 3,081
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of the period $ 4,808 $ 5,687
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 907 $ 914
Income taxes paid $ 201 $ 148
NONCASH INVESTING ACTIVITIES:
Issuance of common stock pursuant to the acquisition of SCI (see Note 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-month period
ended December 28, 1997 are not necessarily indicative of the results
that may be expected for any future periods, including the full fiscal
year. Reference should also be made to the Annual Consolidated
Financial Statements, Notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in
the Company's Annual Report on Form 10-K for the fiscal year ended
September 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
for December 28, 1997 and December 29, 1996 have been restated, along
with the balance sheet detail for December 28, 1997 and September 28,
1997.
2. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, (SFAS 128),
Earnings per Share (EPS). SFAS 128 requires dual presentation of basic
EPS and diluted EPS on the face of all income statements issued after
December 15, 1997 for all entities with complex capital structures.
Basic EPS is computed as net income (loss) divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible
securities. At December 28, 1997, the dilutive effects of the options
have been excluded because the calculation was anti-dilutive. This
statement also requires a reconciliation of the numerator and
denominator of the diluted EPS computation. EPS data for the period
ended December 28, 1997 and all prior periods have been restated to
conform with the provisions of this statement.
The following is a reconciliation of the numerator (net
income/(loss))and denominator (number of shares) used in the basic and
diluted EPS calculation:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data) DECEMBER 28, 1997 DECEMBER 29, 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS: Net Income/(Loss) $ (5,476) $ 2,082
Denominator: Average Common
Shares Outstanding 18,967 17,942
----------------------- -----------------------
Basic EPS $ (.29) $ .12
----------------------- -----------------------
----------------------- -----------------------
Diluted EPS: Net Income/(Loss) $ (5,476) $ 2,082
Denominator: Average Common
Shares Outstanding 18,967 17,942
Options -- 1,276
----------------------- -----------------------
Total Shares 18,967 19,218
----------------------- -----------------------
----------------------- -----------------------
Diluted EPS $ (.29) $ .11
----------------------- -----------------------
----------------------- -----------------------
</TABLE>
3. DEPRECIATION AND AMORTIZATION
Depreciation and amortization was approximately $3.4 million and
$2.6 million for the three-month periods ended December 28, 1997 and
December 29, 1996, respectively.
6
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
4. INVENTORIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) DECEMBER 28, 1997 SEPTEMBER 28, 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Inventories consist of:
Purchased parts and sub-assemblies $ 15,712 $ 15,499
Work in process 4,453 3,435
Finished goods 37,320 38,594
---------------------------------------------------------------------------------------------------------------------
57,485 57,528
Less reserves (6,864) (4,856)
---------------------------------------------------------------------------------------------------------------------
$ 50,621 $ 52,672
---------------------------------------------------------------------------------------------------------------------
</TABLE>
5. SERVICE PARTS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) DECEMBER 28, 1997 SEPTEMBER 28, 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service parts consist of:
Field service parts, at cost $ 24,321 $ 23,844
Less accumulated depreciation (7,681) (7,375)
---------------------------------------------------------------------------------------------------------------------
$ 16,640 $ 16,469
---------------------------------------------------------------------------------------------------------------------
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) DECEMBER 28, 1997 SEPTEMBER 28, 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed assets, at cost, consist of:
Production and test equipment $ 4,946 $ 9,144
Field service equipment 1,790 2,443
Office and demonstration equipment 9,713 15,166
Leasehold improvements 978 1,181
---------------------------------------------------------------------------------------------------------------------
17,427 27,934
Less accumulated depreciation and
Amortization (7,877) (18,145)
---------------------------------------------------------------------------------------------------------------------
$ 9,550 $ 9,789
---------------------------------------------------------------------------------------------------------------------
</TABLE>
7. INTANGIBLES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) DECEMBER 28, 1997 SEPTEMBER 28, 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Intangibles consist of:
Goodwill $ 19,412 $ 15,140
Acquired technology 8,984 8,984
Other 510 510
---------------------------------------------------------------------------------------------------------------------
28,906 24,634
Less accumulated amortization (3,635) (2,931)
---------------------------------------------------------------------------------------------------------------------
$ 25,271 $ 21,703
---------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
8. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) DECEMBER 28, 1997 SEPTEMBER 28, 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other accrued liabilities consist of:
Accrued cost of revenue $ 686 $ $367
Accrued royalties 959 790
Other accrued expenses (145) 6,065
---------------------------------------------------------------------------------------------------------------------
$ 1,500 $ $7,222
---------------------------------------------------------------------------------------------------------------------
</TABLE>
9. DISCONTINUED PRODUCT CHARGES
On September 25, 1998, the Company concluded a comprehensive review of
its operations and decided to discontinue its physician network
services business. As a result, the Company took a non-ordinary charge
in the fourth quarter of fiscal 1998 of $1.9 million. The Company
decided to discontinue this business in the fourth quarter of fiscal
1998 and focus on its core businesses, since, among other things, this
business did not contribute meaningfully to the Company's results in
fiscal 1998, and was not expected to do so in future periods.
In connection with the Company's evaluation of its operations, the
Company identified certain assets, consisting of capitalized consulting
and banking expenses that had been incurred for specific potential
acquisitions, and determined it was appropriate to write off these
assets since the acquisitions would not occur. Accordingly, the Company
has included a charge of $1.3 million in its results of operations for
the fourth quarter of fiscal 1998 for these assets.
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.
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
periods ended December 28, 1997 and December 29, 1996 are based on the
estimated effective income tax rates for the fiscal years ending
September 27, 1998 and September 28, 1997 of 39.0%.
8
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(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 December 28, 1997, the Company
had $37.3 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. ACQUISITION
In October 1997, the Company acquired substantially all of the assets
of Southern Cats, Inc. and its affiliates (Southern Cats) in exchange
for 139,131 shares of the Company's common stock 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 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.
10
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
A summary of the effects of the restatement follows:
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 28, 1997 DECEMBER 29, 1996
------------------------- -------------------------
As As
Originally Originally
(Amounts in thousands, except per share data) Restated Reported Restated Reported
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, NET:
Product $48,019 $55,853 $46,418 $51,604
Service 19,419 19,670 16,661 16,761
- ---------------------------------------------------------------------------------------------------------------
67,438 75,523 63,079 68,365
- ---------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Product 27,160 31,339 30,023 30,040
Service 11,843 12,276 11,165 10,798
Discontinued product 14,494 3,500 -- --
- ---------------------------------------------------------------------------------------------------------------
53,497 47,115 41,188 40,838
- ---------------------------------------------------------------------------------------------------------------
Gross profit 13,941 28,408 21,891 27,527
- ---------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing and sales 11,558 11,601 10,208 10,737
Research and development 5,318 4,361 3,310 3,249
General and administrative 4,587 4,285 3,553 4,246
Goodwill amortization 492 375 198 198
Discontinued product -- 12,900 -- --
- ---------------------------------------------------------------------------------------------------------------
21,955 33,522 17,269 18,430
- ---------------------------------------------------------------------------------------------------------------
Operating income/(loss) (8,014) (5,114) 4,622 9,097
- ---------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Interest and other, net 963 949 1,209 1,102
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (8,977) (6,063) 3,413 7,995
Provision (benefit) for income taxes (3,501) (2,365) 1,331 2,902
- ---------------------------------------------------------------------------------------------------------------
Net income/(loss) ($5,476) ($3,698) $2,082 $5,093
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Net income/(loss) per share
Basic ($.29) ($.19) $.12 $.28
Diluted ($.29) ($.19) $.11 $.27
Number of shares used in per share calculations
Basic 18,967 19,060 17,942 18,049
Diluted 18,967 19,060 19,218 19,057
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, 1997 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 $4,808 $4,808 $5,088 $5,088
Accounts receivable, net 47,661 104,535 48,572 99,495
Inventories, net 50,621 24,979 52,672 27,534
Prepaid expenses and other current assets 3,260 8,304 3,570 10,155
-----------------------------------------------------
TOTAL CURRENT ASSETS 106,350 142,626 109,902 142,272
Service parts, net 16,640 16,756 16,469 17,278
Fixed assets, net 9,550 11,473 9,789 11,555
Capitalized software, net 7,476 9,331 12,265 14,007
Intangibles, net 25,271 14,149 21,703 10,110
Deferred income taxes 19,897 6,444 21,702 8,249
Other assets, net 3,276 3,993 3,269 3,524
-----------------------------------------------------
TOTAL ASSETS $188,460 $204,772 $195,099 $206,995
-----------------------------------------------------
-----------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $22,662 $22,662 $22,217 $22,217
Accounts payable 12,277 12,277 10,543 10,543
Deferred revenues 12,512 11,179 15,017 11,561
Customer deposits and advance billings 2,888 3,053 2,826 2,841
Accrued compensation 8,009 7,894 7,567 7,522
Warranty and installation 6,651 7,663 3,713 4,495
Other accrued liabilities 1,500 1,192 7,221 6,620
-----------------------------------------------------
TOTAL CURRENT LIABILITIES 66,499 65,920 69,104 65,799
Non-current deferred income taxes 14,423 11,696 13,830 11,103
Non-current liabilities and deferred credits 1,867 1,360 4,073 3,596
-----------------------------------------------------
TOTAL LIABILITIES 82,789 78,976 87,007 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: 19,082 shares at
December 28, 1997 and 18,812 shares at
September 28, 1997 131,905 127,008 128,108 123,269
Retained earnings/accumulated deficit (23,127) 1,895 (17,651) 5,593
Translation adjustment (3,107) (3,107) (2,365) (2,365)
-----------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 105,671 125,796 108,092 126,497
-----------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $188,460 $204,772 $195,099 $206,995
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
12
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
15. SUBSEQUENT EVENTS
On December 31, 1997, the Company acquired CT Solutions, Inc. for cash.
CT Solutions is a respected provider of computed tomography refurbished
equipment and service. The acquisition was accounted for using the
purchase method of accounting.
On January 23, 1998, the Company acquired O.N.E.S. Medical Services,
Inc. (ONES) for cash. ONES is one of the largest independent providers
of nuclear medicine service and refurbished equipment in the United
States. The acquisition was accounted for using the purchase method of
accounting.
Neither of the acquisitions discussed above is material to the
financial position or results of operations of the Company.
13
<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 December 28, 1997 are not necessarily indicative of the results
that may be expected for any future periods, including the full fiscal year.
Reference should also be made to the Annual Consolidated Financial Statements,
Notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's Annual Report on Form 10-K
for the fiscal year ended September 27, 1998.
RESULTS OF OPERATIONS
THE THREE MONTH PERIOD ENDED DECEMBER 28, 1997 RESTATED COMPARED TO THE THREE
MONTH PERIOD ENDED DECEMBER 29, 1996 RESTATED
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 first quarter of fiscal 1998 increased 7%, or $4.4 million,
over the first quarter fiscal 1997 revenues of $63.1 million. Revenues are
primarily generated from the sale and servicing of medical imaging products.
Medical Systems revenues represented 80% and 85% of the Company's total
revenues for the first quarter of fiscal 1998 and 1997, respectively. The
Company's Software Business revenues represented approximately 20% and 15% of
the Company's total revenues for the first quarter of fiscal 1998 and 1997,
respectively. Excluding the discontinued product charge associated with the
write-off of the LabStat-TM- and DSA assets, gross profit for the first
quarter of fiscal 1998 was $28.4 million, a 30% increase over the $21.9
million generated in the same period in fiscal 1997. Including this charge,
gross profit was $13.9 million for the first quarter of fiscal 1998. (See
Note 9 of the Notes to Condensed Consolidated Financial Statements).
14
<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 first
quarter of fiscal 1998 compared to the same period of fiscal 1997 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) DECEMBER 28, 1997 DECEMBER 29, 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Product $ 38,789 $ 40,817
Service 15,333 12,663
-------------------------- ---------------------------
Total $ 54,122 $ 53,480
Geographical mix:
North America 82.7% 79.2%
Europe 12.2% 15.2%
Latin America, Japan and Asia 5.1% 5.6%
Gross margin before discontinued
product charge
Product 41.3% 34.3%
Service 37.1% 27.9%
-------------------------- ---------------------------
Total 40.1% 32.8%
Gross margin after discontinued
product charge
Product 33.8% 34.3%
Service 37.1% 27.9%
-------------------------- ---------------------------
Total 34.7% 32.8%
</TABLE>
Medical Systems' product revenues decreased by 5% for the first quarter of
fiscal 1998 compared to the first quarter of fiscal 1997 due to the timing of
delivery for installations. In the first quarters of fiscal 1998 and 1997,
Medical Systems' revenues increased in dollar volume in North American
geographical market, while decreasing in Europe and Latin America. Excluding
the effects of the discontinued product charge associated with the write-off
of the DSA assets, gross profit margins for Medical Systems products
increased to 41.3% in the first quarter of fiscal 1998. Including this charge
gross profit margins were 33.8% for this period. This compares with gross
profit margins of 34.3% for the first quarter of fiscal 1997. Margins before
the discontinued product charge increased primarily due to reductions in
product cost and sales of Molecular Coincidence Detection (MCD-TM-), which
has a higher gross margin.
The increase in Medical Systems' service revenues and the improvement in
service gross profit margins from first quarter fiscal 1997 to the first
quarter fiscal 1998 resulted from an increase in the number of customers
under service contracts, economies of scale related to more effective
coverage of field service support costs and improved product reliability.
Service revenues for the period increased 21% over the same period in fiscal
1997. The higher growth rate in first quarter of fiscal 1998 primarily
resulted from an increase in the Company's installed customer base as well as
the acceleration of the Company's multi-vendor service business through
acquisition.
15
<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 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
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 first quarter of fiscal 1998 compared to the first quarter of
fiscal 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
(Dollar amounts in thousands) DECEMBER 28, 1997 DECEMBER 29, 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Product $ 9,230 $ 5,478
Service 4,086 3,998
-------------------------- ---------------------------
Total $ 13,316 $ 9,476
Gross margin before discontinued
Product charge
Product 52.8% 41.1%
Service 46.0% 49.0%
-------------------------- ---------------------------
Total 50.5% 44.5%
Gross margin after discontinued
Product charge
Product (72.9)% 41.1%
Service 46.0% 49.0%
-------------------------- ---------------------------
Total (36.4)% 44.5%
</TABLE>
Software Business product revenues increased 68% from the first quarter of
fiscal 1997 to the first quarter of fiscal 1998. This increase resulted
primarily from by the sales of the Company's RTP product, Pinnacle3-TM-,
which received 510(k) clearance from the United States Food and Drug
Administration (FDA) in April 1997. 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 increased to 52.8% in the
first quarter of fiscal 1998. Including this charge gross profit/(loss)
margins were (72.9%) for this period. Margins before the discontinued product
charge increased primarily due to sales of Pinnacle3-TM-, which has a higher
gross margin.
Software Business service revenues increased slightly in the first quarter of
fiscal 1998 from the first quarter of fiscal 1997 due principally to higher
radiology service revenues. However, margins decreased due to lower dollar
volume in service renewals from HCIS' legacy client base and increased
personnel and support costs.
16
<PAGE>
OPERATING AND OTHER EXPENSES:
Summary information showing the Company's operating and other expenses as a
percentage of revenue is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
DECEMBER 28, 1997 DECEMBER 29, 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating costs and expenses:
Marketing and sales 17.1% 16.2%
Research and development,
net of software capitalization 7.9% 5.2%
General and administrative 6.8% 5.6%
Goodwill amortization 0.7% 0.3%
--------------------------- ------------------------------
32.6% 27.4%
--------------------------- ------------------------------
--------------------------- ------------------------------
Interest and other expense, net 1.4% 1.9%
</TABLE>
Marketing and sales expenses increased $1.4 million over the same period in
the prior year primarily as a result of an increase in sales representatives.
Research and development expenditures, net of software capitalization,
totaled $5.3 million and $3.3 million in the first quarters of fiscal 1998
and 1997, respectively. Research and development expenses, on both a gross
and net basis, increased as a percentage of revenue for the quarter compared
to the same quarter in the prior fiscal year. The increase resulted from
additional investments made by the Company to enhance its radiology product.
Research and development expenditures, net of software capitalization,
increased by $2.0 million from the first quarter of fiscal 1997 to the first
quarter of fiscal 1998 as a result of these increased expenditures.
Capitalized software costs were $1.1 million and $1.1 million in the first
quarter of fiscal 1998 and 1997, respectively.
General and administrative expenses increased as a percentage of revenue from
the first quarter of fiscal 1997 to the first quarter of fiscal 1998 due to
higher compensation costs and the acquisition of SCI. See Note 13 of Notes to
Condensed Consolidated Financial Statements.
Goodwill amortization increased slightly as a percentage of revenue from the
first quarter of fiscal 1997 to the first quarter of fiscal 1998 as a result
of the amortization of expenses associated with the acquisition of SCI in
October 1997.
Other expense, net, which primarily consists of interest expense and foreign
currency transaction gains and losses, decreased slightly as a percentage of
revenue from the first quarter of fiscal 1997 to the first quarter of fiscal
1998 due to the Company's decreased level of bank borrowings during the
quarter.
INCOME TAXES:
The effective tax rate as a percentage of pretax income was 39.0% for the first
three months of fiscal 1998 and fiscal 1997.
17
<PAGE>
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 constant at
1.6 to one, while working capital decreased $.9 million to $39.9 million in
the first quarter of fiscal 1998 from $40.8 million in the fourth quarter of
fiscal 1997.
The primary uses of cash in 1998 were an $4.1 million increase in accounts
receivable and a $5.0 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.
Cash of $2.8 million was used for investing activities in the first quarter
of fiscal 1998 and consisted of capital expenditures for office,
manufacturing and research and development equipment and capitalized software
research and development costs in both the Medical Systems and Software
Business units.
Financing activities provided $0.9 million in cash in the first quarter of
fiscal 1998. This was primarily attributable to common stock issued to
employees under the Company's employee stock option and stock purchase plans.
The Company's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash requirements
will fluctuate based on the timing and extent of these factors, management
believes that cash generated from operations, together with the liquidity
provided by existing cash balances and borrowing capability, will be
sufficient to satisfy commitments for capital expenditures and other cash
requirements for the next fiscal year. However, the Company may need to
increase its sources of capital through additional borrowings or the sale of
securities in response to changing business conditions or to pursue new
business opportunities. Should the Company not be able to renew existing
credit facilities new sources of funding will be required. 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/A, particularly this Item 2, 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.
18
<PAGE>
COMPETITION
The markets served by the Company are characterized by rapidly evolving
technology, intense competition and pricing pressure. There are a number of
companies that currently offer, or are in the process of developing, products
that compete with products offered by the Company. Some of the Company's
competitors have substantially greater capital, engineering, manufacturing
and other resources than the Company. These competitors could develop
technologies and products that are more effective than those currently used
or marketed by the Company or that could render the Company's products
obsolete or noncompetitive. In fiscal 1997 the introduction by certain of the
Company's nuclear medicine competitors of new products resulted in a decrease
in the Company's market share for that year. In the future, these products
may continue to have an adverse effect on the Company's market share.
DEPENDENCE ON DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS AND PRODUCT
ENHANCEMENTS
ADAC's success is dependent upon the successful development, introduction and
commercialization of new products and the development of enhancements to
existing products. Because the nuclear medicine market is relatively mature,
and from time to time in recent years has experienced a decline, the Company
must continue to develop and successfully commercialize innovative new
products and product enhancements such as MCD, and the current updates to the
Company's products in order to pursue its growth strategy. Failure of the
Company to market and sell its products effectively in future periods could
have a material adverse effect on the Company's results of operations.
The development of new products and product enhancements entails considerable
time and expense, including research and development costs, and the time,
expense and uncertainty involved in obtaining any necessary regulatory
clearances. The success of MCD depends on a number of factors, including the
commercial availability of, fleuro-deoxy-glucose ("FDG"). At this time, the
infrastructure for the commercial supply of FDG is not well developed.
Continued uncertainty surrounding MCD could have an adverse effect on sales
of MCD, which could have a material adverse effect on the Company's results
of operations.
GOVERNMENT REGULATION
There has been a trend in recent years, both in the United States and abroad,
toward more stringent regulation and enforcement of requirements applicable
to medical device manufacturers. The continuing trend of more stringent
regulatory oversight in product clearance and enforcement activities has
caused medical device manufacturers to experience longer approval cycles,
more uncertainty, greater risk, and higher expenses. There can be no
assurance that any necessary clearance or approval will be granted the
Company or that FDA review will not involve delays adversely affecting the
Company. In addition, a failure to comply with FDA requirements relating to
medical device testing, manufacture, packaging, labeling, distribution,
promotion, record keeping, and reporting of adverse events could result in
enforcement actions including Warning Letters, such as the one issued to
Cortet in August 1997, as well as civil penalties, injunctions, suspensions
or losses of regulatory clearances, product recalls, seizure or
administrative detention of products, operating restrictions through consent
decrees or otherwise, and criminal prosecution. Failure of the Company to
address adequately the concerns raised by the FDA in the Cortet Warning
Letter could have a material adverse effect on Cortet's business and cause
fluctuations in the market price for the Company's common stock. The Company
is also subject to FTC restrictions on advertising and numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection and disposal of hazardous
substances. Changes in existing requirements, adoption of new requirements or
failure to comply with applicable requirements could have a material adverse
effect on the Company.
19
<PAGE>
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.
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.
20
<PAGE>
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.
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.
21
<PAGE>
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 Condensed Financial Statements.
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.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
(c) On October 28, 1997, the Company issued 139,131 shares of common
stock in connection with the acquisition by the Company of
substantially all of the assets of SCI and its affiliates. See Note 13
of Notes to Condensed Consolidated Financial Statements. The shares
were offered and sold to SCI and its affiliates pursuant to the
exemption from the registration requirements of the Securities Act
provided by Section 4(2) of the Securities Act.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Form 8-K Reports:
None filed during the fiscal quarter described in this Report
on Form 10-Q.
23
<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 24, 1999
ADAC Laboratories
------------------------
(Registrant)
BY: /s/ P. Andre Simone
-----------------------
P. Andre Simone
Vice President and Chief Financial Officer
24
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
25
<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> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> DEC-28-1997
<CASH> 4,808
<SECURITIES> 0
<RECEIVABLES> 51,080
<ALLOWANCES> (3,419)
<INVENTORY> 50,621
<CURRENT-ASSETS> 106,350
<PP&E> 17,427
<DEPRECIATION> 7,877
<TOTAL-ASSETS> 188,460
<CURRENT-LIABILITIES> 66,499
<BONDS> 0
0
0
<COMMON> 131,905
<OTHER-SE> (26,234)
<TOTAL-LIABILITY-AND-EQUITY> 188,460
<SALES> 48,019
<TOTAL-REVENUES> 67,438
<CGS> 27,160
<TOTAL-COSTS> 53,497
<OTHER-EXPENSES> 21,955
<LOSS-PROVISION> 1,927
<INTEREST-EXPENSE> 954
<INCOME-PRETAX> (8,977)
<INCOME-TAX> (3,501)
<INCOME-CONTINUING> (5,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,476)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
