<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JULY 2, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-9428
------------------------
ADAC LABORATORIES
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-1725806
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
540 ALDER DRIVE MILPITAS, CALIFORNIA
95035
(Address of principal executive (Zip Code)
offices)
</TABLE>
(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 July 31, 2000 Registrant had 20,988,000 outstanding shares of Common
Stock, no par value.
(This document contains a total of 29 pages)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ADAC LABORATORIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three-Month and Nine-Month Periods Ended July 2, 2000 and
July 4, 1999.............................................. 3
Condensed Consolidated Balance Sheets at July 2, 2000 and
October 3, 1999........................................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended July 2, 2000 and July 4, 1999.... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Part II. Other Information
Item 1. Legal Proceedings........................................... 28
Item 3. Defaults upon Senior Securities............................. 28
Item 6. Exhibits and Reports on Form 8-K............................ 28
Signatures.................................................................... 29
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES, NET:
Product............................................ $63,082 $ 50,400 $197,359 $184,826
Service............................................ 24,228 25,220 70,286 72,466
------- -------- -------- --------
87,310 75,620 267,645 257,292
------- -------- -------- --------
COST OF REVENUES:
Product............................................ 35,144 37,942 117,864 132,724
Service............................................ 16,592 16,606 49,288 51,435
------- -------- -------- --------
51,736 54,548 167,152 184,159
------- -------- -------- --------
GROSS PROFIT......................................... 35,574 21,072 100,493 73,133
------- -------- -------- --------
OPERATING EXPENSES:
Marketing and sales................................ 14,334 15,200 42,577 47,936
Research and development........................... 4,540 4,546 14,085 13,390
General and administrative......................... 8,128 16,584 23,848 42,676
Goodwill amortization.............................. 508 507 1,534 1,497
Restructuring charges.............................. -- 474 -- 3,774
Settlement of litigation and related charges....... -- -- 10,340 --
------- -------- -------- --------
27,510 37,311 92,384 109,273
------- -------- -------- --------
OPERATING INCOME (LOSS).............................. 8,064 (16,239) 8,109 (36,140)
Interest and other expense, net...................... 939 549 3,091 3,530
------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES.............................................. 7,125 (16,788) 5,018 (39,670)
Provision (benefit) for income taxes................. 2,536 (3,574) 1,757 (9,521)
------- -------- -------- --------
NET INCOME (LOSS).................................... $ 4,589 $(13,214) $ 3,261 $(30,149)
======= ======== ======== ========
NET INCOME (LOSS) PER SHARE:
Basic.............................................. $ 0.22 $ (0.64) $ 0.16 $ (1.47)
Diluted............................................ $ 0.21 $ (0.64) $ 0.15 $ (1.47)
NUMBER OF SHARES USED IN PER SHARE CALCULATION:
Basic.............................................. 20,724 20,504 20,649 20,443
Diluted............................................ 21,867 20,504 21,284 20,443
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 2, OCTOBER 3,
2000 1999 (1)
----------- ----------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,632 $ 5,796
Trade receivables, net of allowance for doubtful accounts
of $14,808 in 2000 and $14,707 in 1999.................. 82,442 80,393
Tax and other receivables................................. 3,136 2,265
Inventories, net.......................................... 28,938 35,076
Prepaid expenses and other current assets................. 6,132 5,620
Current deferred income taxes............................. 13,717 13,717
-------- --------
TOTAL CURRENT ASSETS.................................... 142,997 142,867
Service parts, net.......................................... 19,062 18,297
Fixed assets, net........................................... 16,926 15,555
Capitalized software, net of accumulated amortization of
$16,215 in 2000 and $13,167 in 1999....................... 22,158 17,417
Intangibles, net............................................ 38,664 41,024
Deferred income taxes....................................... 1,528 3,230
Other assets, net........................................... 1,659 1,272
-------- --------
TOTAL ASSETS............................................ $242,994 $239,662
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks.................................... $ 38,891 $ 51,961
Accounts payable.......................................... 24,649 13,492
Deferred revenues......................................... 18,718 17,185
Accrued compensation...................................... 12,829 12,750
Customer deposits and advances............................ 6,531 6,757
Warranty and installation................................. 5,956 5,835
Other accrued liabilities................................. 17,406 20,461
-------- --------
TOTAL CURRENT LIABILITIES............................... 124,980 128,441
Non-current liabilities..................................... 3,515 3,708
-------- --------
TOTAL LIABILITIES....................................... 128,495 132,149
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized: 5,000 shares; issued and outstanding: none.... -- --
Common stock, no par value:
Authorized: 50,000 shares; issued and outstanding: 20,938
shares as of July 2, 2000 and 20,542 shares as of
October 3, 1999......................................... 159,141 154,275
Accumulated deficit......................................... (40,625) (43,886)
Accumulated other comprehensive loss........................ (4,017) (2,876)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 114,499 107,513
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $242,994 $239,662
======== ========
</TABLE>
------------------------
(1) Data extracted from audited consolidated financial statements dated
October 3, 1999 of ADAC Laboratories.
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>
NINE MONTHS ENDED
-------------------
JULY 2, JULY 4,
2000 1999
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 3,261 $(30,149)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 14,469 10,592
Deferred income taxes..................................... 1,702 (9,558)
Stock compensation expense................................ 786 382
Restructuring charges..................................... -- 3,774
Changes in operating assets and liabilities:
Trade receivables, net.................................... (2,413) (22,133)
Tax and other receivables................................. (871) 4,593
Inventories, net.......................................... 5,912 35,189
Prepaid expenses and other current assets................. (449) (688)
Service parts............................................. (3,713) (2,288)
Accounts payable.......................................... 11,135 (10,815)
Deferred revenues......................................... 1,699 6,682
Accrued compensation...................................... 79 2,281
Customer deposits and advances............................ (227) 2,062
Warranty and installation................................. 70 (425)
Settlement of litigation and related charges.............. 1,283 --
Other accrued liabilities................................. (4,500) 2,132
Non-current liabilities................................... 998 80
------- --------
Net cash provided by (used in) operating activities......... 29,221 (8,289)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (6,177) (9,815)
Capitalized software...................................... (7,789) (5,910)
Other assets and intangibles.............................. (1,895) (2,895)
------- --------
Net cash used in investing activities....................... (15,861) (18,620)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under short-term debt
arrangements, net....................................... (13,070) 24,299
Payments under capital lease agreements................... (1,194) (182)
Proceeds from issuance of common stock, net............... 4,301 4,144
------- --------
Net cash (used in) provided by financing activities......... (9,963) 28,261
------- --------
Effect of exchange rate changes on cash..................... (561) (1,354)
------- --------
Net change in cash and cash equivalents..................... 2,836 (2)
Cash and cash equivalents, at beginning of the period....... 5,796 4,869
------- --------
Cash and cash equivalents, at end of the period............. $ 8,632 $ 4,867
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of SEC 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 nine-month periods ended July 2,
2000 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
October 3, 1999.
The balance sheet data at October 3, 1999 was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles.
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share has been computed using the weighted
average number of common shares outstanding. Diluted net income per share
includes the dilutive effect of common stock options and warrants using the
treasury stock method. The calculation of basic and diluted earnings per share
(EPS) for the three and nine-month periods ended July 2, 2000 and July 4, 1999
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic EPS:
Net income (loss).................................... $ 4,589 $(13,214) $ 3,261 $(30,149)
Weighted average common shares outstanding........... 20,724 20,504 20,649 20,443
Basic net income (loss) per share.................... $ 0.22 $ (0.64) $ 0.16 $ (1.47)
Diluted EPS:
Net income (loss).................................... $ 4,589 $(13,214) $ 3,261 $(30,149)
Weighted average common shares outstanding........... 20,724 20,504 20,649 20,443
Options.............................................. 1,143 -- 635 --
------- -------- ------- --------
Total shares......................................... 21,867 20,504 21,284 20,443
======= ======== ======= ========
Diluted net income (loss) per share.................. $ 0.21 $ (0.64) $ 0.15 $ (1.47)
</TABLE>
If the Company had recorded net income in the three and nine-month periods
ended July 4, 1999, the total diluted shares would have increased by shares for
36,000 and 286,000 options, respectively.
6
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVENTORIES
<TABLE>
<CAPTION>
JULY 2, OCTOBER 3,
2000 1999
-------- ----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Inventories consist of:
Purchased parts and sub-assemblies........................ $14,426 $ 7,203
Work-in-process........................................... 7,320 5,518
Finished goods............................................ 7,192 22,355
------- -------
$28,938 $35,076
======= =======
</TABLE>
4. FIXED ASSETS
<TABLE>
<CAPTION>
JULY 2, OCTOBER 3,
2000 1999
-------- ----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Fixed assets, at cost, consist of:
Production and test equipment............................. $ 6,602 $ 3,819
Field service equipment................................... 234 709
Office and demonstration equipment........................ 26,735 23,707
Leasehold improvements.................................... 1,915 1,659
-------- --------
35,486 29,894
Less accumulated depreciation and amortization............ (18,560) (14,339)
-------- --------
$ 16,926 $ 15,555
======== ========
</TABLE>
5. RESTRUCTURING CHARGES
During fiscal 1999, the Company conducted a comprehensive review of its
operations. Based on this review it restructured its European, South American
and ADAC Medical Technologies ("AMT") businesses. As a result, the Company
recorded charges in fiscal 1999 of $4.1 million. Of this amount $0.5 million and
$3.8 million were recorded during the three and nine-month periods ended
July 4, 1999, respectively. Amounts of $0.3 million and $1.0 million were
charged against the liability during the three and nine-month periods ended
July 2, 2000, representing cash payments made. As of July 2, 2000, $1.0 million
remained in the accrual, comprised of $0.7 million for severance expenses,
$0.1 million for legal and consulting, and $0.2 million for facilities and other
costs associated with the restructuring. The Company currently expects that
these restructuring costs will be paid over the remaining quarter of fiscal
2000.
6. CREDIT AND BORROWING ARRANGEMENTS
As of July 2, 2000 the Company had an $85.0 million revolving credit
facility with a bank syndicate. The credit facility offers borrowings in either
U.S. dollars or in foreign currencies and expires on March 29, 2002. The Company
pays commitment fees and interest on its borrowings based on its debt level in
relation to its cash flow. Commitment fees range from 0.25% to 0.75% of unused
commitment, and interest rates are based on the banks' prime rate or LIBOR plus
rates ranging from
7
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. CREDIT AND BORROWING ARRANGEMENTS (CONTINUED)
1.0% to 2.5%. At July 2, 2000, the Company had $46.1 million available for
borrowing under this facility. Due to the settlement of certain securities
litigation and related charges, the results of the Company's operations in the
first quarter of fiscal 2000 caused the Company to be out of compliance with the
financial covenants required by the facility. On January 28, 2000, the Company
and the bank syndicate signed an amendment increasing the credit facility from
$75.0 million to $85.0 million and modifying the financial covenants,
retroactively to include the first fiscal quarter of 2000, to be more reflective
of the Company's recent financial performance. The Company was in compliance
with these modified covenants in the first, second and third quarters of fiscal
2000.
7. 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 named as
defendants the Company and certain of its present and former officers and
directors. The complaints alleged various violations of the federal securities
laws in connection with the restatement of the Company's financial statements
and sought unspecified but potentially significant damages. In April 1999, these
actions were ordered consolidated and, in July 1999, the plaintiffs filed a
consolidated amended complaint. 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.
In January 2000, the Company reached an agreement with the plaintiffs to
settle the class action lawsuit. The parties to the class action submitted a
Stipulation of Settlement to the court for preliminary approval. On July 17,
2000, the Court preliminarily approved the settlement, certified the class for
settlement purposes, and approved the notice of the settlement to be sent to
class members. Notice has been sent to the settlement class. Pursuant to the
class action settlement, the plaintiff class will receive $20 million in full
settlement of their claims. In January, 2000, the Company also reached an
agreement-in-principle to settle the derivative action; it is expected that the
derivative settlement will be finalized in the near future and presented for
court approval. Settlement of both of these actions is contingent upon the
satisfaction of numerous conditions, including among others, final court
approval. As a result of having reached these agreements, the Company recorded a
non-ordinary pre-tax charge of $10.3 million in the first quarter of fiscal
2000, representing its total costs for the settlements after contribution by the
insurance company, including $1.3 million for the related legal fees to bring
these matters to a conclusion. During the nine months ended July 2, 2000, the
Company made cash payments of $9.0 million against this accrual, consisting of
$8.0 million in settlement costs and $1.0 million in related legal fees. As of
July 2, 2000, approximately $1.3 million remained in the accrual.
The Company has been informed that the United States Securities and Exchange
Commission (SEC) has issued a Formal Order of Private Investigation in
connection with matters relating to the Company's previously announced
restatement of its financial results for 1996, 1997 and the first three quarters
of 1998. The Company is continuing to cooperate with the SEC. The Company is
unable to predict the outcome of the investigation at this time.
The Company is also a defendant in various legal proceedings incidental to
its business. Management is of the opinion that any liability resulting from
these claims would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
8
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. INCOME TAXES
The Company uses the asset and liability 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 and nine-month periods ended July 2, 2000 and
July 4, 1999 are based on the estimated effective income tax rates for the
fiscal years ending October 1, 2000 and ended October 3, 1999 of 35% and 26%,
respectively. The estimated effective tax rate for fiscal year 2000 was adjusted
in the third quarter of fiscal 2000 from 37% to 35%, resulting in an effective
tax rate of 36% for that quarter. The estimated effective tax rate for fiscal
year 1999 was adjusted in the third quarter of fiscal 1999 from 26% to 24%,
resulting in an effective tax rate of 21% for that quarter.
9. SEGMENT REPORTING
The Company has three reportable segments, Medical Systems ("MS"), Radiation
Therapy Planning ("RTP") and HealthCare Information Systems ("HCIS"). The
Company is organized on the basis of products and services. The Company's
reportable segments are strategic business units that offer different products
and include corporate allocations of general and administrative expenses. The
following table summarizes information about the Company's reportable segments
for the three and nine-month periods ended July 2, 2000 and July 4, 1999. Asset
information by reportable segment has not been presented as the Company does not
produce and rely on such information.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 2, 2000 NINE MONTHS ENDED JULY 2, 2000
----------------------------------------- -----------------------------------------
MS RTP HCIS TOTAL MS RTP HCIS TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net:
Product................................. $49,110 $ 9,250 $4,722 $63,082 $153,813 $29,102 $14,444 $197,359
Service................................. 20,211 1,143 2,874 24,228 57,781 2,909 9,596 70,286
------- ------- ------ ------- -------- ------- ------- --------
$69,321 $10,393 $7,596 $87,310 $211,594 $32,011 $24,040 $267,645
======= ======= ====== ======= ======== ======= ======= ========
Income (loss) before provision (benefit)
for income taxes........................ $ 6,982 $ 1,943 $(1,800) $ 7,125 $ 14,519 $ 3,605 $(2,766) $ 15,358
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 4, 1999 NINE MONTHS ENDED JULY 4, 1999
----------------------------------------- -----------------------------------------
MS RTP HCIS TOTAL MS RTP HCIS TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net:
Product................................. $32,900 $10,251 $ 7,249 $50,400 $134,792 $34,896 $15,138 $184,826
Service................................. 21,066 492 3,662 25,220 59,374 1,610 11,482 72,466
------- ------- ------- ------- -------- ------- ------- --------
$53,966 $10,743 $10,911 $75,620 $194,166 $36,506 $26,620 $257,292
======= ======= ======= ======= ======== ======= ======= ========
(Loss) income before (benefit) provision
for income taxes........................ $(7,225) $ 496 $ (91) $(6,820) $(13,946) $ 5,129 $ (405) $ (9,222)
</TABLE>
9
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SEGMENT REPORTING (CONTINUED)
The following is a reconciliation of total segment income (loss) before
provision (benefit) for income taxes to consolidated income (loss) before
provision (benefit) for income taxes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- -------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total segment income (loss) before provision (benefit)
for income taxes.................................... $7,125 $ (6,820) $ 15,358 $ (9,222)
Excluded non-ordinary charges and expenses:
Inventory allowances................................ -- 2,394 -- 13,614
Receivables--doubtful accounts...................... -- 7,100 -- 13,060
Restructuring charges............................... -- 474 -- 3,774
Settlement of litigation and related charges........ -- -- 10,340 --
------ -------- -------- --------
-- 9,968 10,340 30,448
------ -------- -------- --------
Total consolidated income (loss) before provision
(benefit) for income taxes.......................... $7,125 $(16,788) $ 5,018 $(39,670)
====== ======== ======== ========
</TABLE>
10. COMPREHENSIVE INCOME (LOSS)
The Company's accumulated other comprehensive loss consists solely of
translation adjustments. Comprehensive income (loss) for the three and
nine-month periods ended July 2, 2000 and July 4, 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss)........................................ $4,589 $(13,214) $3,261 $(30,149)
Change in accumulated translation adjustment, net of
tax.................................................... (239) (94) (742) (1,029)
------ -------- ------ --------
Comprehensive income (loss).............................. $4,350 $(13,308) $2,519 $(31,178)
====== ======== ====== ========
</TABLE>
11. FISCAL 1999 NON-ORDINARY CHARGES AND EXPENSES
During 1998, the Company began an examination of the performance,
profitability and prospects of its various business units as part of an overall
evaluation of its business and financial controls. In connection with this
examination, the Company identified issues relating to its application of
accounting principles and conducted a review of its asset carrying values,
accruals and expenses in historical financial periods, leading to a restatement
of reported financial results for fiscal 1996, fiscal 1997 and the first three
quarters of fiscal 1998. Following the restatement, the Company continued to
focus on its accounting systems and internal controls and the assessment of its
business units. As part of this focus and assessment and against the background
of increasing competition in certain of the Company's markets, new product
introductions by the Company and its competitors, and its customers deferring
purchasing decisions due to their perceived Year 2000 compliance risks, the
Company revised its estimates of 1) the recoverability of the Company's
inventory to reflect its lower build plans which resulted in increased levels of
potentially excess and obsolete inventory, 2) the collectibility of
10
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. FISCAL 1999 NON-ORDINARY CHARGES AND EXPENSES (CONTINUED)
receivables, and 3) the value of certain other assets carried on the Company's
books. The Company's financial statements for the nine month period ended
July 4, 1999 include the following adjustments and charges based on changes in
estimates and revaluations resulting from this process. The more significant
charges are listed below.
<TABLE>
<S> <C>
Inventory
Medical Systems product inventory
Inventory obsolescence.................................... $ 5,653
Engineering obsolescence.................................. 1,468
Offsite inventory obsolescence............................ 746
European inventory write-off.............................. 393
AMT product line discontinuance........................... 2,394
AMT inventory reduced to market value..................... 415
-------
Total Medical Systems product inventory................... 11,069
-------
Medical Systems excess consumable spares write-off.......... 788
ARS inventory reduced to market value....................... 877
Nuclear European sales and marketing inventory write-off.... 680
HCIS inventory obsolescence................................. 200
-------
Total inventory charges..................................... 13,614
-------
Receivables
Increase in receivable reserves, excluding South America.... 5,960
-------
South America
Increase in receivables and recourse reserves............... 7,100
-------
$26,674
=======
</TABLE>
These adjustments and charges are reflected in the Condensed Consolidated
Statement of Operations for the three and nine-month periods ended July 4, 1999
as additional cost of revenues and as operating expenses.
The Company has concentrated resources on continuing to improve its
accounting systems and internal controls, and retained a nationally recognized
accounting firm as consultant and internal auditor. That firm has developed a
number of recommendations and has been retained to assist the Company in
implementing certain process improvements. The Company has made improvements in
its accounting processes and controls, and is working to further strengthen
these with the input and assistance of this accounting firm. Although the
Company believes that it has substantially improved the timeliness and accuracy
of the Company's internal financial reporting and monitoring functions, the
Company will continue to seek improvements in these areas.
12. RECLASSIFICATIONS
Certain reclassifications have been made to the prior periods financial
information to conform to the fiscal 2000 presentation. Such reclassifications
had no impact on the Company's financial position or results of operations.
11
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. RECENT PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standard No 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133"), was issued and
is effective for fiscal years commencing after June 15, 2000. The Company will
comply with the requirements of FAS 133 in fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). In June 2000, the SEC issued
SAB 101B, which deferred the implementation of SAB 101 until the fourth quarter
of fiscal years beginning after December 15, 1999. The Company is evaluating the
effect of adopting SAB 101 and will comply with its requirements in fiscal 2001.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB 25", which is effective July 1,
2000. The Company does not expect FIN 44 to have any material impact on its
financial statements.
12
<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 and
nine-month periods ended July 2, 2000 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 October 3, 1999.
RESULTS OF OPERATIONS
THREE-MONTH AND NINE-MONTH PERIODS ENDED JULY 2, 2000 COMPARED TO THREE-MONTH
AND NINE-MONTH PERIODS ENDED JULY 4, 1999
Revenues for the third quarter of fiscal 2000 were $87.3 million, an
increase of $11.7 million, or 15%, from the third quarter of fiscal 1999
revenues of $75.6 million. Revenues are primarily generated from the sale and
servicing of medical imaging products. Medical Systems revenues represented 79%
and 71% of the Company's total revenues for the third quarters of fiscal 2000
and 1999, respectively. The Company's Radiation Therapy Products revenues
represented approximately 12% and 14% of the Company's total revenues for the
third quarters of fiscal 2000 and 1999, respectively. The Company's HealthCare
Information Systems revenues represented approximately 9% and 15% of the
Company's total revenues for the third quarters of fiscal 2000 and 1999,
respectively.
NON-ORDINARY CHARGES AND EXPENSES
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 named as
defendants the Company and certain of its present and former officers and
directors. The complaints alleged various violations of the federal securities
laws in connection with the restatement of the Company's financial statements
and sought unspecified but potentially significant damages. In April 1999, these
actions were ordered consolidated and, in July 1999, the plaintiffs filed a
consolidated amended complaint. 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.
In January 2000, the Company reached an agreement with the plaintiffs to
settle the class action law-suit. The parties to the class action submitted a
Stipulation of Settlement to the court for preliminary approval. On July 17,
2000, the Court preliminarily approved the settlement, certified the class for
settlement purposes, and approved the notice of the settlement to be sent to
class members. Notice has been sent to the settlement class. Pursuant to the
class action settlement, the plaintiff class will receive $20 million in full
settlement of their claims. In January, 2000, the Company also reached an
agreement-in-principle to settle the derivative action; it is expected that the
derivative settlement will be finalized in the near future and presented for
court approval. Settlement of both of these actions is contingent upon the
satisfaction of numerous conditions, including among others, final court
approval. As a result of having reached these agreements, the Company recorded a
non-ordinary pre-tax charge of $10.3 million in the first quarter of fiscal
2000, representing its total costs for the settlements after contribution by the
insurance company, including $1.3 million for the related legal fees to bring
these matters to a conclusion. During the nine months ended July 2, 2000, the
Company made cash payments of $9.0 million against this accrual, consisting of
$8.0 million in settlement costs and $1.0 million in related legal fees. As of
July 2, 2000, approximately $1.3 million remained in the accrual.
13
<PAGE>
The Company has been informed that the United States Securities and Exchange
Commission (SEC) has issued a Formal Order of Private Investigation in
connection with matters relating to the Company's previously announced
restatement of its financial results for 1996, 1997 and the first three quarters
of 1998. The Company is continuing to cooperate with the SEC. The Company is
unable to predict the outcome of the investigation at this time.
RESTRUCTURING
During fiscal 1999, the Company conducted a comprehensive review of its
operations. Based on this review it restructured its European, South American
and ADAC Medical Technologies ("AMT") businesses. As a result, the Company
recorded charges in fiscal 1999 of $4.1 million. Of this amount $0.5 million and
$3.8 million were recorded during the three and nine-month periods ended
July 4, 1999, respectively. Amounts of $0.3 million and $1.0 million were
charged against the liability during the three and nine-month periods ended
July 2, 2000, representing cash payments made. As of July 2, 2000, $1.0 million
remained in the accrual, comprised of $0.7 million for severance expenses,
$0.1 million for legal and consulting, and $0.2 million for facilities and other
costs associated with the restructuring. The Company currently expects that
these restructuring costs will be paid over the remaining quarter of fiscal
2000.
FISCAL 1999 NON-ORDINARY CHARGES AND EXPENSES
During 1998, the Company began an examination of the performance,
profitability and prospects of its various business units as part of an overall
evaluation of its business and financial controls. In connection with this
examination, the Company identified issues relating to its application of
accounting principles and conducted a review of its asset carrying values,
accruals and expenses in historical financial periods, leading to a restatement
of reported financial results for fiscal 1996, fiscal 1997 and the first three
quarters of fiscal 1998. Following the restatement, the Company continued to
focus on its accounting systems and internal controls and the assessment of its
business units. As part of this focus and assessment and against the background
of increasing competition in certain of the Company's markets, new product
introductions by the Company and its competitors, and its customers deferring
purchasing decisions due to their perceived Year 2000 compliance risks, the
Company revised its estimates of 1) the recoverability of the Company's
inventory to reflect its lower build plans which resulted in increased levels of
potentially excess and obsolete inventory, 2) the collectibility of receivables,
and 3) the value of certain other assets carried on the Company's books. The
Company's financial statements for the nine month period ended July 4, 1999
include the following adjustments
14
<PAGE>
and charges based on changes in estimates and revaluations resulting from this
process. The more significant charges are listed below.
<TABLE>
<S> <C>
Inventory
Medical Systems product inventory
Inventory obsolescence.................................... $ 5,653
Engineering obsolescence.................................. 1,468
Offsite inventory obsolescence............................ 746
European inventory write-off.............................. 393
AMT product line discontinuance........................... 2,394
AMT inventory reduced to market value..................... 415
-------
Total Medical Systems product inventory................... 11,069
-------
Medical Systems excess consumable spares write-off.......... 788
ARS inventory reduced to market value....................... 877
Nuclear European sales and marketing inventory write-off.... 680
HCIS inventory obsolescence................................. 200
-------
Total inventory charges..................................... 13,614
-------
Receivables
Increase in receivable reserves, excluding South America.... 5,960
-------
South America
Increase in receivables and recourse reserves............... 7,100
-------
$26,674
=======
</TABLE>
These adjustments and charges are reflected in the Condensed Consolidated
Statement of Operations for the three and nine-month periods ended July 4, 1999
as additional cost of revenues and as operating expenses.
The Company has concentrated resources on continuing to improve its
accounting systems and internal controls, and retained a nationally recognized
accounting firm as consultant and internal auditor. That firm has developed a
number of recommendations and has been retained to assist the Company in
implementing certain process improvements. The Company has made improvements in
its accounting processes and controls, and is working to further strengthen
these with the input and assistance of this accounting firm. Although the
Company believes that it has substantially improved the timeliness and accuracy
of the Company's internal financial reporting and monitoring functions, the
Company will continue to seek improvements in these areas.
MEDICAL SYSTEMS ("MS")
Medical Systems includes revenues from the sale of the Company's nuclear
medicine products and customer service related to those products. Revenues also
include sales from the Company's ADAC Medical Technologies ("AMT") products.
Summary information related to Medical Systems revenues
15
<PAGE>
and gross margins for the three and nine-month periods ended July 2, 2000,
compared to the corresponding periods in fiscal 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Product............................................. $49,110 $32,900 $153,813 $134,792
Service............................................. 20,211 21,066 57,781 59,374
------- ------- -------- --------
Total............................................... $69,321 $53,966 $211,594 $194,166
======= ======= ======== ========
Geographical mix:
United States....................................... 83.5% 90.3% 80.8% 86.7%
International....................................... 16.5% 9.7% 19.2% 13.3%
Gross margin:
Product............................................. $20,541 $ 4,127 $ 56,899 $ 27,311
Service............................................. 5,581 6,645 14,634 14,479
------- ------- -------- --------
Total............................................... $26,122 $10,772 $ 71,533 $ 41,790
======= ======= ======== ========
Gross margin %:
Product............................................. 41.8% 12.5% 37.0% 20.3%
Service............................................. 27.6% 31.5% 25.3% 24.4%
Total............................................... 37.7% 20.0% 33.8% 21.5%
</TABLE>
Medical Systems' product revenues increased 49% and 14% for the three and
nine-month periods ended July 2, 2000, respectively, from the same periods in
fiscal 1999. This increase is primarily due to the significant increase in
shipments of the C-PET-TM- product during fiscal 2000, which has a higher
selling price than other MS products, and the increased volume of the Company's
Forte-TM- product, partially offset by declining sales of some of the older
product lines. The proportion of the Company's revenues derived from
international regions increased primarily in Europe due to increased penetration
of the Forte and C-PET products, and additionally in Japan through the Company's
distributor Hitachi. Revenues for the nine-month period ended July 2, 2000 did
not increase over the comparable period at the same rate as the third quarter
increase due to disproportionately high revenue in the first quarter of fiscal
1999. The first quarter of fiscal 1999 included a large volume of backordered
products that were released in September 1998.
Gross margins for Medical Systems products increased 398% and 108% for the
three and nine-month periods ended July 2, 2000, compared to the corresponding
periods of the prior fiscal year. This increase is primarily due to one-time
non-ordinary charges recorded in the second and third quarters of fiscal 1999
for inventory obsolescence and book to physical adjustments for product
inventory, refurbished and engineering inventories. See Note 11 "Fiscal 1999
Non-Ordinary Charges and Expenses" of the Notes to Condensed Consolidated
Financial Statements. In addition, gross margins for the third quarter of fiscal
2000 improved due to the higher proportion of sales of the C-PET product with
increases in both volume and average selling price. Also, the Company has sold
through the C-PET inventory that was held by UGM in October 1999; inventory that
the Company had purchased prior to Company's acquisition of UGM. New product
manufactured as a wholly owned subsidiary during the current period is at a
significantly lower standard cost than the previous purchase price from UGM. In
addition, factory performance has improved due to higher production volumes to
meet demand in fiscal 2000 compared to the lower production and work down of
higher inventory levels during the same period in fiscal 1999. These
improvements were partially offset by lower average selling prices of some of
the Company's older product lines. Gross margins for the nine-month period ended
July 2, 2000 were reduced by the Company's refined estimate of the warranty
provision resulting in an additional provision of approximately $1.0 million
during the first quarter of fiscal 2000.
16
<PAGE>
Medical Systems service revenues for the three and nine-month periods ended
July 2, 2000, decreased 4% and 3%, respectively, over the same periods in fiscal
1999. The decrease resulted from lower sales related to hardware and software
upgrades for Year 2000 compliance, partially offset by higher core service
revenue from a larger customer base. Gross margins decreased 16% and increased
1% for the three and nine-month periods ended July 2, 2000, compared to the same
periods of fiscal 1999. The decrease for the three-month period is primarily due
to greater sales of high margin hardware and software upgrades for Year 2000
compliance recognized in the third quarter of fiscal 1999, partially offset by
higher core service revenue from a larger customer base in the current quarter.
The increase for the nine month period is primarily due to one-time charges
recorded in the second quarter of fiscal 1999 for the write off of excess
consumable spare parts of approximately $0.8 million. See Note 11 "Fiscal 1999
Non-Ordinary Charges and Expenses" of the Notes to Condensed Consolidated
Financial Statements.
RADIATION THERAPY PRODUCTS ("RTP")
RTP revenues are generated primarily from the sale and support of the
Company's Pinnacle(3TM) radiation therapy planning system. RTP revenues also
include sales from the Company's CT refurbishing business unit, ARS. Summary
information related to RTP revenues and gross margins for the three and
nine-month periods ended July 2, 2000, compared to the corresponding periods in
fiscal 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Product............................................... $ 9,250 $10,251 $29,102 $34,896
Service............................................... 1,143 492 2,909 1,610
------- ------- ------- -------
Total................................................. $10,393 $10,743 $32,011 $36,506
======= ======= ======= =======
Geographical mix:
United States......................................... 90.0% 88.6% 79.5% 89.0%
International......................................... 10.0% 11.4% 20.5% 11.0%
Gross margin:
Product............................................... $ 6,188 $ 5,563 $18,140 $19,084
Service............................................... 688 104 1,592 399
------- ------- ------- -------
Total................................................. $ 6,876 $ 5,667 $19,732 $19,483
======= ======= ======= =======
Gross margin %:
Product............................................... 66.9% 54.3% 62.3% 54.7%
Service............................................... 60.2% 21.1% 54.7% 24.8%
Total................................................. 66.2% 52.8% 61.6% 53.4%
</TABLE>
RTP product revenues decreased 10% and 17% for the three and nine-month
periods ended July 2, 2000 compared to the same periods in fiscal 1999. Product
revenues for the three months ended July 2, 2000 increased 9% from the preceding
three-month period ended April 2, 2000. The decrease for the three-month period
ended July 2, 2000 over the same period in the prior fiscal year is primarily
due to the lower volume of refurbished product shipments and reduced shipments
to Europe during the current period due to lower bookings. Shipments of the
Pinnacle(3TM) increased during the third quarter of fiscal 2000 from the second
quarter of fiscal 2000 to the same level as the third quarter of fiscal 1999
with the successful introduction of the add-on features incorporated in the
Pinnacle(3)MD( TM) and SmartSim-TM-. The decrease from the comparable nine-month
period resulted from lower sales volume of refurbished products and of
Pinnacle(3) due to low bookings during the second quarter of
17
<PAGE>
fiscal 2000 and unusually high revenue during the first quarter of fiscal 1999,
partially offset by higher revenue in Europe during the first six months of
fiscal 2000.
Gross margins for RTP product increased 11% and decreased 5%, respectively,
for the three and nine-month periods ended July 2, 2000, compared to the
corresponding periods in fiscal 1999. The increase in gross margin for the
three-month period compared to the prior fiscal year is due to the reduction in
the cost of the Pinnacle(3) platform and the change in mix of product features
sold during the period. The decrease in gross margin dollars for the nine-month
period over the comparable prior year period is primarily due to the lower
revenue from refurbished product during fiscal 2000 and lower Pinnacle(3)
shipments during the first six months of fiscal 2000. These decreases were
partially offset by the reduction in the cost of the Pinnacle(3) platform, the
change in mix of product features sold during the current quarter and one-time
non-ordinary charges recorded in the second quarter of fiscal 1999 for inventory
obsolescence of $0.9 million. See Note 11 "Fiscal 1999 Non-Ordinary Charges and
Expenses" of the Notes to Condensed Consolidated Financial Statements. Gross
margin increased as a percentage of revenue for the nine-month period compared
to the prior year period due primarily to the third quarter fiscal 2000 lower
cost structure of the Pinnacle(3) platform.
RTP service revenues increased 132% and 81% for the three and nine-month
periods ended July 2, 2000, compared to the corresponding periods in fiscal
1999, due primarily to the commencement of separate RTP service contracts for
software support during fiscal 2000. Service gross margins increased 562% and
299% for the three and nine-month periods ended July 2, 2000, compared to the
corresponding periods in fiscal 1999, due to the increase in the number of
contracts, leveraging the cost structure.
HEALTHCARE INFORMATION SYSTEMS ("HCIS")
HCIS revenues are generated from the sale and support of radiology and
cardiology information systems and the support of the Company's legacy
laboratory information systems. Summary information related to HCIS revenues and
gross margins for the three and nine-month periods ended July 2, 2000, compared
to the corresponding periods in fiscal 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Product............................................... $ 4,722 $ 7,249 $14,444 $15,138
Service............................................... 2,874 3,662 9,596 11,482
------- ------- ------- -------
Total................................................. $ 7,596 $10,911 $24,040 $26,620
======= ======= ======= =======
Geographical mix:
United States......................................... 98.2% 96.3% 96.9% 95.5%
International......................................... 1.8% 3.7% 3.1% 4.5%
Gross margin:
Product............................................... $ 1,209 $ 2,768 $ 4,456 $ 5,707
Service............................................... 1,367 1,865 4,772 6,153
------- ------- ------- -------
Total................................................. $ 2,576 $ 4,633 $ 9,228 $11,860
======= ======= ======= =======
Gross margin %:
Product............................................... 25.6% 38.2% 30.9% 37.7%
Service............................................... 47.6% 50.9% 49.7% 53.6%
Total................................................. 33.9% 42.5% 38.4% 44.6%
</TABLE>
HCIS product revenues decreased 35% and 5% for the three and nine-month
periods ended July 2, 2000, compared to the same periods in fiscal 1999. Product
revenues for the three-month period
18
<PAGE>
ended July 2, 2000 increased $0.8 million, or 20%, compared to the preceding
three-month period ended April 2, 2000. The decrease over the prior year is
primarily due to lower revenue recognized for the Company's radiology product
lines, primarily QuadRIS-TM-, and the loss of revenues for the Labstat-TM-
product discontinued in the first quarter of fiscal 1999. These decreases were
partially offset by the addition of the Image Management product line. The
decrease for the nine month period over the comparable prior year period is due
to the above factors and also partially offset by the prospective adoption of
Statement of Position ("SOP") 97-2 "Software Revenue Recognition" as of the
first quarter of fiscal 1999. The effect of adopting SOP 97-2 was to reduce
revenue recognized within the first six months of fiscal 1999. The increase in
revenue over the second quarter of fiscal 2000 is due primarily to an increase
in Image Management revenue recognized in the period and to a lesser extent
increased cardiology product.
Gross margin for HCIS for the three and nine-month periods ended July 2,
2000 decreased 56% and 22%, respectively, from the corresponding periods in
fiscal 1999. The decrease as a percentage of sales however was 33% and 18%,
respectively. This decrease is primarily due to lower revenue absorbing a higher
cost structure including staffing costs, information systems and software
amortization and also the costs associated with the addition of the Image
Management business unit during the third quarter of fiscal 2000. The decrease
as a percentage of sales is lower due to actions in the prior quarter to reduce
the cost structure having full effect during the current period. The decrease
for the nine-month period is also attributable to the change in product mix to
lower margin cardiology products in the first quarter of fiscal 2000.
HCIS service revenues decreased 22% and 16% for the three and nine-month
periods ended July 2, 2000, compared to the corresponding periods in fiscal
1999. This decrease is due primarily to significantly lower service revenues
from the discontinued Labstat product, partially offset by slightly higher
radiology and cardiology service revenue and the addition of service revenue on
the Image Management products. Service gross margins decreased for the three and
nine-month periods ended July 2, 2000 by 27% and 22%, respectively, compared to
the corresponding periods in fiscal 1999, primarily due to lower revenue
absorbing the fixed cost structure. Service gross margins as a percentage of
revenue decreased at a lower rate compared to the prior year periods and
increased compared to the second quarter of fiscal 2000 due to actions in the
prior quarter to reduce the cost structure having full effect during the current
period.
OPERATING AND OTHER EXPENSES:
As a percentage of the Company's revenues, operating and other expenses for
the three and nine-month periods ended July 2, 2000 and July 4, 1999 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating expenses:
Marketing and sales..................................... 16.4% 20.1% 15.9% 18.6%
Research and development, net of software
capitalization........................................ 5.2% 6.0% 5.3% 5.2%
General and administrative.............................. 9.3% 21.9% 8.9% 16.6%
Goodwill amortization................................... 0.6% 0.7% 0.6% 0.6%
Restructuring charge.................................... -- 0.6% -- 1.5%
Settlement of litigation and related charges............ -- -- 3.9% --
------- ------- ------- -------
31.5% 49.3% 34.5% 42.5%
======= ======= ======= =======
Other expense, net...................................... 1.1% 0.7% 1.2% 1.4%
</TABLE>
Marketing and sales expenses for the three and nine-month periods ended
July 2, 2000 decreased $0.9 million, or 6%, and $5.4 million, or 11%, from the
corresponding periods in the prior fiscal year. This decrease is primarily due
to savings as a result of the restructuring of the European operation
19
<PAGE>
during fiscal 1999, and to a lesser extent cost control measures primarily
within the RTP and HCIS organizations and lower commission expense.
Research and development expenses, net of software capitalization, were flat
for the three-month period ended July 2, 2000 and increased $0.7 million, or 5%,
for the nine-month period ended July 2, 2000, over the corresponding periods in
the prior fiscal year. Although the net expense for the three-month period is
constant, the gross spending increased slightly on the Nuclear and C-PET product
lines within MS. These costs were offset by higher software capitalization
primarily within MS on the Skylight, C-PET and other products. The expense
increase for the nine-month period is the result of flat net spending in the
second and third quarters combined with fewer software projects meeting
technical feasibility during the first quarter of fiscal 2000; therefore fewer
projects met the criteria for capitalization. Several of the projects being
capitalized during the first quarter of fiscal 1999 were completed late in
fiscal 1999.
General and administrative expenses for the three and nine-month periods
ended July 2, 2000 decreased $8.5 million, or 51%, and $18.8 million, or 44%,
respectively, from the corresponding periods in the prior fiscal year. This
decrease is primarily due to one-time charges recorded in the second and third
quarters of fiscal 1999 for increased bad debt reserves. See Note 11 "Fiscal
1999 Non-Ordinary Charges and Expenses" of the Notes to Condensed Consolidated
Financial Statements. Also, additional expenses payable to outside legal
counsel, accounting and other service providers related to the restatement of
the Company's financial statements were recorded during the second and third
quarters of fiscal 1999. The expense decrease was also due to improved cost
control and monitoring, partially offset by investments in infrastructure in
Finance and Administration and UGM in the first half of fiscal 2000.
Goodwill amortization remained constant at $0.5 million per quarter for the
three and nine-month periods ended July 2, 2000 compared to the corresponding
periods of fiscal 1999. There was increased amortization of goodwill in fiscal
2000 related to the acquisition of UGM at the end of fiscal 1999 offset by
goodwill resulting from earlier acquisitions reaching the end of its
amortization life.
The Company recorded a settlement charge in the first quarter of fiscal 2000
of $10.3 million representing its total costs, including legal fees, to settle
the consolidated class action lawsuit and related derivative litigation pending
against the Company. The settlements are contingent upon the satisfaction of
numerous conditions, including among others, final court approval. See Note 7
"Litigation" of the Notes to Condensed Consolidated Financial Statements.
The Company recorded a restructuring charge of $0.5 million and
$3.8 million during the three and nine-month periods ended July 4, 1999,
respectively, related to its international operations in order to improve the
operations' profitability. See Note 5 "Restructuring Charges" of the Notes to
Condensed Consolidated Financial Statements.
Interest and other expense, net, which primarily consists of interest
expense and foreign currency translation gains and losses, increased by
$0.4 million, or 71%, and decreased by $0.4 million, or 12%, for the three and
nine-month periods ended July 2, 2000, respectively, compared to the
corresponding periods in the prior fiscal year. The increase for the three-month
period resulted from higher borrowing rates on the Company's primary debt
facility. The decrease in the nine-month period is due primarily to lower
foreign exchange currency loss for the current year.
INCOME TAXES
The estimated effective tax rate for fiscal year 2000 was adjusted in the
third quarter of fiscal 2000 from 37% to 35%, resulting in an effective tax rate
of 36% for that quarter. The estimated effective tax rate for fiscal year 1999
was adjusted in the third quarter of fiscal 1999 from 26% to 24%, resulting in
an effective tax rate of 21% for that quarter.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its available cash and cash equivalents, cash to be
generated primarily from operations, and its available credit lines will provide
adequate funds to finance the Company's operations for the next 12 months. If
necessary, the Company will seek to increase its credit lines to support the
Company's future growth. There can be no assurance that credit lines sufficient
to satisfy the Company's cash requirements will be available on terms acceptable
to the Company, if at all.
Cash provided by operating activities was $29.2 million in the first nine
months of fiscal 2000. The primary source of cash was provided by operating
income of $20.2 million, consisting of net income of $3.3 million adjusted by
$16.9 million of non-cash charges, and after giving effect to changes in
operating assets and liabilities of $9.0 million (net). Cash provided by changes
in operating assets and liabilities was primarily generated by an increase in
accounts payable of $11.1 million and a decrease in inventory of $5.9 million.
These sources of cash were partially offset by a decrease in other accrued
liabilities of $4.5 million, an increase in field service spares of
$3.7 million and other items which netted to $0.2 million. The primary use of
cash in operations for the first nine months of fiscal 1999 was a $30.1 million
net loss, the increase of $22.1 million in accounts receivable and a reduction
in accounts payable of $10.8 million, partially offset by a decrease of
$35.2 million and $4.6 million in inventories and tax and other receivables,
respectively, and an increase of $6.7 million in deferred revenues.
Cash of $15.9 million was used for investing activities in the first nine
months of fiscal 2000. This activity consisted primarily of $6.2 million,
$7.8 million and $1.9 million for capital equipment expenditures, capitalized
software expenditures and an increase in other assets and intangibles,
respectively. Capital expenditures were primarily for computer equipment, data
processing equipment, the enterprise software implementation in progress for the
sales and service groups and demo equipment and transfers from inventory to
engineering. Cash of $18.6 million was used for investing activities in the
first nine months of fiscal 1999, consisting of $9.8 million, $5.9 million and
$2.9 million for capital expenditures, capitalized software expenditures and
other assets and intangibles.
Financing activities used $10.0 million of cash in the first nine months of
fiscal 2000. This was attributable to $13.1 million of payments against
short-term borrowings and $1.2 million payment of capital lease obligations,
partially offset by $4.3 million of proceeds from common stock issued to
employees under the Company's employee stock purchase and option plans.
Financing activities provided $28.3 million of cash in the first nine months of
fiscal 1999. This was primarily attributable to $24.3 million of increased
borrowings to meet operational needs and $4.1 million of proceeds from common
stock issued to employees under the Company's employee stock purchase and option
plans.
As of July 2, 2000 the Company had an $85.0 million revolving credit
facility with a bank syndicate. The credit facility offers borrowings in either
U.S. dollars or in foreign currencies and expires on March 29, 2002. The Company
pays commitment fees and interest on its borrowings based on its debt level in
relation to its cash flow. Commitment fees range from 0.25% to 0.75% of unused
commitment, and interest rates are based on the banks' prime rate or LIBOR plus
rates ranging from 1.0% to 2.5%. At July 2, 2000, the Company had $46.1 million
available for borrowing under this facility. Due to the settlement of certain
securities litigation and related charges, the results of the Company's
operations in the first quarter of fiscal 2000 caused the Company to be out of
compliance with it's financial covenants in the facility. On January 28, 2000,
the Company and the bank syndicate signed an amendment increasing the credit
facility from $75.0 million to $85.0 million and modifying the financial
covenants, retroactively to include the first fiscal quarter of 2000, to be more
reflective of the Company's recent financial performance. The Company was in
compliance with these modified covenants in the first, second and third quarters
of fiscal 2000.
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
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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.
RECENT PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standard No 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133"), was issued and
is effective for fiscal years commencing after June 15, 2000. The Company will
comply with the requirements of FAS 133 in fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). In June 2000, the SEC issued
SAB 101B, which deferred the implementation of SAB 101 until the fourth quarter
of fiscal years beginning after December 15, 1999. The Company is evaluating the
effect of adopting SAB 101 and will comply with its requirements in fiscal 2001.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB 25", which is effective July 1,
2000. The Company does not expect FIN 44 to have any material impact on its
financial statements.
BUSINESS CONSIDERATIONS
From time to time, the Company may disclose, through press releases, filings
with the SEC or otherwise, certain matters that constitute forward looking
statements within the meaning of the Federal securities laws. These statements,
including the forward looking statements contained in this Form 10-Q, are
generally prefaced with the language "we expect", "we believe", "the Company
believes" or similar language, and 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. These forward
looking statements include statements concerning the Company's future bookings,
revenue, expenses and earnings, the establishment of additional reserves and the
taking of non-ordinary charges, increasing demand for and the profitability of
the Company's products; the shift in the Company's business mix to more
profitable products and the effect on the Company's gross margins and earnings;
and the Company's market position, product leadership and future product
offerings. Factors that could cause actual results to differ materially from
those contained in such forward-looking statements include, but are not limited
to, risks related to the growth prospects of the markets ADAC serves, including
the PET market; the existence of significant competition in each of these
markets and the potential effect on future sales, pricing and profitability; the
Company's dependence on its ability to successfully and timely market, scale
manufacturing capacity for, ship and install its existing and develop and
commercialize new products product enhancements; the collectibility of the
Company's receivables, changes to the Company's operating structure and charges
and dislocations that may result therefrom; the impact of international economic
conditions on the Company's business; and a number of other factors that can
introduce variability into the Company's operating results, including the
ability of the Company to timely convert bookings or backlog into revenue due to
risks associated with completion of customer site preparation and construction,
installation scheduling, receipt of applicable regulatory approvals, customer
financing and other factors. Further information on these and other factors is
found below. All forward-looking statements are based on information available
to the Company on the date hereof, and the Company assumes no obligation to
update such 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
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December 28, 1998. These actions named as defendants the Company and certain of
its present and former officers and directors. The complaints alleged various
violations of the federal securities laws in connection with the restatement of
the Company's financial statements and sought unspecified but potentially
significant damages. In April 1999, these actions were ordered consolidated and,
in July 1999, the plaintiffs filed a consolidated amended complaint. 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.
In January 2000, the Company reached an agreement with the plaintiffs to
settle the class action law-suit. The parties to the class action submitted a
Stipulation of Settlement to the court for preliminary approval. On July 17,
2000, the Court preliminarily approved the settlement, certified the class for
settlement purposes, and approved the notice of the settlement to be sent to
class members. Notice has been sent to the settlement class. Pursuant to the
class action settlement, the plaintiff class will receive $20 million in full
settlement of their claims. In January, 2000, the Company also reached an
agreement-in-principle to settle the derivative action; it is expected that the
derivative settlement will be finalized in the near future and presented for
court approval. Settlement of both of these actions is contingent upon the
satisfaction of numerous conditions, including among others, final court
approval. As a result of having reached these agreements, the Company recorded a
non-ordinary pre-tax charge of $10.3 million in the first quarter of fiscal
2000, representing its total costs for the settlements after contribution by the
insurance company, including $1.3 million for the related legal fees to bring
these matters to a conclusion. During the nine months ended July 2, 2000, the
Company made cash payments of $9.0 million against this accrual, consisting of
$8.0 million in settlement costs and $1.0 million in related legal fees. As of
July 2, 2000, approximately $1.3 million remained in the accrual.
The Company has been informed that the United States Securities and Exchange
Commission (SEC) has issued a Formal Order of Private Investigation in
connection with matters relating to the Company's previously announced
restatement of its financial results for 1996, 1997 and the first three quarters
of 1998. The Company is continuing to cooperate with the SEC. The Company is
unable to predict the outcome of the investigation at this time.
The Company is also a defendant in various legal proceedings incidental to
its business. Management is of the opinion that any liability resulting from
these claims would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
COMPETITION
The markets served by the Company are characterized by rapidly evolving
technology, intense competition and pricing pressure. The Company competes
primarily on the basis of technology, performance, price, quality, reliability,
distribution and customer service and support. There are a number of companies
that currently offer, or are in the process of developing, products that compete
with products offered by the Company. Some of the Company's competitors have
substantially greater capital, engineering, manufacturing and other resources
than the Company. These competitors could develop technologies and products that
are more effective than those currently used or marketed by the Company or that
could render the Company's products obsolete or noncompetitive, which could have
a material adverse effect on the Company's business. Competition in the markets
served by the Company could result in pricing pressure, which could have a
material adverse effect on the Company's gross margins.
DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
ADAC's success is dependent upon the successful development, manufacture and
sale of new products such as the C-PET and the development of enhancements to
existing products. Because the markets in which the Company competes are highly
competitive, the Company must continue to develop and successfully commercialize
innovative new products and product enhancements in order to
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pursue its growth strategy. The development of new products and product
enhancements entails considerable time and expense, including research and
development costs, and the time, expense and uncertainty involved in obtaining
any necessary regulatory clearances and scaling manufacturing capacity. Failure
of the Company to develop, market, manufacture in volume or sell new products
and enhancements effectively in future periods could have a material adverse
effect on the Company's results of operations and financial condition.
SOUTH AMERICAN OPERATIONS
A significant number of the Company's customers in its principal South
American markets of Brazil, Argentina and Colombia are delinquent in making
periodic payments due under the terms of sales previously made to them, many of
which were supported by third-party financing arrangements that involve full or
partial recourse to the Company. Deteriorating economic conditions and currency
devaluations occurring primarily during fiscal 1999, and ineffective monitoring
of delinquencies and collection efforts by the Company, may have all contributed
to delays in the collection of accounts receivable from customers in these
markets. During fiscal 1999 the Company renewed collection efforts and completed
an evaluation of each receivable balance and recourse obligation to determine
the level of reserves required for these customers. As a result of this
evaluation, the Company revised its estimate of the recoverability of its South
American receivables and recourse obligations during fiscal 1999 and provided
additional reserves of $8.9 million. As of July 2, 2000 the Company had net
South American receivables of $2.6 million and recourse contingencies of
$0.3 million.
GOVERNMENT REGULATION
The design, clinical activities, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of the Company's products are subject
to extensive and rigorous governmental regulation in the United States and
foreign countries. In the United States and certain foreign countries, the
process of obtaining and maintaining required regulatory clearances or approvals
is lengthy, expensive and uncertain. There can be no assurance that any
necessary clearance or approval will be granted to the Company or that FDA or
other regulatory agency review will not involve delays adversely affecting the
Company. In addition, a failure to comply with applicable regulatory
requirements could result in enforcement actions including Warning Letters, as
well as civil penalties, injunctions, suspensions or losses of regulatory
clearances, product recalls, seizure or administrative detention of products,
operating restrictions through consent decrees or otherwise, and criminal
prosecution, which could have a material adverse effect upon the Company.
In mid-1998, the State of California, under a contract with the FDA,
completed a routine inspection of ADAC's facility in Milpitas, California. The
state investigator issued a FDA Form 483 containing observations of
non-compliance of the recently implemented QSR. The state investigator also
placed a temporary shipment hold on Pinnacle(3) pending the Company
satisfactorily responding to the State's concerns regarding the Company's
quality systems. The Company promptly responded to the FDA and the State and
initiated a number of corrective actions. The State lifted the Pinnacle(3)
shipment hold on August 28, 1998 and, in September 1998, ADAC received a letter
from the FDA indicating that the Company had adequately responded to the FDA's
concerns. Although the Company was deemed to have adequately responded to the
State and FDA following the foregoing inspections, the Company is responsible
for the full implementation of all corrective actions. In addition, as all
companies are, the Company remains subject to periodic inspections in the future
and there can be no assurance as to the timing or outcome of any subsequent
inspection. The scope of any re-inspection could be more comprehensive than the
inspection of the Company's Milpitas facility, and there can be no assurance
that the FDA, upon re-inspection, will deem the Company's corrective actions to
be adequate or that additional corrective action, in areas not addressed in the
Form 483, will not be required. Any failure by the Company to fully implement
the required corrective actions or to comply with any other applicable
regulatory requirements could have a material adverse effect on the Company's
ability to continue to manufacture and distribute its products, and in more
serious cases,
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<PAGE>
could result in seizure, recall, injunction and/or civil fines. Any of the
foregoing, would have a material adverse effect on the Company.
The Company is also subject to FTC restrictions on advertising and numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection and disposal of
hazardous substances. Changes in existing requirements, adoption of new
requirements or failure to comply with applicable requirements could have a
material adverse effect on the Company.
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 uncertain. The timing of revenues can be affected by delays in product
introductions, timely scaling of manufacturing capacity, 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
shortfall late in that quarter. In addition, the Company's bookings and backlog
cannot necessarily be relied upon as an accurate predictor of future revenues as
the timing of such revenues is dependent upon completion of customer site
preparation and construction, installation scheduling, receipt of applicable
regulatory approvals, customer financing and other factors. Accordingly, there
can be no assurance that orders will mature into revenue. The Company has
accounts receivable due from customers in Latin America. Recent changes in
economic conditions in that region, including the devaluation of Brazilian
currency, may adversely affect the Company's ability to collect these accounts
receivable. If the Company were unable to collect a substantial majority of
these accounts receivable, the Company's results of operations for a quarterly
period could be adversely affected.
INTERNAL CONTROLS
After completion of their audit of the results of the Company's 1998 fiscal
year, the Company's independent accountants reported to the Company's audit
committee that they had found material weaknesses in the Company's internal
accounting controls. Following receipt of this report, the Company retained a
nationally recognized accounting firm other than its independent auditors to
review its controls. The Company has further engaged this firm to recommend to
the Company suggested improvements in these controls and to assist the Company
in implementing them. The Company has made improvements in its accounting
processes and controls, and is working to further strengthen these with the
input and assistance of this accounting firm. Although the Company believes that
it has substantially improved the timeliness and accuracy of the Company's
internal financial reporting and monitoring functions, the Company will continue
to seek improvements in these areas.
RISKS RELATED TO ACQUISITIONS
In the past two years, the Company has acquired a number of 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
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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 constitute "Year 2000 Readiness Disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act. The
Company utilized both internal and external resources to identify, correct or
reprogram and test for Year 2000 compliance. The Company's initiatives focused
on three main areas of potential impact: the software and equipment provided to
customers, internal systems and vendors and suppliers. As part of these
initiatives the Company developed and installed software upgrades for a majority
of its installed base to make the Company's products Year 2000 compliant, sold
hardware upgrades to customers with equipment that the Company no longer
manufactures, analyzed or tested its vendors' systems as needed based on data
gathered from such vendors and implemented system changes needed to correct its
internal Year 2000 issues. Where possible the Company contacted by mail
customers which required computer hardware upgrades, and also posted information
relating to Year 2000 compliance for its products on the Company's website.
While the Company has passed a number of critical Year 2000 dates
(September 9, 1999, January 1, 2000 and February 29, 2000) without any
significant problems or delays reported through customer service or internal
systems, issues could still arise due to other dates not already identified.
Failure by the Company 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. In addition, there is no guarantee that the systems and products
of other companies on which the Company relies were timely converted or that
they will not have a material adverse effect on the Company in the months to
come.
The Company incurred Year 2000 costs of approximately $1.2 million of which
$0.7 million was incurred during the nine-months ended July 4, 1999. This amount
does not include any reserves for any potential future customer or other claim
related to Year 2000 compliance, which claim, if brought, could have a material
adverse effect on the Company.
HEALTHCARE 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
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business interruption from these and other sources, there can be no assurance
that such coverage would be adequate.
PRODUCT LIABILITY
Although the Company maintains product liability insurance coverage in an
amount that it deems sufficient for its business, there can be no assurance that
such coverage will ultimately prove to be adequate or that such coverage will
continue to remain available on acceptable terms, if at all.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is and is expected to
continue to be subject to significant fluctuations in response to variations in
anticipated or actual operating results, market speculation, announcements of
new products or technology by the Company or its competitors, changes in
earnings estimates by the Company's analysts, trends in the healthcare 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 healthcare reform, may adversely
impact the market price of the Common Stock regardless of the Company's
operating results.
MARKET RISK
FOREIGN CURRENCY EXCHANGE
The Company faces exposure to adverse movements in foreign currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on the Company's financial results. The
Company's primary exposures relate to transaction exposures and translation
exposures. Transaction exposure is any monetary assets or liabilities
denominated in a non-functional currency. Non-functional currency is any
currency other than the company's reporting currency. For example, the Company's
US functional currency is USD. Therefore, any assets or liabilities that are on
the Company's US books that are not in USD are nonfunctional currency. The
company has started hedging on transaction exposure. Translation exposure occurs
by the need to convert foreign currency financial statements into USD for
consolidation. The company does not hedge against translation exposure.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's cash equivalents and notes payable to banks. The
Company's cash equivalents include highly liquid instruments with an original
maturity of three months or less. The Company primarily enters into debt
obligations to support general corporate purposes, including working capital
requirements, capital expenditures, and acquisitions. The Company is subject to
fluctuating interest rates that may impact, adversely or otherwise, its results
of operations or cash flows for its variable rate notes payable and cash
equivalents.
The estimated fair value of the Company's cash and cash equivalents
approximates their carrying values based on the short maturities of these
financial instruments. The estimated fair value of the Company's debt
obligations approximates their carrying values based on rates currently
available to the Company for debt with similar terms and remaining maturities.
Although payments under certain of the Company's operating leases for its
facilities are tied to market indices, the Company is not exposed to material
interest rate risk associated with these obligations. The Company does not hedge
interest rate change exposures.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 "Litigation" of Notes to Condensed Consolidated Financial
Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 6 "Credit and Borrowing Arrangements" of Notes to Condensed
Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
27 Financial Data Schedule
(b) Reports on Form 8-K:
None filed during the fiscal quarter described in this Report on
Form 10-Q.
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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.
<TABLE>
<S> <C> <C>
Date: August 14, 2000 ADAC LABORATORIES
(REGISTRANT)
By: /s/ NEIL J. LAIRD
-----------------------------------------
Neil J. Laird
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
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