-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G+qW2VPYW9VK14G2xeZy48bYDbnZK8V5aZAhlooKtJX/53rq/MRTiD6CbW6gNn0y S6r7WpELLMhgYlcAAhUW6Q== 0000313798-98-000013.txt : 19980619 0000313798-98-000013.hdr.sgml : 19980618 ACCESSION NUMBER: 0000313798-98-000013 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980617 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAC LABORATORIES CENTRAL INDEX KEY: 0000313798 STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844] IRS NUMBER: 941725806 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-09428 FILM NUMBER: 98649610 BUSINESS ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083219100 MAIL ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 - -----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PPQF+qitVpTyyqhwdlRdWklWTcoB5gP811kd8B0hk21A7qlpMkNVjNgzZihnhfAu LmkDOS2xUnZVPeBhjDBZGQ== 0000313798-98-000013.txt : 19980618 0000313798-98-000013.hdr.sgml : 19980618 ACCESSION NUMBER: 0000313798-98-000013 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980617 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAC LABORATORIES CENTRAL INDEX KEY: 0000313798 STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844] IRS NUMBER: 941725806 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-09428 FILM NUMBER: 98649610 BUSINESS ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083219100 MAIL ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 10-Q/A 1 FORM 10-Q/A FOR PERIOD ENDED MARCH 29, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 29, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-9428 ADAC LABORATORIES (Exact name of registrant as specified in its charter) California 94-1725806 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 540 Alder Drive Milpitas, California 95035 (Address of principal executive offices) (Zip Code) (408) 321-9100 (Registrant's telephone number including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of common stock, no par value, outstanding at May 8, 1998, 19,600,767 ADAC LABORATORIES QUARTERLY REPORT ON FORM-10Q/A INDEX Page Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Operations for the Three-Month And Six-Month Periods Ended March 29, 1998 and March 30, 1997 3 Condensed Consolidated Balance Sheets at March 29, 1998 and September 29, 1997 4 Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended March 29, 1998 and March 30, 1997 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 Part II. Other Information Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Exhibit Index 20 10.21 Amendment No. 7 to 1992 Stock Option Plan 10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994) 27 Financial Data Schedule PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADAC LABORATORIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Six Months Ended ------------------------ ----------------------- March 29, March 30, March 29, March 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- REVENUES, NET: Product $56,584 $52,922 $112,437 $104,526 Service 20,794 17,054 40,464 33,815 ----------- ----------- ----------- ----------- 77,378 69,976 152,901 138,341 ----------- ----------- ----------- ----------- COST OF REVENUES: Product 31,046 30,222 62,385 60,262 Service 13,388 10,766 25,664 21,564 Discontinued product -- -- 3,500 -- ----------- ----------- ----------- ----------- 44,434 40,988 91,549 81,826 ----------- ----------- ----------- ----------- Gross Profit 32,944 28,988 61,352 56,515 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Marketing and sales 11,549 10,784 23,150 21,521 Research and development 3,704 3,548 8,065 6,797 General and administrative 4,830 4,424 9,115 8,670 Goodwill amortization 428 198 803 396 Discontinued product -- -- 12,900 -- ----------- ----------- ----------- ----------- 20,511 18,954 54,033 37,384 ----------- ----------- ----------- ----------- Operating Income 12,433 10,034 7,319 19,131 Interest and other expense, net 951 1,318 1,900 2,420 ----------- ----------- ----------- ----------- Income before provision for income taxes 11,482 8,716 5,419 16,711 Provision for income taxes 4,478 3,164 2,113 6,066 ----------- ----------- ----------- ----------- Net income $7,004 $5,552 $3,306 $10,645 =========== =========== =========== =========== Net income: Basic $0.36 $0.30 $0.17 $0.59 =========== =========== =========== =========== Diluted $0.35 $0.29 $0.17 $0.55 =========== =========== =========== =========== Number of shares used in per share calculations: Basic 19,195 18,246 19,082 18,071 =========== =========== =========== =========== Diluted 20,192 19,434 20,015 19,303 =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. ADAC LABORATORIES CONDENSED CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS)
March 29, September 28, 1998 1997 (UNAUDITED) ------------ ------------ ASSETS Current assets: Cash and cash equivalents $5,106 $5,088 Accounts receivable 112,871 99,495 Inventories 32,901 27,534 Prepaid expenses and other current assets 8,567 10,155 ------------ ------------ Total current assets 159,445 142,272 ------------ ------------ Service parts 18,573 17,278 Fixed assets 10,814 11,555 Capitalized software 11,004 14,007 Goodwill 20,891 10,110 Deferred income taxes 10,172 8,249 Other assets 3,064 3,524 ------------ ------------ Total Assets $233,963 $206,995 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable to banks $29,704 $22,217 Accounts payable 17,363 10,543 Deferred revenues 10,013 11,561 Customer deposits and advance billings 2,140 2,841 Accrued compensation 6,232 7,522 Other accrued liabilities 19,102 11,115 ------------ ------------ Total current liabilities 84,554 65,799 ------------ ------------ Deferred income taxes 9,532 11,103 Liabilities and deferred credits 3,630 3,596 ------------ ------------ Total Liabilities 97,716 80,498 ------------ ------------ SHAREHOLDERS' EQUITY Preferred stock, no par value: Authorized: 5,000 shares; Issued and outstanding: none; - - Common stock, no par value: Authorized: 50,000 shares; Issued and outstanding: 19,427 shares at March 29, 1998 and 18,812 shares at September 28, 1997 130,701 123,269 Retained earnings 8,899 5,593 Translation adjustment (3,353) (2,365) ------------ ------------ Total Shareholders' Equity 136,247 126,497 ------------ ------------ Total Liabilities and Shareholders' Equity $233,963 $206,995 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. ADAC LABORATORIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED ------------------------ March 29, March 30, 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,306 $10,645 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 5,443 4,890 Provision for product returns and doubtful accounts 1,886 1,276 Deferred income taxes (3,499) 1,047 Inventory allowance (141) 3,701 Discontinued products 16,400 Changes in assets and liabilities: Accounts receivable (20,388) (9,993) Inventories (7,827) 406 Prepaid expenses and other current assets 1,596 556 Service parts (1,824) (1,358) Accounts payable 6,155 (3,638) Deferred revenues (1,960) (2,203) Customer deposits and advance billings (154) (922) Accrued compensation (701) (411) Other accrued liabilities (1,290) 738 Non-current liabilities and deferred credits 6,723 2,072 ----------- ----------- Cash provided by operating activities 3,725 6,806 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,630) (2,600) Increase in other assets (11,155) (3,434) Acquisitions, net of cash acquired (1,493) ----------- ----------- Cash used in investing activities (14,278) (6,034) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under short-term debt arrangements, net 6,929 (427) Dividends paid (2,137) Proceeds from issuance of common stock, net 4,630 5,271 ----------- ----------- Cash provided by financing activities 11,559 2,707 ----------- ----------- Effect of exchange rates on cash (988) (1,152) ----------- ----------- Net increase in cash and cash equivalents 18 2,327 Cash and cash equivalents, at beginning of the period 5,088 3,081 ----------- ----------- Cash and cash equivalents, at end of the period $5,106 $5,408 =========== =========== Supplemental cash flow disclosure: Interest paid $1,983 $1,999 Income taxes paid $2,668 $1,602 Noncash investing activities: Issuance of common stock pursuant to the acquisition of SCI (see Note 1
The accompanying notes are an integral part of these condensed consolidated financial statements. ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included. Operating results for the three- and six-month periods ended March 29, 1998 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1997. The previous year-end's balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. 2. Net Income Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, (SFAS 128), Earnings per Share (EPS). SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements, for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. This statement also requires a reconciliation of the numerator and denominator of the diluted EPS computation. EPS data for the period ended March 29, 1998 and all prior periods have been restated to conform with the provisions of this statement. The following is a reconciliation of the numerator (net income) and denominator (number of shares) used in the basic and diluted EPS calculation:
Three Months Ended Six Months Ended (Dollar amounts in thousands, March 29, March 30, March 29, March 30, except per share data) 1998 1997 1998 1997 - - ---------------------------- ----------- ----------- ----------- ----------- Basic EPS: Net Income $7,004 $5,552 $3,306 $10,645 Denominator: Weighted Average Common Shares Outstanding 19,195 18,246 19,082 18,071 ----------- ----------- ----------- ----------- Basic EPS $ .36 $ .30 $ .17 $ .59 =========== =========== =========== =========== Diluted EPS: Net Income $7,004 $5,552 $3,306 $10,645 Denominator: Weighted Average Common Shares Outstanding 19,195 18,246 19,082 18,071 Options 997 1,188 933 1,232 ----------- ----------- ----------- ----------- Total Shares 20,192 19,434 20,015 19,303 ----------- ----------- ----------- ----------- Diluted EPS $ .35 $ .29 $ .17 $ .55 =========== =========== =========== ===========
ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. Depreciation and Amortization Depreciation and amortization was approximately $2.5 million and $2.4 million for the three-month periods ended March 29, 1998 and March 30, 1997, respectively. 4. Inventories
March 29, September 28, (Dollar amounts in thousands) 1998 1997 - - ----------------------------------- ------------ ------------ Purchased parts and sub-assemblies $16,874 $14,327 Work in process 4,417 3,175 Finished goods 11,610 10,032 ------------ ------------ $32,901 $27,534 ============ ============
5. Fixed Assets
March 29, September 28, (Dollar amounts in thousands) 1998 1997 - - ----------------------------------- ------------ ------------ Production and test equipment $3,991 $9,144 Field service equipment 1,238 2,443 Office and demonstration equipment 13,521 16,932 Leasehold improvements 1,033 1,181 ------------ ------------ 19,783 29,700 Less accumulated depreciation and amortization (8,969) (18,145) ------------ ------------ $10,814 $11,555 ============ ============
6. Other Accrued Liabilities
March 29, September 28, (Dollar amounts in thousands) 1998 1997 - - ----------------------------------- ------------ ------------ Accrued customer service costs $7,682 $4,495 Other accrued expenses 11,420 6,620 ------------ ------------ $19,102 $11,115 ============ ============
7. Discontinued product charges On February 10, 1998, the Company decided to discontinue the LabStat product while retaining the laboratory support and maintenance business. The decision was made after it was determined that continuing development and marketing of LabStat was not in the best interest of the Company and its shareholders and that all meaningful discussions with possible strategic partners had ceased. ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company's decision to discontinue LabStat resulted in a one-time discontinued product charge of $12.9 million in the first quarter of fiscal 1998. The charge was a consequence of the Company determining that certain assets utilized in the development and marketing of LabStat had become impaired as a result of the discontinuation. The discontinued product charge, consisting principally of non-cash charges, included the write-off of $6.3 million of receivables, $5.7 million of capitalized software and $.9 million of fixed assets that were specifically utilized in the LabStat product. The Company did not incur any material costs in the second quarter of fiscal 1998 in relation to these activities. In connection with the Company's evaluation of its laboratory information systems business, the Company also conducted an analysis of the recoverability of certain assets utilized in the Company's Digital Subtraction Angiography (DSA) business and determined it was appropriate to write off certain of these assets. Accordingly, the Company included an impairment charge for these assets of $3.5 million in its results of operations for the first quarter of fiscal 1998. The decision to write off the DSA assets, consisting principally of inventory, was a result of steadily declining revenues and the Company's decision to no longer market the product. The combined one-time write-off for LabStat and DSA in the first quarter of fiscal 1998 was $16.4 million. 8. Income Taxes The Company uses the deferral method to account for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The provisions for income taxes for each of the six-month periods ended March 29, 1998 and March 30, 1997 are based on the estimated effective income tax rates for the fiscal years ending September 27, 1998 and September 28, 1997 of 39.0% and 36.3%, respectively, excluding with respect to fiscal 1997 the effects of the one-time charge for in-process research and development and other acquisition costs and expenses. 9. Credit and Borrowing Arrangements The Company has a $60 million revolving credit facility with a bank syndicate. The credit facility offers borrowings in either U.S. dollars or in foreign currencies and expires July 30, 1999. The Company pays interest and commitment fees on its borrowings based on its debt level in relation to its cash flow. Commitment fees range from 0.25% to 0.475% of unused commitment and interest rates are based on the bank's prime rate or Libor plus rates ranging from 0.875% to 1.5%. Borrowings are generally repaid within 90 days. At March 29, 1998, the Company had $30.3 million available for borrowing under this facility. 10. Litigation The Company is a defendant in various legal proceedings incidental to its business. While it is not possible to determine the ultimate outcome of these actions at this time, management is of the opinion that any unaccrued liability resulting from these claims would not have a material adverse effect on the Company's consolidated financial position or results of operations. 11. Acquisitions In October 1997, the Company acquired substantially all of the assets of Southern Cats, Inc. and its affiliates (Southern Cats) in exchange for 139,131 shares of the Company's common stock. Southern Cats was an independent provider of computed tomography and X-ray ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) equipment refurbishment and service. The acquisition was accounted for using the purchase method of accounting. In January 1998, the Company acquired CT Solutions, Inc. and O.N.E.S. Medical Services, Inc. (ONES) for cash. CT Solutions was an independent provider of computed tomography refurbished equipment and service. ONES was a provider of nuclear medicine service and refurbished equipment. The acquisitions were accounted for using the purchase method of accounting. None of the acquisitions discussed above is material to the financial position or results of operations of the Company. 12. Recent Pronouncements In June 1997, Financial Accounting Standard 130, "Reporting Comprehensive Income" ("FAS 130"), was issued and is effective for fiscal years commencing after December 15, 1997. The Company will comply with the requirements of FAS 130 in fiscal year 1999. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In June 1997, Financial Accounting Standard 131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS 131"), was issued and is effective for fiscal years commencing after December 15, 1997. The Company will comply with the requirements of FAS 131 in fiscal year 1999. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position ("SOP 97-2"), "Software Revenue Recognition". This SOP supersedes "SOP 91-1", Software Revenue Recognition. The Company will comply with the requirements of "SOP 97-2" in fiscal year 1999. The Company is currently assessing the implications of this new statement and the impact of its implementation on the Company's consolidated financial statements. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere within this document. Operating results for the three-month and six-month periods ended March 29, 1998 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1997. RESULTS OF OPERATIONS The Three-Month and Six-Month Periods Ended March 29, 1998 Compared to the Three-Month and Six-Month Periods Ended March 30, 1997 Revenues for the second quarter of fiscal 1998 increased 11%, or $7.4 million, over the second quarter fiscal 1997 revenues of $70.0 million. Revenues are primarily generated from the sale and servicing of medical imaging products. Medical Systems revenues represented 87% and 88% of the Company's total revenues for the second quarter of fiscal 1998 and 1997, respectively. The Company's Healthcare Information Systems revenues represented approximately 13% and 12% of the Company's total revenues for the second quarter of fiscal 1998 and 1997, respectively. Year-to-date revenues increased 11%, or $14.6 million, over the $138.3 million for the same period in fiscal 1997. Excluding the discontinued product charge associated with the write-off of the DSA assets in the first quarter of fiscal 1998, gross profit for the first six months of fiscal 1998 was $64.9 million, a 15% increase over the $56.5 million generated in the same period in fiscal 1997. Including this charge, gross profit was $61.4 million for the first six months of fiscal 1998. See Note 7 of the Notes to Condensed Consolidated Financial Statements. Medical Systems Medical Systems includes revenues from the sale of the Company's nuclear medicine, RTP and ADAC Medical Technologies (AMT) products, as well as customer service related to those products. Summary information related to Medical Systems' product and service revenues and gross profit margins for the three-month and six-month periods ended March 29, 1998 compared to the corresponding periods in fiscal 1997 are as follows:
Three Months Ended Six Months Ended ------------------------ ----------------------- March 29, March 30, March 29, March 30, (Dollar Amounts in Thousands) 1998 1997 1998 1997 - - ----------------------------- ----------- ----------- ----------- ----------- Revenues: Product $50,480 $48,759 $102,673 $93,771 Service 16,587 13,080 32,170 25,843 Geographical mix: North America 84.8% 78.9% 80.4% 78.4% Europe 12.1% 9.6% 13.4% 12.5% Latin America, Japan and Asia 3.1% 11.5% 6.2% 9.1% Gross margin before discontinued product charge Product 45.6% 43.1% 45.5% 42.7% Service 32.1% 33.3% 33.7% 32.3% Gross margin after discontinued product charge Product 45.6% 43.1% 42.1% 42.7% Service 32.1% 33.3% 33.7% 32.3%
Medical Systems' product revenues for the three- and six-month periods ended March 29, 1998 increased 4% and 9%, respectively, over the same periods in fiscal 1997. Product revenue growth was driven principally by sales of the Company's RTP product, Pinnacle3(TM), and, to a lesser extent, by sales of refurbished equipment through AMT, and the company's newest business initiative ADAC Multi-Modality Services (AMMS). RTP product revenues for the three-month and six-month periods ended March 29, 1998 increased 74% and 95%, respectively, over the same periods in fiscal 1997. These increases were partially offset by a decline in nuclear revenues of 10% and 4% over the corresponding periods in fiscal 1997. Nuclear medicine revenues decreased largely as a result of weaker Asian and Latin American markets as well as, a decline in unit sales of MCD for the three- and six-month periods ended March 31, 1998 compared to the corresponding periods in fiscal 1997. See "Business Considerations -- Dependence on New Products and Product Enhancements". Excluding the effects of the discontinued product charge associated with the write-off of the DSA assets in the first quarter of fiscal 1998, gross profit margins for Medical Systems products increased to 45.5% in the first six months of fiscal 1998. Including this charge, gross profit margins were 42.1% for this period. This compares with gross profit margins of 42.7% for the first six months of fiscal 1997. Margins before the discontinued product charge increased primarily due to sales of Pinnacle3 and reductions in product cost. Medical Systems service revenues for the three-month and six-month periods ended March 29, 1998 increased 27% and 24%, respectively, over the same periods in fiscal 1997. These increases resulted from the Company's acquisition of two multi-modality service businesses as well as an increase in the number of customers under service contracts, economies of scale related to more effective coverage of field service support costs and improved product reliability. Healthcare Information Systems (HCIS) HCIS has historically generated revenues from the sale of laboratory, radiology and cardiology information systems, which include hardware and software, as well as from the provision of service for these products. In the first quarter of fiscal 1998, the Company took a one-time charge of $12.9 million to discontinue development and marketing of its LabStat product. See Note 7 of Notes to Condensed Consolidated Financial Statements. As a result, in the future HCIS revenues will be derived primarily from the sale and support of radiology information systems. All of the Company's HCIS revenues are generated in North America. Summary information related to HCIS' product and service revenues and gross profit margins for the three- and six-month periods ended March 29, 1998 compared to the corresponding periods in fiscal 1997 are as follows:
Three Months Ended Six Months Ended ------------------------ ----------------------- March 29, March 30, March 29, March 30, (Dollar Amounts in Thousands) 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Revenues: Product $6,104 $4,040 $9,764 $10,508 Service 4,208 3,974 8,295 7,972 Gross margin: Product 41.1% 38.4% 34.6% 37.6% Service 50.0% 48.7% 47.9% 48.9%
HCIS' product revenues for the second quarter of fiscal 1998 increased 51% over the same quarter of fiscal 1997 due to increased sales of the Company's radiology information system (QuadRIS)(TM). Product gross margins also increased over the same period due to an increase in QuadRIS sales and cost reductions associated with the LabStat(TM) write-off. See Note 7 of Notes to Condensed Consolidated Financial Statements. The results for the six-month period ended March 29, 1998 were significantly impacted by the LabStat write-off and accordingly, the Company does not believe these results are indicative of the future financial performance of HCIS. HCIS service revenues increased slightly for the three- and six-month periods ended March 29, 1998 from the corresponding periods in fiscal 1997 due principally to higher radiology service revenues. However, service gross margins decreased year-to-date due to lower dollar volume in service renewals from HCIS' legacy client base and increased personnel and support costs. Weaker margins from the first quarter of fiscal 1998 were partially offset by higher margins in the second quarter of fiscal 1998. Operating and Other Expenses: As a percentage of total revenue, the Company's operating and other expenses for the three- and six-month periods ended March 29, 1998 are as follows:
Three Months Ended Six Months Ended ------------------------ ----------------------- March 29, March 30, March 29, March 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Marketing and sales 14.9% 15.4% 15.1% 15.6% Research and development 4.8% 5.1% 5.3% 4.9% General and administrative 6.2% 6.3% 6.0% 6.3% Goodwill amortization 0.6% 0.3% 0.5% 0.3% Discontinued product charge 0.0% 0.0% 8.4% 0.0% ----------- ----------- ----------- ----------- 26.5% 27.1% 35.3% 27.1% =========== =========== =========== =========== Interest and other expense, net 1.2% 1.9% 1.2% 1.8%
Marketing and sales expenses for the three-month and six-month periods ended March 29, 1998 increased $0.8 and $1.6 million, but decreased as a percentage of revenue, over the corresponding periods in the prior fiscal year as a result of higher compensation costs associated with increasing revenues and orders. Research and development expenditures, net of software capitalization, totaled $3.7 million and $3.5 million in the second quarter of fiscal 1998 and 1997, respectively. Year-to-date research and development expenditures, net of software capitalization, were $8.1 million and $6.8 million in fiscal 1998 and 1997, respectively. Research and development expenses for the three- and six-month periods ended March 29, 1998 increased on a gross basis, as a percentage of revenue, when compared to the same periods in the prior fiscal year. These increases resulted primarily from additional investments by the Company to maintain and enhance its radiology and nuclear medicine products. These additional investments were partially offset by the decrease in costs associated with the discontinuation of the Company's LabStat product. See Note 7 of Notes to Condensed Consolidated Financial Statements. The increases in gross research and development expenses were partially offset by an increase in capitalized software costs to $2.3 million in the second quarter of fiscal 1998 from $1.1 million in the corresponding quarter in fiscal 1997. General and administrative expenses increased in dollar volume for the three- and six-month periods ended March 29, 1998, but decreased as a percentage of revenue due to higher sales. Goodwill amortization increased as a percentage of revenue in the three-month and six-month periods of fiscal 1998 compared to the corresponding periods of fiscal 1997. The increases in general and administrative expenses and amortization of goodwill resulted principally from the acquisitions made in fiscal 1998. See Note 11 of Notes to Condensed Consolidated Financial Statements. The Company took a one-time charge to operating expense of $12.9 million in the first quarter of fiscal 1998 in connection with its decision to discontinue its LabStat product. See Note 7 of Notes to Condensed Consolidated Financial Statements. Interest and other expense, net, which primarily consists of interest expense and foreign currency transaction gains and losses, decreased as a percentage of revenue for the quarter and on a year to date basis due primarily to foreign currency gains during the second quarter of fiscal 1998. Income Taxes: The effective tax rate as a percentage of pretax income was 39.0% for the first six months of fiscal 1998, compared with 36.3% for the first six months of fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company believes its available cash resources, generated primarily from operations, lease financing and credit lines will provide adequate funds to finance the Company's operations in fiscal 1998. The Company's ratio of current assets to current liabilities was 1.9 to one, while working capital for the first six months of fiscal 1998 decreased $1.8 million to $74.9 from $76.7 for the same period in fiscal 1997. Cash and cash equivalents at the end of the second quarter of fiscal 1998 were unchanged from the end of the fourth quarter of fiscal 1997, compared to an increase of $2.3 million for the corresponding period in fiscal 1997. The fiscal 1998 activity consisted primarily of (i) an increase in accounts receivable; (ii) an increase in goodwill; and (iii) an increase in borrowing compared with the same period in fiscal 1997. The increase in accounts receivable resulted from higher revenues, the lengthening of customer payment terms to meet competitive conditions, and an increase in international business, as well as delays in product installations and implementations due to customer site preparation and other factors, which delayed final acceptance payments. These items were partially offset by lower prepaid expense and an increase in accounts payable and accrued liabilities, all of which resulted from increased purchasing to support the higher sales volume. Cash of 12.7 million was used for investing activities in the first six months of fiscal 1998. This activity consisted principally of the acquisitions of CT Solutions and ONES. Financing activities provided $11.6 million of cash in the first six months of fiscal 1998. This was primarily attributable to increased borrowings for the purchase of CT Solutions and ONES and common stock issued to employees under the Company's employee stock purchase and option plans. The Company's liquidity is affected by many factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the next fiscal year. However, the Company may need to increase its sources of capital through additional borrowings or the sale of securities in response to changing business conditions or to pursue new business opportunities. There can be no assurance that such additional sources of capital will be available on terms favorable to the Company, if at all. BUSINESS CONSIDERATIONS From time to time, the Company may disclose, through press releases, filings with the SEC or otherwise, certain matters that constitute forward looking statements within the meaning of the Federal securities laws. Such statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those projected, including without limitation those set forth below. The Company expressly disclaims any obligation to update any forward looking statements. Competition The markets served by the Company are characterized by rapidly evolving technology, intense competition and pricing pressure. There are a number of companies that currently offer, or are in the process of developing, products that compete with products offered by the Company. Some of the Company's competitors have substantially greater capital, engineering, manufacturing and other resources than the Company. These competitors could develop technologies and products that are more effective than those currently used or marketed by the Company or that could render the Company's products obsolete or noncompetitive. The introduction by certain of the Company's nuclear medicine competitors of new products in fiscal 1997 resulted in a decrease in the Company's market share for that year and for the six-month period ended March 31, 1998. In the future, these products may continue to have an adverse effect on the Company's market share. Dependence on New Products and Product Enhancements ADAC's success is dependent upon the successful development, introduction and commercialization of new products and the development of enhancements to existing products. Because the nuclear medicine market is highly competitive, the Company must continue to develop and successfully commercialize innovative new products and product enhancements such as MCD and MCD/AC in order to pursue its growth strategy. Failure of the Company to develop, market and sell its products effectively in future periods could have a material adverse effect on the Company's results of operations. The development of new products and product enhancements entails considerable time and expense, including research and development costs, and the time, expense and uncertainty involved in obtaining any necessary regulatory clearances. The success of MCD depends on a number of factors, including the commercial availability of, fluoro-deoxy-glucose ("FDG") and the establishment by the Health Care Financing Administration of reimbursement amounts for MCD scans. Continued uncertainty concerning the commercial supply of FDG and the timing and amount of reimbursement could have an adverse effect on sales of MCD, which could have a material adverse effect on the Company's results of operations. Government Regulation There has been a trend in recent years, both in the United States and abroad, toward more stringent regulation and enforcement of requirements applicable to medical device manufacturers. The continuing trend of more stringent regulatory oversight in product clearance and enforcement activities has caused medical device manufacturers to experience longer approval cycles, more uncertainty, greater risk, and higher expenses. There can be no assurance that any necessary clearance or approval will be granted the Company or that FDA review will not involve delays adversely affecting the Company. In addition, a failure to comply with FDA requirements relating to medical device testing, manufacture, packaging, labeling, distribution, promotion, record keeping, and reporting of adverse events could result in enforcement actions including Warning Letters, such as the one issued to Cortet in August 1997, as well as civil penalties, injunctions, suspensions or losses of regulatory clearances, product recalls, seizure or administrative detention of products, operating restrictions through consent decrees or otherwise, and criminal prosecution. The Company is also subject to FTC restrictions on advertising and numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection and disposal of hazardous substances. Changes in existing requirements, adoption of new requirements or failure to comply with applicable requirements could have a material adverse effect on the Company. Future Operating Results The Company's future operating results may vary substantially from period to period. The timing and amount of revenues are subject to a number of factors that make estimation of revenues and operating results prior to the end of the quarter very uncertain. The timing of revenues can be affected by delays in product introductions, shipments and installations, as well as general economic and industry conditions. Furthermore, of the orders received by the Company in any fiscal quarter, a disproportionately large percentage has typically been received and shipped toward the end of that quarter. Accordingly, results for a given quarter can be adversely affected if there is a substantial order shortfall late in that quarter. In addition, although both the Company's bookings and revenue have increased in recent periods, the Company's bookings and backlog cannot necessarily be relied upon as an accurate predictor of future revenues as the timing of such revenues is dependent upon completion of customer site preparation and construction, installation scheduling, receipt of applicable regulatory approvals, and other factors. Accordingly, there can be no assurance that the orders will mature into revenue. Risks Related to Acquisitions In the past fiscal year, the Company has acquired a number of small businesses, and anticipates that it may continue to acquire businesses whose products and services complement the Company's business. Acquisitions involve numerous risks, including, among other things, difficulties in successfully integrating the businesses (including products and services, as well as sales and marketing efforts), failure to retain existing customers of or attract new customers to the acquired business operations, failure to retain key technical and management personnel, coordinating geographically separated organizations, and diversion of ADAC management attention. These risks, as well as liabilities of any acquired business (whether known or unknown at the time of acquisition), could have a material adverse effect on the results of operations and financial condition of the Company, including adverse short-term effects on its reported operating results. The Company seeks to mitigate these risks by taking reserves when appropriate in connection with these acquisitions. In addition, the Company has in the past and may in the future issue stock as consideration for acquisitions. Future sales of shares of the Company's stock issued in such acquisitions could adversely affect or cause fluctuations in the market price of the Company's Common Stock. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from 20th century dates. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. As a result, in two years, computer systems and/or software used by many companies may need to be upgraded to comply with such Year 2000 requirements. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test its internal systems, for Year 2000 compliance. Management is in the process of assessing the Year 2000 compliance expense and any related potential effect on the Company's earnings. In addition, the Company is currently seeking to ensure that the software included in its nuclear medicine, healthcare information and other systems is Year 2000 compliant. Failure (or perceived failure) of such products to be Year 2000 compliant could significantly adversely affect sales of such products, which could have a material adverse effect on the Company's results of operations and financial condition. In addition, the Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many potential customers may choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industries in which the Company competes. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for the Company's products. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers, to reevaluate their current system needs, and as a result consider switching to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. Health Care Reform; Reimbursement and Pricing Pressure There is significant concern today about the availability and rising cost of healthcare in the United States. Cost containment initiatives, market pressures and proposed changes in applicable laws and regulations may have a dramatic effect on pricing or potential demand for medical devices, the relative costs associated with doing business and the amount of reimbursement by both government and third party payors, which could have a material adverse effect on the Company's results of operations. Intellectual Property Rights The Company's success depends in part on its continued ability to obtain patents, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. There can be no assurance that pending patent applications will mature into issued patents or that third parties will not make claims of infringement against the Company's products or technologies or will not be issued patents that may require payment of license fees by the Company or prevent the sale of certain products by the Company. Reliance on Suppliers Certain components used by the Company to manufacture its products such as the sodium iodide crystals used in the Company's nuclear medicine systems are presently available from only one supplier. The Company also relies on several significant vendors for hardware and software components for its healthcare information systems products. The loss of any of these suppliers, including any single-source supplier, would require obtaining one or more replacement suppliers as well as potentially requiring a significant level of hardware and software development to incorporate the new parts into the Company's products. Although the Company has obtained insurance to protect against loss due to business interruption from these and other sources, there can be no assurance that such coverage would be adequate. Product Liability Although the Company maintains product liability insurance coverage in an amount that it deems sufficient for its business, there can be no assurance that such coverage will ultimately prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. Volatility of Stock Price The market price of the Company's Common Stock is and is expected to continue to be subject to significant fluctuations in response to variations in anticipated or actual operating results, market speculation, announcements of new products or technology by the Company or its competitors, changes in earnings estimates by the Company's analysts, trends in the health care industry in general and other factors, many of which are beyond the control of the Company. In addition, broad market fluctuations as well as general economic or political conditions or initiatives, such as health care reform, may adversely impact the market price of the Common Stock regardless of the Company's operating results. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities (c) On March 26, 1998, the Company issued 43,404 shares of common stock to Bain & Company, Inc. ("Bain") upon the exercise by Bain of a warrant to purchase 60,000 shares of Company common stock granted Bain in August 1994 (the "Warrant"). The exercise price of $390,000 was paid by the surrender of 16,596 shares under the Warrant. The shares were offered and sold to Bain pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Act"), provided by Section 4(2) of the Act. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders (a) The Company held its 1998 Annual Meeting of Shareholders on March 5, 1998 (the "Annual Meeting"). (b) At the Annual Meeting, the following directors were duly elected: Stanley D. Czerwinski, R. Andrew Eckert, Graham O. King, David L. Lowe, Edmund H. Shea, Jr. and F. David Rollo. (c) At the Annual Meeting, the following votes were cast for each of the items voted upon at the meeting: 1) Election of Directors: In Favor Withheld Stanley D. Czerwinski 16,135,010 816,204 R. Andrew Eckert 16,462,343 488,871 Graham O. King 16,469,222 481,992 David L. Lowe 16,462,701 488,513 F. David Rollo 16,469,022 482,192 Edmund H. Shea, Jr. 16,465,011 486,203 2) Proposal to approve an amendment to the Company's 1992 Stock Option Plan to increase the number of shares authorized thereunder by 847,000 shares: FOR - 10,567,703; AGAINST - 2,079,618; ABSTAIN - 273,074; and BROKER NON-VOTES - 4,030,819. 3) Proposal to approve an amendment to the Company's Employee Stock Purchase Plan to increase the shares authorized thereunder by 100,000 shares: FOR - 11,872,589; AGAINST - 797,828; ABSTAIN - 249,976; and BROKER NON-VOTES - 4,030,821. 4) Proposal to ratify the adoption by the Company's subsidiary, ADAC Healthcare Information Systems, Inc., of its 1997 Stock Option Plan: FOR - 7,775,906; AGAINST - 4,879,914; ABSTAIN - 264,572; and BROKER NON-VOTES - 4,030,822. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.21 Amendment No. 7 to 1992 Stock Option Plan 10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994) 27 Financial Data Schedule (b) Form 8-K Reports: None filed during the fiscal quarter described in this Report on Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: June 16, 1998 ADAC Laboratories (Registrant) BY: /s/ P. Andre' Simone P. Andre' Simone Vice President and Chief Financial Officer EXHIBIT INDEX 10.21 Amendment No. 7 to 1992 Stock Option Plan 10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994) 27 Financial Data Schedule EX-10.45 2 AMENDMENT NO. 7 TO 1992 STOCK OPTION PLAN AMENDMENT NO. 7 TO ADAC LABORATORIES 1992 STOCK OPTION PLAN The 1992 Stock Option Plan (the "Plan") of ADAC Laboratories, a California corporation (the "Company"), is hereby amended in the following respects: 1. Stock Subject to the Plan. Section 3, entitled "Stock Subject to the Plan," is hereby amended to delete the first sentence and to add a new first sentence as follows: Subject to the provisions of Section 11 and Section 4(b)(xi) below, the maximum aggregate number of shares that may be optioned and sold under the Plan is 5,360,000 shares of Common Stock. This amendment reflects an increase in the number of authorized shares by 847,000 shares. 2. Effective Date. Except as amended above, in all other respects the Plan is hereby ratified and confirmed. The amendment to the Plan herein set forth was approved by the Board of Directors on November 10, 1997 and by the shareholders on March 5, 1998. By Order of the Board of Directors: By: /s/ Karen L. Masterson Karen L. Masterson Secretary EX-10.46 3 AMENDMENT NO. 2 TO EMPLOYEE STOCK PURCHASE PLAN (1994) AMENDMENT NO. 2 TO ADAC LABORATORIES EMPLOYEE STOCK PURCHASE PLAN (1994) The Employee Stock Purchase Plan (1994) (the "Plan") of ADAC Laboratories, a California corporation (the "Company"), is hereby amended in the following respects: 1. Number of Shares to be Offered. The first sentence of Section 4, entitled "Number of Shares to be Offered," is deleted in its entirety and the following sentence is substituted in its place: The maximum aggregate number of shares which shall be offered under the Plan shall be 370,000 shares of Stock, subject to adjustment as provided in Section 8 hereof. This amendment reflects an increase in the number of shares authorized for issuance under the Plan by 100,000 shares. 2. Effective Date. Except as amended above, in all other respects the Plan is hereby ratified and confirmed. The amendment of the Plan, as set forth above, was approved by the Board of Directors on November 10, 1997 and by the shareholders on March 5, 1998. By Order of the Board of Directors: By: /s/ Karen L. Masterson Karen L. Masterson Secretary EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS SEP-27-1998 SEP-29-1997 MAR-29-1998 5,106 0 112,871 0 32,901 159,445 10,814 0 233,963 84,554 0 0 0 130,701 5,546 233,963 56,584 77,378 31,046 44,434 20,511 0 0 11,482 4,478 7,004 0 0 0 7,004 $0.36 $0.35
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