-----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, Rt3ftirknR+ksslqx+BPdgIOKt0EpwmkWKI3J+7gb+txc3HoBm76QZLkR8gbdvRJ AWtl2+DjAdeEYjjzrT/fDQ== 0001047469-99-007967.txt : 19990302 0001047469-99-007967.hdr.sgml : 19990302 ACCESSION NUMBER: 0001047469-99-007967 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19990301 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: 99554592 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 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 29, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-9428 ADAC LABORATORIES ----------------- (Exact name of registrant as specified in its charter) California 94-1725806 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 540 Alder Drive Milpitas, California 95035 -------------------- ----- (Address of principal executive offices) (Zip Code) (408) 321-9100 -------------- (Registrant's telephone number including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- As of February 1, 1999, Registrant had outstanding 20,450,067 shares of Common Stock, no par value. (This document contains a total of 27 pages) ADAC LABORATORIES QUARTERLY REPORT ON FORM 10-Q/A INDEX
Page ---- Part I Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Operations for the 3 Three-Month and Six-Month Periods Ended March 29, 1998 and March 30, 1997 Condensed Consolidated Balance Sheets at March 29, 1998 and September 28, 1997 4 Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended 5 March 29, 1998 and March 30, 1997 Notes to Condensed Consolidated Financial Statements 6-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-23 Part II. Other Information Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 26 Exhibit Index 27 27 Financial Data Schedule
2 PART I - FINANCIAL INFORMATION ADAC LABORATORIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------------------------------------------- MARCH 29, MARCH 30, MARCH 29, MARCH 30, 1998 1997 1998 1997 (Amounts in thousands, except per share data) (Restated) (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------------- REVENUES, NET: Product $ 53,801 $ 44,690 $ 101,820 $ 91,108 Service 20,721 16,865 40,140 33,526 -------- -------- --------- -------- 74,522 61,555 141,960 124,634 -------- -------- --------- -------- COST OF REVENUES: Product 28,990 24,235 56,150 54,258 Service 13,853 11,191 25,696 22,356 Discontinued product -- -- 14,494 -- -------- -------- --------- -------- 42,843 35,426 96,340 76,614 -------- -------- --------- -------- GROSS PROFIT 31,679 26,129 45,620 48,020 -------- -------- --------- -------- OPERATING EXPENSES: Marketing and sales 11,915 10,366 23,473 20,574 Research and development 3,963 3,589 9,281 6,899 General and administrative 5,473 4,700 10,060 8,253 Goodwill amortization 545 251 1,037 449 -------- -------- --------- -------- 21,896 18,906 43,851 36,175 -------- -------- --------- -------- OPERATING INCOME 9,783 7,223 1,769 11,845 -------- -------- --------- -------- Interest and other expense, net 965 1,410 1,928 2,619 -------- -------- --------- -------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 8,818 5,813 (159) 9,226 Provision (benefit) for income tax 3,439 2,267 (62) 3,598 -------- -------- --------- -------- NET INCOME (LOSS) $ 5,379 $ 3,546 $ (97) $ 5,628 -------- -------- --------- -------- -------- -------- --------- -------- NET INCOME (LOSS) PER SHARE Basic $ .28 $ .19 $ (.01) $ .31 -------- -------- --------- -------- -------- -------- --------- -------- Diluted $ .27 $ .18 $ (.01) $ .29 -------- -------- --------- -------- -------- -------- --------- -------- NUMBER OF SHARES USED IN PER SHARE CALCULATION Basic 19,226 18,271 19,097 18,135 -------- -------- --------- -------- -------- -------- --------- -------- Diluted 20,223 19,456 19,097 19,363 -------- -------- --------- -------- -------- -------- --------- --------
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ADAC LABORATORIES CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 29, SEPTEMBER 28, 1998 1997 (Unaudited) (Amounts in thousands) (Restated) (Restated) - -------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,106 $ 5,088 Accounts receivable, net 53,380 48,572 Inventories, net 60,630 52,672 Prepaid expenses and other current assets 3,579 3,570 - -------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 122,695 109,902 Service parts, net 17,706 16,469 Fixed assets, net 9,632 9,789 Capitalized software, net 8,988 12,265 Intangibles, net 31,542 21,703 Deferred income taxes 23,625 21,702 Other assets, net 2,451 3,269 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $216,639 $195,099 - -------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to banks $ 29,704 $ 22,217 Accounts payable 17,363 10,543 Deferred revenues 11,540 15,017 Customer deposits and advanced billings 1,952 2,826 Accrued compensation 7,077 7,567 Warranty and installation 6,926 3,713 Other accrued liabilities 10,886 7,222 - -------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 85,448 69,105 Deferred income taxes 12,259 13,830 Liabilities and deferred credits 4,240 4,073 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES 101,947 87,008 - -------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized: 5,000 shares; Issued and outstanding: none Common stock, no par value: Authorized: 50,000 shares; Issued and outstanding: 19,427 shares at 135,793 128,109 March 29, 1998 and 18,812 shares at September 28, 1997 Accumulated deficit (17,748) (17,652) Translation adjustment (3,353) (2,366) - -------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 114,692 108,091 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $216,639 $195,099 - --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ADAC LABORATORIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ---------------- MARCH 29, MARCH 30, 1998 1997 (Amounts in thousands) (Restated) (Restated) - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (97) $ 5,628 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 6,216 5,204 Provision for product returns and doubtful accounts 2,530 (52) Deferred income taxes (3,729) 4,338 Inventory allowance 433 3,701 Discontinued products 14,494 -- Changes in assets and liabilities: Accounts receivable (9,908) 3,008 Inventories (15,548) (6,639) Prepaid expenses and other current assets (1) 2,150 Service parts (1,746) (1,819) Accounts payable 6,155 (3,638) Deferred revenues (1,354) (898) Customer deposits and advance billings (874) (411) Accrued compensation (490) 342 Warranty and other accrued liabilities 4,919 (667) Non-current liabilities and deferred credits (21) (904) - ---------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities 979 9,343 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,362) (3,400) Increase in other assets (2,666) (2,106) Intangibles (7,134) (7,264) Acquisition assets, net 807 -- - ---------------------------------------------------------------------------------------------------- Cash used in investing activities (11,355) (12,770) - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under short term debt arrangements, net 6,496 (427) Dividends paid -- (2,137) Proceeds from issuance of common stock, net 4,885 9,470 - ---------------------------------------------------------------------------------------------------- Cash provided by financing activities 11,381 6,906 - ---------------------------------------------------------------------------------------------------- Effect of exchange rates on cash (987) (1,152) - ---------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 18 2,327 Cash and cash equivalents, at beginning of the period 5,088 3,081 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents, at end of the period $ 5,106 $ 5,408 - ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid $ 1,928 $ 1,999 Income taxes paid $ 2,668 $ 1,602 NON-CASH INVESTING ACTIVITIES: Issuance of common stock pursuant to the acquisition of SCI (see Note 13)
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q/A and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included. Operating results for the three- and six-month periods ended March 29, 1998 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1998. The previous year-end's balance sheet data was derived from audited financial statements but does not include all disclosures required by generaly accepted accounting principles. 2. NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, (SFAS 128), Earnings per Share (EPS). SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements, for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. This statement also requires a reconciliation of the numerator and denominator of the diluted EPS computation. EPS data for the period ended March 29, 1998 and all prior periods have been restated to conform with the provisions of this statement. The following is a reconciliation of the numerator (net income) and denominator (number of shares) used in the basic and diluted EPS calculation:
THREE MONTHS ENDED SIX MONTHS ENDED (Dollar amounts in thousands except MARCH 29, MARCH 30, MARCH 29, MARCH 30, per share data) 1998 1997 1998 1997 ----------------------------------------------------------------------------------------------- Basic EPS: Net Income (loss) $ 5,379 $ 3,546 $ (97) $ 5,628 Denominator: Weighted Average Common Shares Outstanding 19,226 18,271 19,097 18,135 --------- --------- --------- -------- Basic EPS $ .28 $ .19 $ (.01) $ .31 --------- --------- --------- -------- --------- --------- --------- -------- Diluted EPS: Net Income (loss) $ 5,379 $ 3,546 $ (97) $ 5,628 Denominator: Weighted Average Common Shares Outstanding 19,226 18,271 19,097 18,135 Options 997 1,185 -- 1,228 --------- --------- --------- -------- Total Shares 20,223 19,456 19,097 19,363 --------- --------- --------- -------- --------- --------- --------- -------- Diluted EPS $ .27 $ .18 $ (.01) $ .29 --------- --------- --------- -------- --------- --------- --------- --------
3. DEPRECIATION AND AMORTIZATION Depreciation and amortization was approximately $2.8 million and $2.6 million for the three-month periods ended March 29, 1998 and March 30, 1997, respectively. 6 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. INVENTORIES
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997 -------------------------------------------------------------------------------- Inventories consist of: Purchased parts and sub-assemblies $17,960 $15,499 Work in process 4,701 3,435 Finished goods 42,108 38,594 -------------------------------------------------------------------------------- 64,769 57,528 Less reserves (4,139) (4,856) -------------------------------------------------------------------------------- $60,630 $52,672 --------------------------------------------------------------------------------
5. SERVICE PARTS
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997 -------------------------------------------------------------------------------- Service parts consist of: Field service parts, at cost $25,610 $23,844 Less accumulated depreciation (7,904) (7,375) -------------------------------------------------------------------------------- $17,706 $16,469 --------------------------------------------------------------------------------
6. FIXED ASSETS
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997 -------------------------------------------------------------------------------- Fixed assets, at cost, consist of: Production and test equipment $ 3,923 $ 9,144 Field service equipment 1,054 2,443 Office and demonstration equipment 12,573 15,166 Leasehold improvements 1,033 1,181 -------------------------------------------------------------------------------- 18,583 27,934 Less accumulated depreciation and amortization (8,951) (18,145) -------------------------------------------------------------------------------- $ 9,632 $ 9,789 --------------------------------------------------------------------------------
7. INTANGIBLES
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997 -------------------------------------------------------------------------------- Intangibles consist of: Goodwill $26,554 $15,140 Acquired technology 8,984 8,984 Other 510 510 -------------------------------------------------------------------------------- 36,048 24,634 Less accumulated amortization (4,506) (2,931) -------------------------------------------------------------------------------- $31,542 $21,703 --------------------------------------------------------------------------------
7 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. OTHER ACCRUED LIABILITIES
(Dollar amounts in thousands) MARCH 29, 1998 SEPTEMBER 28, 1997 -------------------------------------------------------------------------------- Other accrued liabilities consist of: Accrued cost of revenue $ 671 $ 367 Accrued royalties 873 790 Other accrued expenses 9,342 6,065 -------------------------------------------------------------------------------- $10,886 $7,222 --------------------------------------------------------------------------------
9. DISCONTINUED PRODUCT CHARGES On February 10, 1998, the Company decided to discontinue the HCIS business unit's LabStat product while retaining the laboratory support and maintenance business. The decision was made after the Company's Board of Directors determined that continuing development and marketing of LabStat was not in the best interest of the Company and its shareholders and that all meaningful discussions with possible strategic partners had ceased. This decision has allowed the Company to increase its focus on the radiology business resulting in greater profitability for both HCIS and ADAC as a whole. The Company's decision to discontinue LabStat resulted in a non-ordinary discontinued product charge of $11.6 million. The charge was a consequence of the Company determining that certain assets utilized in the development and marketing of LabStat became impaired as a result of the Company's decision. The discontinued business charge consisted principally of non-cash charges, including the write off of $4.9 million of capitalized software, $4.7 million of deferred product costs, $0.9 million of fixed assets that were specifically utilized in the LabStat product, $1.0 million in legal and other expenses that were accrued as part of the write-off and $0.1 million in receivables. In connection with the Company's evaluation of its laboratory information systems business, the Company also conducted an analysis of the recoverability of certain assets utilized in the Company's Digital Subtraction Angiography (DSA) business and determined it was appropriate to write off certain of these assets. Accordingly, the Company included an impairment charge of $2.9 million in its results of operations for the first quarter of fiscal 1998 related to these assets. The decision to write off the DSA assets, consisting primarily of inventory, was a result of the Company's decision to no longer market the product due to steadily declining revenues. The combined non-ordinary write off for LabStat and DSA was $14.5 million. 10. INCOME TAXES The Company uses the deferral method to account for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The provision (benefit) for income taxes for each of the three-month and six-month periods ended March 29, 1998 and March 30, 1997 are based on the estimated effective income tax rates for the fiscal years ending September 27, 1998 and September 28, 1997 of 39.0%. 8 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. CREDIT AND BORROWING ARRANGEMENTS The Company has a $60 million revolving credit facility with a bank syndicate. The credit facility offers borrowings in either U.S. dollars or in foreign currencies and expires July 30, 1999. The Company pays interest and commitment fees on its borrowings based on its debt level in relation to its cash flow. Commitment fees range from 0.25% to 0.475% of unused commitment and interest rates are based on the bank's prime rate or Libor plus rates ranging from 0.875% to 1.5%. Borrowings are generally repaid within 90 days. At March 29, 1998, the Company had $30.3 million available for borrowing under this facility. 12. LITIGATION Commencing in December 1998, a total of eleven class action lawsuits were filed in federal court by or on behalf of stockholders who purchased Company stock between January 10, 1996 and December 28, 1998. These actions name as defendants the Company and certain of its present officers and directors. The complaints allege various violations of the federal securities laws in connection with restatement of the Company's financial statements and seek unspecified but potentially significant damages. The Company intends to contest these actions vigorously. A stockholder derivative action, purportedly on behalf of the Company and naming as defendants Company officers and directors was also filed in state court seeking recovery for the Company based on stock sales by these defendants during the above time period. The Company is also a defendant in various legal proceedings incidental to its business. While it is not possible to determine the ultimate outcome of these actions at this time, management is of the opinion that any unaccrued liability resulting from these claims would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow. 13. ACQUISITIONS In January 1998, the Company acquired CT Solutions, Inc. (CT Solutions) and O.N.E.S. Medical Services, Inc. (ONES) for cash. CT Solutions was an independent provider of computed tomography refurbished equipment and service. ONES was a provider of nuclear medicine service and refurbished equipment. The acquisitions were accounted for using the purchase method of accounting. CT Solutions and ONES are not material to the financial position or results of operations of the Company. In October 1997, the Company acquired substantially all of the assets of Southern Cats, Inc. and its affiliates (Southern Cats) in exchange for 139,131 shares of the Company's common stock valued at $2.8 million. Southern Cats was an independent provider of computed tomography and X-ray equipment refurbishment and service. The acquisition was accounted for using the purchase method of accounting. Southern Cats is not material to the financial position or results of operations of the Company. 9 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 14. RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the Company's announcement on November 5, 1998 of the results of operations for its fourth fiscal quarter and fiscal year ending September 27, 1998, the Company commenced a review of its accounting principles and their historic application. On December 29, 1998, the Company announced that its financial results for fiscal years 1996, 1997 and the first three quarters of fiscal 1998 would be restated and that its previously announced results for the fourth fiscal quarter would change. The Company completed an extensive and critical review of revenue recorded for each year of fiscal 1996 through 1998. In deciding when revenue would be recognized, the Company applied a more stringent revenue recognition policy than it had in the past. The items recognized and restated were primarily certain sales transactions by the Company's Medical Systems business unit where products sold had been shipped to a destination other than their final installation location. The primary impact of the revenue restatement was to move revenue and associated costs forward to future periods, including fiscal 1999. Costs, expenses and return reserves associated with the restated revenues were also adjusted. The Company adjusted a number of non-ordinary charges taken during the restated periods. The adjustments included a reduction in the acquired in-process research and development charge taken in the third quarter of fiscal 1997 to reflect recent SEC interpretations. The Company also reduced the non-ordinary international restructuring charge taken in the fourth quarter of fiscal 1998 and moved it forward to fiscal 1999 due to a delay in implementing certain aspects of the plan. In addition, the Company adopted completed contract accounting for the LabStat product, which resulted in the Company's reversing approximately $6 million of revenues (together with associated costs) previously recognized in fiscal 1996 and 1997, and correspondingly reducing the non-ordinary charge for the discontinuation of the LabStat product previously taken in the first quarter of fiscal 1998. The Company also undertook a review of its asset carrying values, accruals and expenses, financial instruments and financial statements in each restated period and made certain adjustments to these items throughout those periods. The Company also restated the Geometrics acquisition from pooling accounting to purchase accounting. 10 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A summary of the effects of the restatement follows: CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED ------------------------------------------------ MARCH 29, 1998 MARCH 30, 1997 ------------------------------------------------ As As Originally Originally (Amounts in thousands, except per share data) Restated Reported Restated Reported - -------------------------------------------------------------------------------------------------- REVENUES, NET: Product $53,801 $56,584 $44,690 $52,922 Service 20,721 20,794 16,865 17,054 - -------------------------------------------------------------------------------------------------- 74,522 77,378 61,555 69,976 - -------------------------------------------------------------------------------------------------- COST OF REVENUES: Product 28,990 31,046 24,235 30,222 Service 13,853 13,388 11,191 10,766 - -------------------------------------------------------------------------------------------------- 42,843 44,434 35,426 40,988 - -------------------------------------------------------------------------------------------------- Gross profit 31,679 32,944 26,129 28,988 - -------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Marketing and sales 11,915 11,549 10,366 10,784 Research and development 3,963 3,704 3,589 3,548 General and administrative 5,473 4,830 4,700 4,424 Goodwill amortization 545 428 251 198 - -------------------------------------------------------------------------------------------------- 21,896 20,511 18,906 18,954 - -------------------------------------------------------------------------------------------------- Operating income 9,783 12,433 7,223 10,034 - -------------------------------------------------------------------------------------------------- OTHER EXPENSE: Interest and other, net 965 951 1,410 1,318 - -------------------------------------------------------------------------------------------------- Income before provision for income taxes 8,818 11,482 5,813 8,716 Provision for income taxes 3,439 4,478 2,267 3,164 - -------------------------------------------------------------------------------------------------- Net income $ 5,379 $ 7,004 $ 3,546 $ 5,552 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Net income per share Basic $ .28 $ .36 $ .19 $ .30 Diluted $ .27 $ .35 $ .18 $ .29 Number of shares used in per share calculations Basic 19,226 19,195 18,271 18,246 Diluted 20,223 20,192 19,456 19,396 - --------------------------------------------------------------------------------------------------
11 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED ------------------------------------------------ MARCH 29, 1998 MARCH 30, 1997 ------------------------------------------------ As As Originally Originally (Amounts in thousands, except per share data) Restated Reported Restated Reported - -------------------------------------------------------------------------------------------------- REVENUES, NET: Product $101,820 $112,437 $ 91,108 $104,526 Service 40,140 40,464 33,526 33,815 - -------------------------------------------------------------------------------------------------- 141,960 152,901 124,634 138,341 - -------------------------------------------------------------------------------------------------- COST OF REVENUES: Product 56,150 62,385 54,258 60,262 Service 25,696 25,664 22,356 21,564 Discontinued product 14,494 3,500 -- -- - -------------------------------------------------------------------------------------------------- 96,340 91,549 76,614 81,826 - -------------------------------------------------------------------------------------------------- Gross profit 45,620 61,352 48,020 56,515 - -------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Marketing and sales 23,473 23,150 20,574 21,521 Research and development 9,281 8,065 6,899 6,797 General and administrative 10,060 9,115 8,253 8,670 Goodwill amortization 1,037 803 449 396 Discontinued product -- 12,900 -- -- - -------------------------------------------------------------------------------------------------- 43,851 54,033 36,175 37,384 - -------------------------------------------------------------------------------------------------- Operating income 1,769 7,319 11,845 19,131 - -------------------------------------------------------------------------------------------------- OTHER EXPENSE: Interest and other, net 1,928 1,900 2,619 2,420 - -------------------------------------------------------------------------------------------------- Income (loss) before provision for income taxes (159) 5,419 9,226 16,711 Provision (benefit) for income taxes (62) 2,113 3,598 6,066 - -------------------------------------------------------------------------------------------------- Net income (loss) ($97) $ 3,306 $ 5,628 $ 10,645 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Net income (loss) per share Basic ($.01) $ .17 $ .31 $ .59 Diluted ($.01) $ .17 $ .29 $ .55 Number of shares used in per share calculations Basic 19,097 19,082 18,135 18,071 Diluted 19,097 20,015 19,363 19,303 - --------------------------------------------------------------------------------------------------
12 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED (UNAUDITED) CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 SEPTEMBER 28, 1997 --------------------------------------------------- As As Originally Originally (Amounts in thousands) Restated Reported Restated Reported - -------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,106 $ 5,106 $ 5,088 $ 5,088 Accounts receivable, net 53,380 112,871 48,572 99,495 Inventories, net 60,630 32,901 52,672 27,534 Prepaid expenses and other current assets 3,579 8,567 3,570 10,155 --------------------------------------------------- TOTAL CURRENT ASSETS 122,695 159,445 109,902 142,272 Service parts, net 17,706 18,573 16,469 17,278 Fixed assets, net 9,632 10,814 9,789 11,555 Capitalized software, net 8,988 11,004 12,265 14,007 Intangibles, net 31,542 20,891 21,703 10,110 Deferred income taxes 23,625 10,172 21,702 8,249 Other assets, net 2,451 3,064 3,269 3,524 --------------------------------------------------- TOTAL ASSETS $216,639 $233,963 $195,099 $206,995 --------------------------------------------------- --------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to banks $ 29,704 $ 29,704 $ 22,217 $ 22,217 Accounts payable 17,363 17,363 10,543 10,543 Deferred revenues 11,540 10,013 15,017 11,561 Customer deposits and advance billings 1,952 2,140 2,826 2,841 Accrued compensation 7,077 6,232 7,567 7,522 Other accrued liabilities 17,812 19,102 10,935 11,115 --------------------------------------------------- TOTAL CURRENT LIABILITIES 85,448 84,554 69,105 65,799 Deferred income taxes 12,259 9,532 13,830 11,103 Liabilities and deferred credits 4,240 3,630 4,073 3,596 --------------------------------------------------- TOTAL LIABILITIES 101,947 97,716 87,008 80,498 --------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized: 5,000 shares; Issued and outstanding: none Common stock, no par value: Authorized: 50,000 shares; Issued and outstanding: 19,427 shares at March 29, 1997 and 18,812 shares at September 28, 1997 135,793 130,701 128,109 123,269 Retained earnings/accumulated deficit (17,748) 8,899 (17,652) 5,593 Translation adjustment (3,353) (3,353) (2,366) (2,365) --------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 114,692 136,247 108,091 126,497 --------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $216,639 $233,963 $195,099 $206,995 --------------------------------------------------- ---------------------------------------------------
13 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED (UNAUDITED) 15. RECENT PRONOUNCEMENTS In June 1997, Financial Accounting Standard 130, "Reporting Comprehensive Income" ("FAS 130"), was issued and is effective for fiscal years commencing after December 15, 1997. The Company will comply with the requirements of FAS 130 in fiscal year 1999. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In June 1997, Financial Accounting Standard 131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS 131"), was issued and is effective for fiscal years commencing after December 15, 1997. The Company will comply with the requirements of FAS 131 in fiscal year 1999. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position ("SOP 97-2"), "Software Revenue Recognition". This SOP supersedes "SOP 91-1", Software Revenue Recognition. The Company will comply with the requirements of "SOP 97-2" in fiscal year 1999. The Company is currently assessing the implications of this new statement and the impact of its implementation on the Company's consolidated financial statements. 14 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere within this document. Operating results for the three-month and six-month periods ended March 29, 1998 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1998. RESULTS OF OPERATIONS THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 29, 1998 COMPARED TO THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 30, 1997 Prior to fiscal 1998, the results of the Company's RTP division were included as part of Medical Systems for the purposes of Management's Discussion and Analysis. However, due to RTP's continued growth, its results are now presented with the Company's other software business, HCIS. All historical data and comparisons have been restated to reflect this change. Revenues for the second quarter of fiscal 1998 are $74.5 million, a 21% increase, or $13.0 million, over the second quarter fiscal 1997 revenues of $61.6 million. Revenues are primarily generated from the sale and servicing of medical imaging products. Medical Systems revenues represented 77% and 84% of the Company's total revenues for the second quarter of fiscal 1998 and 1997, respectively. The Company's Software Business revenues represented approximately 23% and 16% of the Company's total revenues for the second quarter of fiscal 1998 and 1997, respectively. Year-to-date revenues increased 14%, or $17.3 million, over the $124.6 million for the same period in fiscal 1997. Excluding the discontinued product charge associated with the write-off of the LabStat-TM- and DSA assets in the first quarter of fiscal 1998, gross profit for the first six months of fiscal 1998 was $60.1 million, a 25% increase over the $48.0 million generated in the same period in fiscal 1997. Including this charge, gross profit was $45.6 million for the first six months of fiscal 1998. See Note 9 of the Notes to Condensed Consolidated Financial Statements. 15 MEDICAL SYSTEMS Medical Systems includes revenues from the sale of the Company's nuclear medicine and ADAC Medical Technologies (AMT) products, as well as customer service related to those products. Summary information related to Medical Systems' product and service revenues and gross profit margins for the three-month and six-month periods ended March 29, 1998 compared to the corresponding periods in fiscal 1997 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- MARCH 29, MARCH 30, MARCH 29, MARCH 30, (Dollar amounts in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------- Revenues: Product $40,634 $38,605 $ 79,423 $ 79,422 Service 16,514 12,891 31,847 25,554 ------------------------------------------------------ Total $57,148 $51,496 $111,270 $104,976 Geographical mix: North America 79.2% 78.7% 80.9% 79.0% Europe 12.0% 10.6% 12.1% 12.9% Latin America, Japan and Asia 8.8% 10.7% 7.0% 8.1% Gross margin before discontinued product charge Product 43.4% 44.2% 42.4% 39.1% Service 28.9% 29.0% 32.9% 28.5% ------------------------------------------------------ Total 39.3% 40.4% 39.7% 36.5% Gross margin after discontinued product charge Product 43.4% 44.2% 38.7% 39.1% Service 28.9% 29.0% 32.9% 28.5% ------------------------------------------------------ Total 39.3% 40.4% 37.0% 36.5%
Medical Systems' product revenues for the three-month period ended March 29, 1998 increased 5% over the same period in fiscal 1997. Product revenue growth was driven by sales of refurbished equipment through AMT, and the Company's newest business initiative ADAC Multi-Modality Services (AMMS). Medical Systems' product revenues for the six-month period ended March 29, 1998 remained unchanged from the same period in fiscal 1997. Nuclear medicine revenues decreased largely as a result of weaker Asian and Latin American markets as well as, a decline in unit sales of MCD for the three- and six-month periods ended March 31, 1998 compared to the corresponding periods in fiscal 1997. See "Business Considerations -- Dependence on New Products and Product Enhancements." Excluding the effects of the discontinued product charge associated with the write-off of the DSA assets in the first quarter of fiscal 1998, gross profit margins for Medical Systems products were 42.4% for the first six months of fiscal 1998. Including this charge, gross profit margins were 38.7% for this period. This compares with gross profit margins of 39.1% for the first six months of fiscal 1997. Medical Systems service revenues for the three-month and six-month periods ended March 29, 1998 increased 28% and 25%, respectively, over the same periods in fiscal 1997. These increases resulted from the Company's acquisition of two multi-modality service businesses as well as an increase in the number of customers under service contracts, economies of scale related to more effective coverage of field service support costs and improved product reliability. 16 SOFTWARE BUSINESS ADAC's Software Business includes RTP and HCIS. RTP revenues are generated primarily from the sale and support of the Company's Pinnacle(3)-TM- radiation therapy planning system. HCIS historically generated revenues from the sale of radiology, laboratory and cardiology information systems as well as from providing support for these products. In the first quarter of fiscal 1998, the Company took a one-time charge of $11.6 million to discontinue development and marketing of its LabStat-TM- product. See Note 9 of the Notes to Condensed Consolidated Financial Statements. Summary information related to the Software Business product and service revenues and gross profit margins for the three- and six-month periods ended March 29, 1998 compared to the corresponding periods in fiscal 1997 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- MARCH 29, MARCH 30, MARCH 29, MARCH 30, (Dollar amounts in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------- Revenues: Product $13,167 $5,962 $22,397 $11,440 Service 4,207 3,974 8,293 7,972 ------------------------------------------------------ Total $17,375 $9,936 $30,691 $19,412 Gross margin before discontinued product charge Product 54.4% 54.9% 53.6% 48.3% Service 49.6% 48.7% 47.9% 48.9% ------------------------------------------------------ Total 53.2% 52.4% 52.0% 48.6% Gross margin after discontinued product charge Product 54.4% 54.9% 1.9% 48.3% Service 49.6% 48.7% 47.9% 48.9% ------------------------------------------------------ Total 53.2% 52.4% 14.3% 48.6%
Software Business product revenues increased 121% and 96% for the three-month and six-month periods ended March 29, 1998 over the same period in fiscal 1997. This increase resulted primarily from higher sales of the Company's RTP product, Pinnacle(3)-TM- and radiology information system QuadRIS-TM-. Excluding the effects of the discontinued product charge associated with the write-off of the LabStat-TM- assets, gross profit margins for the Software Business products were 53.6% for the first six months of fiscal 1998. See Note 9 of Notes to Condensed Consolidated Financial Statements. Including this charge, gross profit margins were 1.9% for this period. Margins before the discontinued product charge increased primarily due to the higher margins associated with sales of Pinnacle(3)-TM-. Software Business service revenues increased slightly for the three- and six-month periods ended March 29, 1998 from the corresponding periods in fiscal 1997 due principally to higher radiology service revenues. However, service gross margins decreased year-to-date due to lower dollar volume in service renewals from HCIS' legacy client base and increased personnel and support costs. Weaker margins from the first quarter of fiscal 1998 were partially offset by higher margins in the second quarter of fiscal 1998. 17 OPERATING AND OTHER EXPENSES: Summary information showing the Company's operating and other expenses as a percentage of revenue for the three- and six-month periods (as restated) are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- MARCH 29, MARCH 30, MARCH 29, MARCH 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------- Operating costs and expenses: Marketing and sales 16.0% 16.8% 16.5% 16.5% Research and development, net of software capitalization 5.3% 5.8% 6.5% 5.5% General and administrative 7.3% 7.6% 7.1% 6.6% Goodwill amortization 0.7% 0.4% 0.7% 0.4% ------------------------------------------------------ 29.4% 30.7% 30.9% 29.0% ------------------------------------------------------ ------------------------------------------------------ Interest and other expense, net 1.3% 2.3% 1.4% 2.1%
Marketing and sales expenses for the three-month and six-month periods ended March 29, 1998 increased $1.5 million and $2.9 million over the corresponding periods in the prior fiscal year as a result of higher compensation costs associated with increasing the number of sales representatives. Research and development expenditures, net of software capitalization, totaled $4.0 million and $3.6 million in the second quarter of fiscal 1998 and 1997, respectively. Year-to-date research and development expenditures, net of software capitalization, were $9.3 million and $6.9 million in fiscal 1998 and 1997, respectively. Research and development expenses for the three- and six-month periods ended March 29, 1998 increased on a gross basis, as a percentage of revenue, when compared to the same periods in the prior fiscal year. These increases resulted primarily from additional investments by the Company to maintain and enhance its radiology and nuclear medicine products. These additional investments were partially offset by the decrease in costs associated with the discontinuation of the Company's LabStat-TM- product. See Note 9 of Notes to Condensed Consolidated Financial Statements. The increases in gross research and development expenses were partially offset by an increase in capitalized software costs to $3.1 million in the second quarter of fiscal 1998 from $2.2 million in the corresponding quarter in fiscal 1997. General and administrative expenses increased in dollar volume for the three-and six-month periods ended March 29, 1998. Intangible amortization increased as a percentage of revenue in the three-month and six-month periods of fiscal 1998 compared to the corresponding periods of fiscal 1997. The increases in general and administrative expenses and amortization of goodwill resulted principally from the acquisitions made in fiscal 1998. See Note 13 of Notes to Condensed Consolidated Financial Statements. Interest and other expense, net, which primarily consists of interest expense and foreign currency transaction gains and losses, decreased as a percentage of revenue for the quarter and on a year to date basis due primarily to foreign currency gains during the second quarter of fiscal 1998. INCOME TAXES: The effective tax rate as a percentage of pretax income was 39.0% for the first six months of fiscal 1998 and fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company believes its available cash resources, generated primarily from operations and credit lines, will provide adequate funds to finance the Company's operations in fiscal 1998. If necessary, the Company will seek to increase its credit line to support the Company's future growth. The Company's ratio of current assets to current liabilities was 1.4 to one, while working capital for the first six months of fiscal 1998 decreased $3.6 million to $37.2 million from $40.8 million in the fourth quarter of fiscal 1997. 18 The primary uses of cash in 1998 were an $9.9 million increase in accounts receivable and a $15.5 million increase in inventory. Inventory and accounts receivable increased due to delays in product installations and implementations due to customer site preparation and other factors. The increase in accounts receivable was also attributable to higher revenues and the lengthening of customer payment terms to meet competitive conditions. Cash of $11.4 million was used for investing activities in the first six months of fiscal 1998. This activity consisted principally of the acquisitions of CT Solutions and ONES. Financing activities provided $11.4 million of cash in the first six months of fiscal 1998. This was primarily attributable to increased borrowings for the purchase of CT Solutions and ONES and common stock issued to employees under the Company's employee stock purchase and option plans. The Company's liquidity is affected by many factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the next fiscal year. However, the Company may need to increase its sources of capital through additional borrowings or the sale of securities in response to changing business conditions or to pursue new business opportunities. There can be no assurance that such additional sources of capital will be available on terms favorable to the Company, if at all. BUSINESS CONSIDERATIONS From time to time, the Company may disclose, through press releases, filings with the SEC or otherwise, certain matters that constitute forward looking statements within the meaning of the Federal securities laws. Such statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those projected, including without limitation those set forth below. The Company expressly disclaims any obligation to update any forward looking statements LITIGATION Commencing in December 1998, a total of eleven class action lawsuits were filed in federal court by or on behalf of stockholders who purchased Company stock between January 10, 1996 and December 28, 1998. These actions name as defendants the Company and certain of its present officers and directors. The complaints allege various violations of the federal securities laws in connection with restatement of the Company's financial statements and seek unspecified but potentially significant damages. The Company intends to contest these actions vigorously. A stockholder derivative action, purportedly on behalf of the Company and naming as defendants Company officers and directors was also filed in state court seeking recovery for the Company based on stock sales by these defendants during the above time period. The Company is also a defendant in various legal proceedings incidental to its business. While it is not possible to determine the ultimate outcome of these actions at this time, management is of the opinion that any unaccrued liability resulting from these claims would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow. COMPETITION The markets served by the Company are characterized by rapidly evolving technology, intense competition and pricing pressure. There are a number of companies that currently offer, or are in the process of developing, products that compete with products offered by the Company. Some of the Company's competitors have substantially greater capital, engineering, manufacturing and other resources than the Company. These competitors could develop technologies and products that are more effective than those currently used or marketed by the Company or that could render the Company's products obsolete or noncompetitive. The introduction by certain of the Company's nuclear medicine competitors of new products in fiscal 1997 resulted in a decrease in the Company's market share for that year and for the six-month period ended March 31, 1998. In the future, these products may continue to have an adverse effect on the Company's market share. Dependence on Development and Commercialization of New Products and Product Enhancements 19 ADAC's success is dependent upon the successful development, introduction and commercialization of new products and the development of enhancements to existing products. Because the nuclear medicine market is relatively mature, and from time to time in recent years has experienced a decline, the Company must continue to develop and successfully commercialize innovative new products and product enhancements such as MCD, and the current updates to the Company's products in order to pursue its growth strategy. Failure of the Company to market and sell its products effectively in future periods could have a material adverse effect on the Company's results of operations. The development of new products and product enhancements entails considerable time and expense, including research and development costs, and the time, expense and uncertainty involved in obtaining any necessary regulatory clearances. The success of MCD depends on a number of factors, including the commercial availability of, fleuro-deoxy-glucose ("FDG"). At this time, the infrastructure for the commercial supply of FDG is not well developed. Continued uncertainty surrounding MCD could have an adverse effect on sales of MCD, which could have a material adverse effect on the Company's results of operations. GOVERNMENT REGULATION There has been a trend in recent years, both in the United States and abroad, toward more stringent regulation and enforcement of requirements applicable to medical device manufacturers. The continuing trend of more stringent regulatory oversight in product clearance and enforcement activities has caused medical device manufacturers to experience longer approval cycles, more uncertainty, greater risk, and higher expenses. There can be no assurance that any necessary clearance or approval will be granted the Company or that FDA review will not involve delays adversely affecting the Company. In addition, a failure to comply with FDA requirements relating to medical device testing, manufacture, packaging, labeling, distribution, promotion, record keeping, and reporting of adverse events could result in enforcement actions including Warning Letters, such as the one issued to Cortet in August 1997, as well as civil penalties, injunctions, suspensions or losses of regulatory clearances, product recalls, seizure or administrative detention of products, operating restrictions through consent decrees or otherwise, and criminal prosecution. Failure of the Company to address adequately the concerns raised by the FDA in the Cortet Warning Letter could have a material adverse effect on Cortet's business and cause fluctuations in the market price for the Company's common stock. The Company is also subject to FTC restrictions on advertising and numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection and disposal of hazardous substances. Changes in existing requirements, adoption of new requirements or failure to comply with applicable requirements could have a material adverse effect on the Company. FUTURE OPERATING RESULTS The Company's future operating results may vary substantially from period to period. The timing and amount of revenues are subject to a number of factors that make estimation of revenues and operating results prior to the end of the quarter very uncertain. The timing of revenues can be affected by delays in product introductions, shipments and installation scheduling, as well as general economic and industry conditions. Furthermore, of the orders received by the Company in any fiscal quarter, a disproportionately large percentage has typically been received and shipped toward the end of that quarter, which is typical for the industry. Accordingly, results for a given quarter can be adversely affected if there is a substantial order shortfall late in that quarter. In addition, although both the Company's bookings and revenue have increased in recent periods, the Company's bookings and backlog cannot necessarily be relied upon as an accurate predictor of future revenues as the timing of such revenues is dependent upon completion of customer site preparation and construction, installation scheduling, receipt of applicable regulatory approvals, customer financing and other factors. Accordingly, there can be no assurance that orders will mature into revenue. 20 RISKS RELATED TO ACQUISITIONS In the past fiscal year, the Company has acquired a number of small businesses, and anticipates that it may continue to acquire businesses whose products and services complement the Company's businesses. Acquisitions involve numerous risks, including, among other things, difficulties in successfully integrating the businesses (including products and services, as well as sales and marketing efforts), failure to retain existing customers or attract new customers to the acquired business operations, failure to retain key technical and management personnel, coordinating geographically separated organizations, and diversion of ADAC management attention. These risks, as well as liabilities of any acquired business (whether known or unknown at the time of acquisition), could have a material adverse effect on the results of operations and financial condition of the Company, including adverse short-term effects on its reported operating results. The Company seeks to mitigate these risks by taking reserves when appropriate in connection with these acquisitions. In addition, the Company has in the past and may in the future issue stock as consideration for acquisitions. Future sales of shares of the Company's stock issued in such acquisitions could adversely affect or cause fluctuations in the market price of the Company's Common Stock. YEAR 2000 COMPLIANCE The following statements are a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the Year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from 20th century dates. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. As a result, in one year, computer systems and/or software used by many companies may need to be upgraded to comply with such Year 2000 requirements. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test its internal systems, for Year 2000 compliance. Although management is continuing to assess the expense associated with internal Year 2000 compliance, the Company does not believe such compliance will have a material adverse effect on the Company's results of operations or financial condition. The Company has completed an assessment and analysis of its internal information technology systems, software and manufacturing equipment. The Company has implemented plans to correct its internal Year 2000 issues, and expects to have its remediation process substantially completed by early 1999. While the Company currently expects that the Year 2000 will not pose significant internal operational problems, delays in the implementation of new information systems, or a failure to fully identify all Year 2000 dependencies in the Company's systems, could have a material adverse effect on the Company's results of operations. The Company has established a program to assess its products to ensure that they are Year 2000 compliant. To monitor this program and to inform customers about the Year 2000 issues with respect to its products, the Company has created a website at www.adaclabs.com/about/year20001.html. This website identifies the status of Year 2000 compatibility of its products, including products that are Year 2000 compliant, products that need free software updates, products that require hardware upgrades, and products that cannot be made Year 2000 compliant. This list is periodically updated as analysis of additional products is completed. The Company will sell, or provide under warranty or service contracts, software license upgrades to update the majority of its installed base to make the products Year 2000 compliant, and anticipates completing development of such upgrades in mid-1999. For older equipment which the Company no longer manufactures, the Company will sell hardware upgrades to its customers which will address the Year 2000 compliance where possible. The Company is contacting by mail customers which require computer hardware upgrades, and is also posting information relating to Year 2000 compliance for its products on the Company's website as described above. The Company is gathering information from its suppliers and vendors to determine the extent to which the Company's capabilities are vulnerable to failure by those third parties to remedy their own Year 2000 issues. The Company is currently receiving responses to those inquiries and anticipates that the analysis of this information will be completed by mid-1999. The Company will proceed with further analysis or testing of its vendors' systems as needed. However, there is no guarantee that the systems and products of other companies on which the Company relies will be timely converted or that they will not have a material adverse effect on the Company. 21 The Company is in the process of developing a contingency plan. This plan is expected to be in place in the first half of mid-1999. The inability of the Company to develop and implement a contingency plan could result in a material adverse effect on the Company. The Company currently estimates that total Year 2000 costs will be approximately $1.2 million, of which $0.2 million has already been incurred. These cost estimates do not include any potential costs related to any customer or other claim. In addition, these cost estimates are based on current assessments of the ongoing activities described above, and are subject to changes as the Company continuously monitors these activities. The Company believes any modifications deemed necessary will be made on a timely basis and does not believe that the costs of such modifications will have a material adverse effect on the Company's operating results; however, the Company's expectations as to the extent and timeliness of any modifications required in order to achieve Year 2000 compliance and the costs related thereto are forward-looking statements subject to risks and uncertainties. Actual results may vary as a result of number of factors, including those described herein. There can be no assurance that the Company will be able to successfully modify on a timely basis such products, services and systems to comply with Year 2000 requirements, which failure could have a material adverse effect on the Company's operating results. In addition, the Company is currently seeking to ensure that the software included in its products and other systems is Year 2000 compliant. Failure (or perceived failure) of such products to be Year 2000 compliant could significantly adversely affect sales of such products, which could have a material adverse effect on the Company's results of operations and financial condition. In addition, the Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many potential customers may choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industries in which the Company competes. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for the Company's products. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers, to reevaluate their current system needs, and as a result consider switching to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. HEALTH CARE REFORM; REIMBURSEMENT AND PRICING PRESSURE There is significant concern today about the availability and rising cost of healthcare in the United States. Cost containment initiatives, market pressures and proposed changes in applicable laws and regulations may have a dramatic effect on pricing or potential demand for medical devices, the relative costs associated with doing business and the amount of reimbursement by both government and third party payors, which could have a material adverse effect on the Company's results of operations. INTELLECTUAL PROPERTY RIGHTS The Company's success depends in part on its continued ability to obtain patents, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. There can be no assurance that pending patent applications will mature into issued patents or that third parties will not make claims of infringement against the Company's products or technologies or will not be issued patents that may require payment of license fees by the Company or prevent the sale of certain products by the Company. RELIANCE ON SUPPLIERS Certain components used by the Company to manufacture its products such as the sodium iodide crystals used in the Company's nuclear medicine systems are presently available from only one supplier. The Company also relies on several significant vendors for hardware and software components for its healthcare information systems products. The loss of any of these suppliers, including any single-source supplier, would require obtaining one or more replacement suppliers as well as potentially requiring a significant level of hardware and software development to incorporate the new parts into the Company's products. Although the Company has obtained insurance to protect against loss due to business interruption from these and other sources, there can be no assurance that such coverage would be adequate. See Note 1 of Notes to Consolidated Financial Statements. 22 PRODUCT LIABILITY Although the Company maintains product liability insurance coverage in an amount that it deems sufficient for its business, there can be no assurance that such coverage will ultimately prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock is and is expected to continue to be subject to significant fluctuations in response to variations in anticipated or actual operating results, market speculation, announcements of new products or technology by the Company or its competitors, changes in earnings estimates by the Company's analysts, trends in the health care industry in general and other factors, many of which are beyond the control of the Company. In addition, broad market fluctuations as well as general economic or political conditions or initiatives, such as health care reform, may adversely impact the market price of the Common Stock regardless of the Company's operating results. 23 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. 24 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.21 Amendment No. 7 to 1992 Stock Option Plan 10.22 Amendment No. 2 to Employee Stock Purchase Plan (1994) 27 Financial Data Schedule (b) Form 8-K Reports: None filed during the fiscal quarter described in this Report on Form 10-Q. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 26, 1999 ADAC Laboratories ----------------- (Registrant) BY: /s/ P. Andre Simone -------------------- P. Andre Simone Vice President and Chief Financial Officer 26 EXHIBIT INDEX 27 Financial Data Schedule
27 EX-27 2 EXHIBIT 27
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 6-MOS SEP-27-1998 SEP-29-1997 MAR-29-1998 5,106 0 57,321 (3,941) 60,630 122,695 18,583 8,951 216,639 85,448 0 0 0 135,793 (21,101) 216,639 101,820 141,960 56,150 96,340 43,851 2,530 2,019 (159) (62) (97) 0 0 0 (97) (0.01) (0.01)
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