UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 28, 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
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(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 August 7, 1998,
20,033,771.
(This document contains a total of 20 pages)
ADAC LABORATORIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three-Month
And Nine-Month Periods Ended June 28, 1998 and June 29, 1997 3
Condensed Consolidated Balance Sheets at June 28, 1998 and
September 28, 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended June 28, 1998 and June 29, 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 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
27 Financial Data Schedule
PART I - FINANCIAL INFORMATION
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE NINE
MONTHS ENDED MONTHS ENDED
-------------------- --------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUES, NET:
Product. . . . . . . . . . . . . . $ 62,521 $ 53,657 $ 174,958 $ 158,183
Service. . . . . . . . . . . . . . 21,000 17,853 61,464 51,668
--------- --------- --------- ---------
83,521 71,510 236,422 209,851
--------- --------- --------- ---------
COST OF REVENUES:
Product. . . . . . . . . . . . . . 32,923 30,799 95,308 91,061
Service. . . . . . . . . . . . . . 14,352 11,042 40,016 32,606
Discontinued product 3,500
47,275 41,841 138,824 123,667
--------- --------- --------- ---------
GROSS PROFIT . . . . . . . . . . . . 36,246 29,669 97,598 86,184
--------- --------- --------- ---------
OPERATING EXPENSES:
Marketing and sales. . . . . . . . 12,671 10,313 35,821 31,834
Research and development . . . . . 3,789 4,018 11,854 10,815
General and administrative . . . . 5,455 4,514 14,570 13,184
Goodwill . . . . . . . . . . . . . 471 198 1,274 594
In-process research and development
and acquisition expenses 5,862 5,862
Discontinued product 12,900
--------- --------- --------- ---------
22,386 24,905 76,419 62,289
--------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . 13,860 4,764 21,179 23,895
--------- --------- --------- ---------
Other expense, net . . . . . . . . . 1,565 1,336 3,465 3,756
--------- --------- --------- ---------
INCOME BEFORE PROVISION
FOR INCOME TAXES . . . . . . . . . 12,295 3,428 17,714 20,139
Provision for income tax . . . . . . 4,795 3,322 6,908 9,388
--------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . $ 7,500 $ 106 $ 10,806 $ 10,751
========= ========= ========= =========
NET INCOME PER SHARE
Basic. . . . . . . . . . . . . . . . $ .38 $ .01 $ .56 $ .59
========= ========= ========= =========
Diluted. . . . . . . . . . . . . . . $ .37 $ .01 $ .54 $ .55
========= ========= ========= =========
NUMBER OF SHARES USED IN PER
SHARE CALCULATION
Basic. . . . . . . . . . . . . . . . 19,729 18,587 19,298 18,306
========= ========= ========= =========
Diluted. . . . . . . . . . . . . . . 20,534 19,705 20,190 19,470
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial
statements.
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
JUNE 28, SEPTEMBER 28,
1998 1997
(UNAUDITED)
------------ --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . $ 9,029 $ 5,088
Accounts receivable. . . . . . . . . . . . 126,654 99,495
Inventories. . . . . . . . . . . . . . . . 37,631 27,534
Prepaid expenses and other current assets. 6,624 10,155
------------ ---------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . 179,938 142,272
Service parts. . . . . . . . . . . . . . . 18,823 17,278
Fixed assets . . . . . . . . . . . . . . . 11,312 11,555
Capitalized software . . . . . . . . . . . 12,441 14,007
Goodwill . . . . . . . . . . . . . . . . . 20,671 10,110
Deferred income taxes. . . . . . . . . . . 8,879 8,249
Other assets . . . . . . . . . . . . . . . 2,692 3,524
------------ ---------------
TOTAL ASSETS . . . . . . . . . . . . . . . $ 254,756 $ 206,995
============ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks . . . . . . . . . . $ 32,659 $ 22,217
Accounts payable . . . . . . . . . . . . . 18,847 10,543
Deferred revenues. . . . . . . . . . . . . 8,398 11,561
Customer deposits and advance billings . . 3,775 2,841
Accrued compensation . . . . . . . . . . . 9,053 7,522
Other accrued liabilities. . . . . . . . . 18,514 11,115
------------ ---------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . 91,246 65,799
Deferred income taxes . . . . . . . . . . . . 10,097 11,103
Liabilities and deferred credits. . . . . . . 3,790 3,596
------------ ---------------
TOTAL LIABILITIES. . . . . . . . . . . . . 105,133 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: 19,913 shares at
June 28, 1998 and 18,812 shares at
September 28, 1997. . . . . . . . . . . 136,495 123,269
Retained earnings. . . . . . . . . . . . . 16,398 5,593
Translation adjustment . . . . . . . . . . (3,270) (2,365)
------------ ---------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . 149,623 126,497
------------ ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 254,756 $ 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)
NINE MONTHS ENDED
----------------------
JUNE 28, JUNE 29,
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . $ 10,806 $ 10,751
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . 7,635 7,074
Provision for product returns and doubtful
accounts . . . . . . . . . . . . . . . . . . . . 3,156 2,021
Deferred income taxes. . . . . . . . . . . . . . (1,871) 147
Inventory allowance. . . . . . . . . . . . . . . (1,812) 3,659
Discontinued products. . . . . . . . . . . . . . 16,400
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . (35,830) (16,932)
Inventories. . . . . . . . . . . . . . . . . . . . . (11,439) 2,287
Prepaid expenses and other current assets. . . . . . 2,520 297
Service parts. . . . . . . . . . . . . . . . . . . . (2,166) (2,109)
Accounts payable . . . . . . . . . . . . . . . . . . 7,639 (4,752)
Deferred revenues. . . . . . . . . . . . . . . . . . (3,575) (1,227)
Customer deposits and advance billings . . . . . . . 934 (194)
Accrued compensation . . . . . . . . . . . . . . . . 1,533 393
Other accrued liabilities. . . . . . . . . . . . . . 5,439 5,851
Non-current liabilities and deferred credits . . . . (594) (1,492)
- ----------------------------------------------------- ---------- ---------
Cash provided by (used in) operating activities . . . (1,225) 5,774
- ----------------------------------------------------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . (3,317) (4,087)
Increase in other assets. . . . . . . . . . . . . . (6,354) (3,825)
Acquisitions, net of cash acquired. . . . . . . . . (3,934)
- ----------------------------------------------------- ---------- ---------
Cash used in investing activities . . . . . . . . . . (13,605) (7,912)
- ----------------------------------------------------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short term
debt arrangements, net . . . . . . . . . . . . . 9,250 (3,328)
Dividends paid. . . . . . . . . . . . . . . . . . . (2,137)
Proceeds from issuance of common stock, net . . . . 10,426 12,111
- ----------------------------------------------------- ---------- ----------
Cash provided by financing activities . . . . . . . . 19,676 6,646
Effect of exchange rates on cash. . . . . . . . . . . (905) (1,446)
- ----------------------------------------------------- ---------- ----------
Net increase in cash and cash equivalents . . . . . . 3,941 3,062
Cash and cash equivalents, at beginning of the period 5,088 3,081
- ------------------------------------------------------ ---------- ----------
Cash and cash equivalents, at end of the period . . . $ 9,029 $ 6,143
- ------------------------------------------------------ ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid . . . . . . . . . . . . . . . . . . . $ 3,160 $ 2,962
Income taxes paid . . . . . . . . . . . . . . . . . $ 5,046 $ 2,464
NONCASH INVESTING ACTIVITIES:
Issuance of common stock pursuant to the acquisition of Southern Cats. See Note 11.
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 nine-month periods ended June 28,
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 June 28, 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 NINE MONTHS ENDED
-------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS JUNE 28, JUNE 29, JUNE 28, JUNE 29,
EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- ------------------------------ --------- --------- --------- ---------
Basic EPS: Net Income. . . . . $ 7,500 $ 106 $ 10,806 $ 10,751
Denominator: Weighted Average
Common Shares Outstanding . 19,729 18,587 19,298 18,306
Basic EPS. . . . . . . . . . . $ .38 $ .01 $ .56 $ .59
========= ========= ========= =========
Diluted EPS: Net Income. . . . $ 7,500 $ 106 $ 10,806 $ 10,751
Denominator: Weighted Average
Common Shares Outstanding . 19,729 18,587 19,298 18,306
Options. . . . . . . . . . . . 805 1,118 892 1,164
Total Shares . . . . . . . . . 20,534 19,705 20,190 19,470
========= ========= ========= =========
Diluted EPS. . . . . . . . . . $ .37 $ .01 $ .54 $ .55
========= ========= ========= =========
3. Depreciation and Amortization
-------------------------------
Depreciation and amortization was approximately $2.2 million and $2.6
million for the three-month periods ended June 28, 1998 and June 29, 1997,
respectively.
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Inventories
-----------
JUNE 28, SEPTEMBER 28,
(Dollar amounts in thousands) 1998 1997
- ----------------------------- --------- --------------
Purchased parts and
Sub-assemblies . . . . . . $ 18,297 $ 14,327
Work in process . . . . . . . 4,152 3,175
Finished goods. . . . . . . . 15,182 10,032
--------- --------------
$ 37,631 $ 27,534
========= ==============
5. Fixed Assets
-------------
JUNE 28, SEPTEMBER 28,
(Dollar amounts in thousands) 1998 1997
- ------------------------------ ---------- ---------------
Production and test equipment. $ 4,022 $ 9,144
Field service equipment. . . . 1,251 2,443
Office and demonstration
Equipment . . . . . . . . . 14,865 16,932
Leasehold improvements . . . . 1,042 1,181
---------- ---------------
21,180 29,700
Less accumulated depreciation
and amortization . . . . . . (9,868) (18,145)
---------- ---------------
$ 11,312 $ 11,555
========== ===============
6. Other Accrued Liabilities
---------------------------
JUNE 28, SEPTEMBER 28,
(Dollar amounts in thousands) 1998 1997
- ----------------------------- --------- --------------
Accrued customer service
costs. . . . . . . . . . . $ 7,516 $ 4,495
Other accrued expenses. . . . 10,998 6,620
--------- --------------
$ 18,514 $ 11,115
========= ==============
7. Discontinued product charges
------------------------------
On February 10, 1998, the Company decided to discontinue its Healthcare
Information Systems (HCIS) product, LabStat , while retaining the HCIS
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.
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 or third quarters of fiscal 1998 in
relation to these activities.
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine-month periods ended
June 28, 1998 and June 29, 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 a one-time charge taken by the Company in the third quarter 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 June
28, 1998, the Company had $27.3 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 equipment refurbishment and service. The
acquisition was accounted for using the purchase method of accounting.
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.
None of the acquisitions discussed above are material to the financial
position or results of operations of the Company.
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 nine-month periods ended June 28, 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.
Previously the results of the Company's Radiation Therapy Planning (RTP)
division were considered immaterial and included, for the purposes of the
Management Discussion and Analysis, as part of Medical Systems. However, due to
RTP's continued growth, its results are now presented with the Company's other
software business (Healthcare Information Systems). All historical data and
comparisons have been restated to reflect this change.
RESULTS OF OPERATIONS
THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 28, 1998 COMPARED TO THE
THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 29, 1997
Revenues for the third quarter of fiscal 1998 increased 17%, or $12.0
million, over the third quarter fiscal 1997 revenues of $71.5 million. Revenues
are primarily generated from the sale and servicing of medical imaging products.
Medical Systems revenues represented 76% and 82% of the Company's total revenues
for the third quarter of fiscal 1998 and 1997, respectively. Revenues from the
Company's Software Business represented approximately 24% and 18% of the
Company's total revenues for the third quarter of fiscal 1998 and 1997,
respectively.
Year-to-date revenues increased 13%, or $26.6 million, over the $209.9 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 nine months of fiscal 1998 was $101.1 million,
a 17% increase over the $86.2 million generated in the same period in fiscal
1997. Including this charge, gross profit was $97.6 million for the first nine
months of fiscal 1998. See Note 7 of Notes to Condensed Consolidated Financial
Statements.
MEDICAL SYSTEMS
Medical Systems includes revenues from the sale of the Company's nuclear
medicine, ADAC Medical Technologies (AMT) and ADAC Radiology Solutions (ARS)
products, as well as customer service related to those products. AMT is engaged
in the refurbishment and sale of nuclear medicine equipment. ARS is engaged
primarily in the refurbishment, sale and service of third-party computed
tomography (CT) equipment. Summary information related to Medical Systems'
product and service revenues and gross profit margins for the three-month and
nine-month periods ended June 28, 1998 compared to the corresponding periods in
fiscal 1997, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
(Dollar amounts in thousands) 1998 1997 1998 1997
- ---------------------------------- ---------- ---------- ---------- ----------
Revenues:
Product. . . . . . . . . . . . . $ 46,636 $ 44,798 $ 136,126 $ 131,790
Service. . . . . . . . . . . . . 16,956 14,028 49,127 39,871
---------- ---------- ---------- ----------
Total Revenues . . . . . . . . $ 63,592 $ 58,826 $ 185,253 $ 171,661
========== ========== ========== ==========
Product revenue geographical mix:
North America. . . . . . . . . . 80.2% 71.2% 78.2% 74.1%
Europe . . . . . . . . . . . . . 13.4% 14.5% 13.7% 13.1%
Latin America, Japan and Asia. . 6.4% 14.3% 8.1% 12.8%
Gross margin before discontinued
product charge:
Product. . . . . . . . . . . . . 42.6% 41.1% 42.1% 41.1%
Service. . . . . . . . . . . . . 27.6% 36.1% 31.6% 33.6%
Total Gross Margin . . . . . . 38.6% 39.9% 39.3% 39.4%
Gross margin after discontinued
product charge:
Product. . . . . . . . . . . . . 42.6% 41.1% 39.5% 41.1%
Service. . . . . . . . . . . . . 27.6% 36.1% 31.6% 33.6%
Total Gross Margin . . . . . . 38.6% 39.9% 37.4% 39.4%
Medical Systems' product revenues for the three and nine-month periods
ended June 28, 1998 increased 4% and 3%, respectively, over the same periods in
fiscal 1997. Product revenue growth was driven principally by sales of
refurbished CT equipment through the Company's newest business initiative, ARS.
Nuclear medicine revenues remained relatively flat due to higher MCD sales
offset by weaker Asian and Latin American sales for the three and nine-month
periods ended June 28, 1998 compared to the corresponding periods in fiscal
1997.
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 42.1% in the first nine
months of fiscal 1998. Including this charge, gross profit margins were 39.5%
for this period. This compares with gross profit margins of 41.1% for the first
nine months of fiscal 1997. See Note 7 of Notes to Condensed Consolidated
Financial Statements. Margins before the discontinued product charge increased
primarily due to sales of MCD which were partially offset by the lower margins
associated with the ARS product sales.
Medical Systems service revenues for the three and nine-month periods ended
June 28, 1998 increased 21% and 23%, respectively, over the same periods in
fiscal 1997. These increases resulted from a higher number of customers under
service contracts and, to a lesser extent, from the Company's entry into the ARS
business in the first half of fiscal 1998 through acquisition. See Note 11 of
Notes to Condensed Consolidated Financial Statements. Service margins decreased
for the three and nine-month periods ended June 28, 1998, when compared to the
same periods in fiscal 1997, due to increased staffing, higher retro-fit costs
and lower margins associated with ARS product sales.
SOFTWARE BUSINESS
ADAC's Software Business includes Radiation Therapy Planning (RTP) and
Healthcare Information Systems (HCIS). RTP revenues are generated primarily
from the sale and support of the Company's Pinnacle3TM radiation therapy
planning system. HCIS historically generated revenues from the sale of
laboratory, radiology and cardiology information systems as well as from the
provision of support 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 LabStat . See Note 7 of Notes to Condensed Consolidated
Financial Statements. As a result, HCIS' current revenues are derived from the
sale and support of radiology and cardiology information systems. Summary
information related to the Software Business' product and support revenues and
gross profit margins for the three and nine-month periods ended June 28, 1998
compared to the corresponding periods in fiscal 1997, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
(Dollar amounts in thousands) 1998 1997 1998 1997
- ---------------------------------- ---------- ---------- --------- ---------
Revenues:
Product. . . . . . . . . . . . . $ 15,885 $ 8,834 $ 38,832 $ 26,122
Support. . . . . . . . . . . . . 4,044 3,825 12,337 11,797
---------- ---------- ---------- ----------
Total Revenues . . . . . . . . $ 19,929 $ 12,629 $ 51,169 $ 37,919
========== ========== ========== ==========
Product revenue geographical mix:
North America. . . . . . . . . . 90.0% 87.8% 91.3% 92.9%
Europe . . . . . . . . . . . . . 6.3% 10.7% 6.7% 5.7%
Latin America, Japan and Asia. . 3.7% 1.5% 2.0% 1.4%
Gross margin:
Product. . . . . . . . . . . . . 61.2% 50.0% 57.6% 48.4%
Support. . . . . . . . . . . . . 48.7% 45.9% 48.1% 47.9%
Total Gross Margin . . . . . . 58.7% 48.8% 55.3% 48.3%
Product revenues for the third quarter of fiscal 1998 increased 80% over
the same quarter of fiscal 1997 due mainly to an 87% increase in sales of
Pinnacle3. Sales of the Company's radiology information system, QuadRIS, also
increased 65% over this period from $2.6 million to $4.3 million. The growth of
Pinnacle3 and QuadRIS reflects greater penetration of the commercial sector by
both these products, and, in the case of QuadRIS, continued growth in government
sales under the Company's digital imaging network - picture archiving
communications systems (DIN-PACS) contract with the United States Department of
Defense. Product gross margins also improved over the same period due to
increased sales of these higher margin products, and cost reductions associated
with the LabStat write-off. See Note 7 of Notes to Condensed Consolidated
Financial Statements.
The Software Business' support revenues increased for the three and
nine-month periods ended June 28, 1998 from the corresponding periods in fiscal
1997 due principally to higher radiology support revenues. Gross margins on
support revenues were slightly higher for the most recent quarter and
year-to-date periods due to an increase in the QuadRIS installed base, partially
offset by fewer support contract renewals from the Company's legacy client base.
OPERATING AND OTHER EXPENSES:
Summary information showing the Company's operating and other expenses as a
percentage of revenue for the three and nine-month periods are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- -------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
--------- --------- --------- ---------
Operating costs and expenses:
Marketing and sales . . . . . . . 15.2% 14.4% 15.2% 15.2%
Research and development,
net of software capitalization. 4.5% 5.6% 5.0% 5.2%
General and administrative. . . . 6.5% 6.3% 6.2% 6.3%
Goodwill amortization . . . . . . .6% .3% .6% .3%
In-process research and development
and acquisition expenses . . . 8.2% 2.8%
Discontinued product charge . . . 5.5%
26.8% 34.8% 32.5% 29.8%
========= ========= ========= =========
Interest and other expense, net. . 1.9% 1.9% 1.5% 1.8%
Marketing and sales expenses for the three and nine-month periods ended
June 28, 1998 increased $2.4 and $3.4 million over the corresponding periods in
fiscal 1997 as a result of higher compensation costs. These expenses also
increased as a percentage of revenue from the third quarter of fiscal 1997 to
the third quarter of fiscal 1998 as a result of an increase in commission and
bonus costs. Year-to-date these expenses remained flat as a percentage of
revenue, compared to the same period in fiscal 1997.
Research and development expenditures, net of software capitalization,
totaled $3.8 million and $4.0 million in the third quarter of fiscal 1998 and
1997, respectively. Year-to-date research and development expenditures, net of
software capitalization, were $11.9 million and $10.8 million in fiscal 1998 and
1997, respectively. Research and development expenses for the nine-month period
ended June 28, 1998 also increased on a gross basis when compared to the same
period in the prior fiscal year. This increase resulted primarily from
additional investments by the Company to maintain and enhance its nuclear
medicine products and QuadRIS. These additional investments were partially
offset by the decrease in costs associated with the discontinuation of LabStat.
See Note 7 of Notes to Condensed Consolidated Financial Statements. The
increase in gross research and development expenses was partially mitigated by
an increase in capitalized software costs to $2.0 million in the second quarter
of fiscal 1998 from $1.2 million in the corresponding quarter in fiscal 1997.
General and administrative expenses increased in dollar volume for the
three and nine-month periods ended June 28, 1998, but remained substantially the
same as a percentage of revenue due to higher sales. Goodwill amortization
increased as a percentage of revenue in the three and nine-month periods of
fiscal 1998 compared to the corresponding periods of fiscal 1997 due largely to
the acquisitions made by the Company 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 LabStat. See Note 7 of Notes to Condensed Consolidated Financial
Statements.
In connection with its acquisition of Cortet, Inc. (Cortet) in May 1997,
the Company recognized a one-time, pre-tax charge to operations in the third
quarter of fiscal 1997 of $5.9 million for charges related to the purchase of
in-process research and development and certain uncompleted acquisition costs
and related expenses.
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 nine-month period ended June 28, 1998 compared to
the same period in fiscal 1997, 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 nine months of fiscal 1998, compared with 36.3% for the first nine months
of fiscal 1997, excluding the effects of the one-time charge taken in the third
quarter of fiscal 1997 for in-process research and development and certain
uncompleted acquisition and related costs and expenses.
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 into fiscal 1999.
The Company's ratio of current assets to current liabilities at June 28,
1998, was 2.0 to one, while working capital for the first nine months of fiscal
1998 increased $12.2 million to $88.7 from $76.5 for the same period in fiscal
1997.
During the first nine months of fiscal 1998, cash used by operating
activities was $1.2 million. This compares with $5.8 million of cash provided
by operating activities for the same period in fiscal 1997. Operating
activities for fiscal 1998 consisted primarily of (i) an increase in accounts
receivable and (ii) an increase in inventory. Accounts receivable increased as a
result of higher revenues, the lengthening of customer payment terms to meet
competitive conditions, and delays in product installations and implementations
due to customer site preparation and other factors, which delayed final
acceptance payments. Additionally, weaker cash collections in Asian and Latin
American markets during the third quarter of fiscal 1998, contributed to the
increase in accounts receivable. The increase in inventory was partially offset
by an increase in accounts payable and accrued liabilities, all of which
resulted from increased purchasing to support the higher sales volume.
Investing activities used $13.6 million of cash in the first nine months of
fiscal 1998. This activity consisted principally of software development and
the acquisitions of CT Solutions and ONES.
Financing activities provided $19.7 million of cash in the first nine
months of fiscal 1998. This was primarily due to increased borrowings under the
Company's revolving credit facility and common stock issued to employees under
the Company's employee stock purchase and option plans. At June 28, 1998, $27.3
million remained available for borrowing under this revolving credit facility.
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. These
statements including the forward looking statements contained in this Form 10-Q,
particularly this Item 2, are subject to a number of risks and uncertainties,
which could cause actual results to differ materially from those projected,
including without limitation those set forth below. The Company expressly
disclaims any obligation to update any forward looking statements.
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 design
testing, manufacture, packaging, labeling, distribution, promotion, record
keeping, and report of adverse events could result in enforcement actions
including Warning Letters, as well as civil penalties, injunctions, suspensions
or losses of regulatory clearances, product recalls, seizure or administrative
detention of products, operating restrictions through consent decrees or
otherwise, and criminal prosecution.
Following an inspection in 1997, Cortet, Inc., which the Company acquired
in May 1997, received a Warning Letter from the FDA concerning inspectional
observations relating to the adequacies of Cortet's quality assurance system.
Cortet responded to the observations and the Warning Letter and received
correspondence from the FDA's Florida District Office indicating that Cortet's
responses appeared to adequately address the FDA's concerns.
The State of California, under a contract with the FDA, recently completed
a routine inspection of ADAC's facility in Milpitas, California. The state
investigator issued a FDA Form 483 containing observations of objectionable
conditions, including alleged violations of the recently implemented Quality
System Regulations (QSR) applicable to the manufacture of medical devices. The
state investigator also placed a temporary shipment hold on Pinnacle3 pending
the Company satisfactorily responding to the State's concerns regarding the
Company's quality systems. The Company has initiated appropriate corrective
actions, is in the process of responding to the FDA and the State, and believes
it will shortly be able to satisfy their concerns. There can be no assurance,
however, that a Warning Letter or further enforcement action will not ensue.
Failure of the Company to adequately address the concerns of the FDA and the
State of California could have a material adverse effect on the Company's
business and results of operation.
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.
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, which could have a material adverse effect on the Company's
business.
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 markets in which the Company competes are 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. 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. Failure of the Company to develop, market
and sell new products and enhancements effectively in future periods could have
a material adverse effect on the Company's results of operations and financial
condition.
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.
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.
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
------- -- ----------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------- ---- ------ ----------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------- -- ------- -- - ---- -- -------- -------
Not applicable.
Item 5. Other Information
----- -----------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
-------- --- ------- -- ---- ---
(a) Exhibits:
Exhibit No. 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: August 12, 1998
ADAC Laboratories
---- ------------
(Registrant)
BY: /s/ P. Andre Simone
--------------------
P. Andre Simone
Vice President and Chief Financial Officer
EXHIBIT INDEX
-------------
27 Financial Data Schedule