UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 2, 1995
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
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(Exact name of registrant as specified in its charter)
California 94-1725806
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(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
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(Registrant's telephone number including area code)
Not Applicable
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(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 1, 1995,
16,511,872.
(This document contains a total of 12 pages)
(Exhibit Index located on page 10)
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
July 2, October 2,
1995 1994
(Unaudited)
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,529 $ 7,203
Accounts receivable, net of allowance
for returns and doubtful accounts 50,645 45,173
Notes receivable 6,408
Inventories 28,178 22,600
Current portion of deferred income tax 11,195 14,877
Prepaid expenses and other current assets 5,730 2,243
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Total current assets 107,685 92,096
Service parts, net 13,651 13,300
Fixed assets, net 5,882 5,515
Other assets 10,750 10,692
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Total Assets $137,968 $121,603
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 7,600 $
Accounts payable 21,394 18,260
Dividends payable 1,967 1,904
Deferred revenues 7,793 6,447
Other accrued liabilities 15,092 16,947
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Total current liabilities 53,846 43,558
Non-current liabilities and deferred credits 4,274 3,379
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Total Liabilities 58,120 46,937
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SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 25,000,000 shares
Issued and outstanding: 16,403,983 shares
at July 2, 1995 and 16,046,579 shares
at October 2, 1994 98,641 97,086
Accumulated deficit (19,796) (22,174)
Translation adjustment 1,003 (246)
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Total Shareholders' Equity 79,848 74,666
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Total Liabilities and Shareholders' Equity $137,968 $121,603
======== ========
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
2
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
-----------
Three Nine
Months Ended Months Ended
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July 2, July 3, July 2, July 3,
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Product sales, net $34,868 $ 30,444 $103,906 $105,663
Field service 10,757 9,637 30,678 28,262
------- -------- -------- --------
45,625 40,081 134,584 133,925
------- -------- -------- --------
Cost of revenues:
Product sales 21,394 17,925 62,682 58,500
Field service 7,036 6,686 21,194 20,206
------- -------- -------- --------
28,430 24,611 83,876 78,706
------- -------- -------- --------
Gross profit 17,195 15,470 50,708 55,219
------- -------- -------- --------
Operating expenses:
Marketing and sales 7,565 7,342 23,171 24,481
Research and development 2,548 2,872 8,133 8,822
General and administrative 2,287 1,765 6,230 5,305
Restructuring charges 2,453 2,453
------- -------- -------- --------
12,400 14,432 37,534 41,061
------- -------- -------- --------
Operating income 4,795 1,038 13,174 14,158
------- -------- -------- --------
Other income (expense):
Litigation defense costs (700) (1,700)
Interest and other income
(expense), net (158) (40) (566) (136)
------- -------- -------- --------
(158) (740) (566) (1,836)
------- -------- -------- --------
Income before provision for
income taxes 4,637 298 12,608 12,322
Provision for income taxes 1,583 29 4,370 1,231
------- -------- -------- --------
Net income $ 3,054 $ 269 $ 8,238 $ 11,091
======= ======== ======== ========
Net income per share $ 0.18 $ 0.02 $ 0.49 $ 0.67
======= ======== ======== ========
Weighted average shares used in
per share calculation 17,439 16,475 16,928 16,674
======= ======== ======== ========
Dividends per share $ 0.12 $ 0.12 $ 0.36 $ 0.36
======= ======== ======== ========
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
3
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
-----------
Nine Months Ended
-----------------
July 2, July 3,
1995 1994
---- ----
Cash flows from operating activities:
Net cash provided by operating
activities $ 3,093 $ 4,642
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Cash flows from investing activities:
Loans to CHCC (Note 7) (6,408)
Proceeds from sale and leaseback
of fixed assets 527
Acquisition of intangible assets (658)
Capital expenditures (1,820) (2,613)
Other (1,610) (1,601)
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Net cash used in investing
activities (9,311) (4,872)
Cash flows from financing activities:
Short term borrowing 7,600 3,100
Dividends paid (5,860) (5,741)
Repurchase of common stock (707)
Proceeds from issuance of
Common Stock, net 1,555 1,062
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Net cash provided by (used in)
financing activities 3,295 (2,286)
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Effect of exchange rates on cash 1,249 303
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Net decrease in cash and cash equivalents (1,674) (2,213)
Cash and cash equivalents, at beginning of
the period 7,203 6,663
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Cash and cash equivalents, at end of the
period $ 5,529 $ 4,450
======= =======
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1. Basis of Presentation
---------------------
The accompanying unaudited condensed 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 consolidated financial statements include all normal
recurring adjustments necessary for a fair presentation of the information
required to be included. Operating results for the nine month period ended
July 2, 1995 are not necessarily indicative of the results that may be
expected for the year. For further information, refer to the consolidated
financial statements and notes thereto for the year ended October 2, 1994
in the 1994 Annual Report to Shareholders.
The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
2. Inventories
-----------
Inventories consist of (in thousands):
July 2, October 2,
1995 1994
---- ----
Purchased parts and
sub-assemblies $11,896 $13,872
Work in process 4,453 3,171
Finished goods 11,829 5,557
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$28,178 $22,600
======= =======
3. Income Taxes
------------
The provisions for income taxes for the nine months ended July 2, 1995 and
July 3, 1994 are based on the estimated effective income tax rates for the
fiscal years ending October 1, 1995 and October 2, 1994 of 35% and 10%,
respectively.
The tax effects of significant items comprising the Company's deferred
taxes (the long-term portions are included in other assets on the condensed
consolidated balance sheet) as of July 2, 1995, are as follows (in
thousands):
Gross deferred tax liabilities:
Difference between book and tax basis of property $ (2,626)
--------
Gross deferred tax assets:
Reserves not currently deductible $ 4,239
Operating loss carryforwards 9,931
Tax credit carryforwards 4,752
--------
18,922
Valuation allowance related to foreign net operating losses (3,696)
--------
Total deferred tax asset $ 15,226
--------
Net deferred taxes $ 12,600
========
5
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------
4. Credit and Borrowing Arrangements
---------------------------------
Interest payments for the nine month periods ended July 2, 1995 and July 3,
1994 were approximately $805,200 and $328,900, respectively.
5. Income Per Share
----------------
Net income per common and common equivalent share has been computed using
the weighted average number of common shares outstanding after considering
the dilutive effect of common stock options and warrants.
6. Litigation
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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.
7. Significant Transaction
-----------------------
On November 30, 1994, the Company entered into an agreement with Community
Health Computing Corporation and its parent, Community Health Computing
Corporation, Inc., (CHCC) of Houston, Texas. Under the agreement, the
Company loaned CHCC $3.2 million at an interest rate of 12% per annum.
Principal and interest obligations were secured by all the assets of CHCC.
Separately, the Company obtained a three-year option from several major
CHCC shareholders to acquire up to 4.8 million shares, representing
approximately 56% of CHCC's outstanding common stock, at $0.30 per share,
subject to certain conditions. Subsequently, the loan of $3.2 million was
repaid and the option to acquire up to $4.8 million shares was withdrawn.
On December 7, 1994, CHCC filed bankruptcy proceedings under Chapter 11.
The Company entered into another agreement with CHCC, which was subject to
Chapter 11 bankruptcy protection, to loan it up to $7.9 million. The
agreement was to provide working capital to CHCC during the period CHCC
operated under Chapter 11 bankruptcy protection, and was at an interest
rate of 12% per annum. Subsequently, the court approved several adjustments
to the loan amount. As of July 2, 1995, approximately $6.4 million was
outstanding under this agreement.
On January 12, 1995, CHCC filed a plan of reorganization with the United
States Bankruptcy Court which included a definitive agreement signed by
ADAC and CHCC which provided, subject to plan confirmation and other
conditions, for ADAC's acquisition of all the capital shares to be issued
by CHCC upon its reorganization following completion of the Chapter 11
bankruptcy proceedings and cancellation of all previously outstanding CHCC
shares.
On April 25, 1995, the U.S. Bankruptcy Court confirmed the plan of
reorganization filed by CHCC in its Chapter 11 case. The Court-approved
plan of reorganization incorporated the above described agreement which
provided for ADAC's acquisition of CHCC.
On July 12, 1995 the Company completed its acquisition of CHCC. The cost of
acquisition is presently estimated at $16.5 million plus expenses, of which
$6.4 million had been paid as of July 2, 1995.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL PERIOD ENDED JULY 2, 1995
--------------------------------
Liquidity and Capital Resources
-------------------------------
The Company's working capital for the nine months ended July 2, 1995 increased
to $53.8 million from $48.5 million at October 2, 1994. Cash and cash
equivalents declined from $7.2 million to $5.5 million, as net cash used in
investing activities of $9.3 million exceeded cash provided by operating
activities of $3.1 million and cash provided by financing activities of $3.3
million. Investing activities included loans to CHCC of $6.4 million (see Note 7
of Notes to the Condensed Consolidated Financial Statements). Cash provided by
financing activities included short-term borrowing of $7.6 million, which was
used primarily to make the loans to CHCC, verses $3.1 million in the same period
of the prior year. Additionally, during the nine month period ending July 2,
1995, the Company paid $2.0 million in settlement of litigation with Elscint
Limited. Other significant items affecting cash included capital expenditures of
$1.8 million, dividend payments of $5.9 million, proceeds from the issuance of
Common Stock of $1.6 million, and the effect of exchange rates, primarily
experienced in the second fiscal quarter, on cash and cash equivalents of
approximately $1.2 million, in which the Company's foreign subsidiaries'
balances were translated into more U.S. dollars as a result of a weakening in
the U.S. dollar related to foreign currencies.
Accounts receivable, net, increased by $5.5 million, primarily due to increased
sales in Latin America which typically have a longer collection cycle. Inventory
increased $5.6 million due to the placement of systems at three luminary sites
for purchase evaluation, several systems in ending finished goods inventory
associated with early fourth quarter revenue, and a general increase in
inventory to support higher revenue levels.
The Company's total acquisition cost of CHCC is presently estimated at $16.5
million plus expenses. The Company believes that the acquisition will provide
ADAC with a strategically important product for the Laboratory Information
Systems market and will be a significant step forward for the Company in its
expansion in the healthcare information systems market.
Management believes that its working capital, combined with the funds available
under its lines of credit (of which $32.4 million out of a total of $40.0
million was available at July 2, 1995), is adequate to meet current operating
expenses, capital expenditures and dividend payments.
Results of Operations
---------------------
Total revenues for the third quarter increased 13.8% compared to the third
quarter of fiscal 1994. Product revenues for the third quarter increased 14.5%
and field service revenues increased 11.6%, respectively, compared to the same
period in the prior fiscal year. The Company's orders received for the third
quarter of fiscal 1995 totaled $47.8 million compared to $43.1 million in the
third quarter of the previous fiscal year. The Company believes that the
increased orders were primarily due to increased market share in the nuclear
medicine market. Backlog at July 2, 1995 was $42.6 million, compared to $34.2
million at the end of the third quarter of 1994. Orders in backlog may be
canceled or rescheduled by customers in many cases without substantial penalty
and, for this reason, orders and backlog may not be indicative of the Company's
revenues for any succeeding period.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL PERIOD ENDED JULY 2, 1995 CONTINUED
------------------------------------------
Total revenues for the nine month period ended July 2, 1995 were relatively
constant with the same period in the previous fiscal year, increasing only
slightly by 0.5%. The 1.7% decrease in product revenue was offset by an increase
in field service revenue of 8.5% compared with the same period in the prior
year. The decline in product revenue is believed to have been caused by the
previous contraction in the domestic nuclear medicine market during 1994 and
into a portion of 1995. Revenue in Europe for the nine month period ended July
2, 1995 represented 15.2% and Asia/Latin America revenue represented 5.9% of
total revenue compared to 15.3% and 3.3%, respectively, in the same period of
fiscal 1994. Field service revenues for the nine months ended July 2, 1995
increased due to a larger installed base and increased renewals related to
improved customer satisfaction in response to Company initiatives.
Gross profit on product sales decreased to 39.7% and 39.2% of revenue for the
three months and nine months ended July 2, 1995, respectively, from 41.1% and
44.6% of revenue in the three and nine month periods in 1994. The lower margins
are a result of pricing pressures in the nuclear medicine market, both within
the U.S. and Europe, as a result of competitors reducing selling prices and
customers becoming more aggressive in cost reduction programs. The pricing
pressures are expected to continue at least into the near future. The Company is
continuing to focus on aggressive cost reduction programs to attempt to mitigate
pricing pressure impacts, as well as introducing new products which are believed
to increase cost-effectiveness to customers.
Field service margins for the three months and nine months ended July 2, 1995,
increased to 34.6% and 30.9%, respectively, of field service revenue compared
with 30.6% and 28.5% of field service revenue for the three month and nine month
periods in the prior fiscal year. The Company expects field service margins to
remain consistent or slightly improve due to improvements in operating
efficiencies resulting from the Company's continual emphasis on total quality
management and increased levels of customer satisfaction, as well as the
efficiencies resulting from a larger customer base.
Operating expenses, excluding restructuring charges, for the three month period
ended July 2, 1995 decreased as a percentage of revenue to 27.2% from 29.9% in
the same period in the prior year. For the nine month period ended July 2, 1995,
operating expenses, excluding restructuring charges, decreased 2.8% from the
same period in the prior fiscal year as a result of continued cost containment
and overall reductions in cost structure. Marketing and sales expenses as a
percentage of revenue in the third quarter of fiscal 1995 compared to the third
quarter of 1994 decreased to 16.5% from 18.3%, research and development expenses
as a percentage of revenues decreased to 5.6% from 7.2%, and general and
administrative expenses as a percentage of revenue increased to 5.0% from 4.4%
due primarily to consulting services related to the Company's healthcare
information systems business and higher bank administrative costs on larger bank
lines. For the nine month period ended July 2, 1995 compared to the same period
in the previous fiscal year, marketing and sales expenses as a percentage of
revenue decreased to 17.2% from 18.3%, research and development expenses as a
percentage of revenues decreased to 6.0% from 6.6%, and general and
administrative expenses as a percentage of revenue increased to 4.6% from 4.0%.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL PERIOD ENDED JULY 2, 1995 CONTINUED
------------------------------------------
Other income and expense, excluding the costs of the Elscint Limited litigation
incurred in fiscal 1994, primarily represents interest costs associated with the
CHCC financing, as discussed in Note 7 of the Notes to Condensed Consolidated
Financial Statements, and a foreign currency transaction loss experienced in the
second quarter of fiscal 1995 due to the weakening of the Italian Lira against
the Dutch Guilder.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" effective October 4, 1993. On adoption of SFAS No.
109, management established a valuation allowance for the entire balance of its
net deferred tax asset and, therefore, reported an effective tax rate of 10% for
that period, which took account of the utilization of net operating loss
carryforwards for purposes of tax calculations and financial reporting.
Following the release of the domestic valuation allowance in the fourth quarter
of fiscal 1994, the Company now has an effective tax rate of approximately 35%.
This rate, which is below the statutory rate, is expected to be achieved through
the implementation of tax saving strategies.
9
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
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 11.1 - Computation of Net Income Per Share
(b) Form 8-K Reports:
No reports on Form 8-K were filed during the fiscal quarter
covered by the report on Form 10-Q; however, one report
on Form 8-K was filed subsequent to the end of the quarter
as follows:
Report on Form 8-K, dated July 26, 1995, concerning a
series of transactions with Community Health Computing
Corporation (CHCC), including the acquisition of 4,000,000
shares of Series A Preferred Stock of CHCC.
10
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 16, 1995
ADAC Laboratories
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(Registrant)
BY: /s/ Dennis R. Mahoney
-------------------
Dennis R. Mahoney
Vice President, Finance, Chief
Financial Officer, and Secretary
(Principal Financial Officer)
11