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 March 31, 1996
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
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(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
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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 May 1, 1996,
17,447,133.
(This document contains a total of 13 pages)
(Exhibit Index located on page 11)
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
March 31, October 1,
1996 1995
(Unaudited)
------------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,168 $ 7,551
Accounts receivable, net of allowance
for returns and doubtful accounts 69,997 55,047
Inventories 28,000 28,217
Deferred income taxes 7,362 10,732
Prepaid expenses and other current assets 7,458 5,515
-------- --------
TOTAL CURRENT ASSETS 117,985 107,062
Service parts, net 13,669 13,571
Fixed assets, net 8,022 8,368
Capitalized software, net 11,225 10,280
Goodwill, net 11,297 11,692
Other assets, net 6,537 7,375
-------- --------
TOTAL ASSETS $168,735 $158,348
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 22,187 $ 18,298
Accounts payable 14,754 13,147
Dividends payable 2,091 2,027
Deferred revenues 13,815 13,506
Customer deposits and advance billings 4,266 4,201
Accrued compensation 6,124 6,335
Other accrued liabilities 12,288 13,812
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TOTAL CURRENT LIABILITIES 75,525 71,326
Non-current liabilities and deferred credits 4,760 4,254
-------- --------
TOTAL LIABILITIES 80,285 75,580
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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: 17,412 shares
March 31, 1996 and 16,919 shares
October 1, 1995 103,845 101,072
Accumulated deficit (15,652) (18,986)
Translation adjustment 257 682
-------- --------
TOTAL SHAREHOLDERS' EQUITY 88,450 82,768
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $168,735 $158,348
======== ========
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 Six
Months Ended Months Ended
------------ ------------
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
---- ---- ---- ----
REVENUES, NET:
Product $ 42,949 $ 33,576 $ 82,657 $ 67,460
Service 15,489 11,151 30,769 21,499
---------- ---------- ---------- ----------
58,438 44,727 113,426 88,959
---------- ---------- ---------- ----------
COST OF REVENUES:
Product 26,393 20,802 50,953 41,657
Service 9,731 7,784 19,061 15,303
---------- ---------- ----------- ----------
36,124 28,586 70,014 56,960
---------- ---------- ----------- ----------
GROSS PROFIT 22,314 16,141 43,412 31,999
---------- ---------- ----------- ----------
OPERATING EXPENSES:
Marketing and sales 8,647 7,102 16,821 14,710
Research and development 3,047 2,373 5,938 4,967
General and administrative 3,454 2,122 7,034 3,943
Goodwill 198 396
---------- ---------- ----------- ----------
15,346 11,597 30,189 23,620
---------- ---------- ----------- ----------
OPERATING INCOME 6,968 4,544 13,223 8,379
---------- ---------- ----------- ----------
Other expense, net (815) (311) (1,621) (408)
---------- ---------- ----------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 6,153 4,233 11,602 7,971
Provision for income taxes (2,215) (1,479) (4,123) (2,787)
---------- ---------- ----------- ----------
NET INCOME $ 3,938 $ 2,754 $ 7,479 $ 5,184
========== ========== =========== ==========
NET INCOME PER SHARE $ 0.22 $ 0.17 $ 0.42 $ 0.31
========== ========== =========== ==========
Number of shares used
in per share calculations 18,271 16,637 17,991 16,666
========== ========== =========== ==========
Dividends per share $ 0.12 $ $0.12 $ 0.24 $ 0.24
========== ========== =========== ==========
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)
-----------
Six Months Ended
----------------
March 31, April 2,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used in) provided by
operating activities $ (1,370) $ 2,046
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to CHC (6,820)
Proceeds from sale and leaseback
of fixed assets 527
Capital expenditures (1,030) (1,279)
Other (2,075) (836)
---------- ---------
Net cash used in investing
activities (3,105) (8,408)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short term borrowing 3,889 7,328
Dividends paid (4,145) (3,893)
Proceeds from issuance of
Common Stock, net 2,773 941
---------- ---------
Net cash provided by
financing activities 2,517 4,376
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Effect of exchange rates on cash 425 1,186
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Net decrease in cash and cash equivalents (2,383) (800)
Cash and cash equivalents, at beginning of
the period 7,551 7,203
---------- ---------
Cash and cash equivalents, at end of the
period $ 5,168 $ 6,403
========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
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 consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the information required
to be included. Operating results for the six-month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for
any future period. For further information, refer to the consolidated
financial statements and notes thereto for the year ended October 1, 1995
in the 1995 Form 10-K.
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 of dollars):
March 31, October 1,
1996 1995
---- ----
Purchased parts and
sub-assemblies $ 10,951 $ 14,138
Work in process 3,245 1,421
Finished goods 13,804 12,658
---------- ----------
$ 28,000 $ 28,217
========== ==========
3. Income Taxes
------------
The Company uses the deferral method to account for income taxes under
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
The provisions for income taxes for each of the six months ended March 31,
1996 and April 2, 1995 are based on the estimated effective income tax
rates for the fiscal years ending September 29, 1996 and October 1, 1995 of
36% and 35%, respectively.
5
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
The tax effects of significant items comprising the Company's deferred taxes as
of March 31, 1996, are as follows (in thousands):
Gross deferred tax liabilities:
Difference between book and tax basis of property $ (1,734)
--------
Gross deferred tax assets:
Reserves not currently deductible $ 1,532
Operating loss carryforwards 5,154
Tax credit carryforwards 5,464
--------
12,150
Valuation allowance (3,054)
--------
Total deferred tax asset $ 9,096
--------
Net deferred taxes $ 7,362
========
4. Credit and Borrowing Arrangements
---------------------------------
Interest payments for the second quarter of fiscal years 1996 and 1995
were approximately $717 and $274, respectively. Interest payments for the
six month periods ended March 31, 1996 and April 2, 1996 were
approximately $1,460 and $380, 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
----------
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. Acquisition
-----------
On November 9, 1995, the Company acquired JD Technical Services, Inc., of
Washington, Missouri, a provider of nuclear medicine imaging systems
remanufacturing, as well as a nationwide provider of multi-vendor service
and support. The Company issued 138 shares of common stock at the average
closing price of the Company's common stock during a specified period, for
a total price of $1.7 million, in exchange for all the outstanding stock
of JD Technical. The transaction was accounted for as a pooling of
interests. Prior period financial statements have not been restated, as
the operations of JD Technical were not material to the financial position
or the results of operations of the Company at the time of acquisition.
6
8. Subsequent Event
----------------
In April 1996, the Company's Board of Directors adopted a Preferred Share
Purchase Rights Plan (the "Rights Plan"). Under the Rights Plan, a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock, without par value (the "Common
Shares"), of the Company was declared. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of Series
A Junior Participating Preferred Stock, without par value (the "Preferred
Stock"), at a price of seventy dollars ($70.00) per one one-hundredth of a
Preferred Share. Each one one-hundredth of a share of Preferred Stock has
designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions which make its value
approximately equal to the value of a Common Share. In general, the Rights
are exercisable upon the commencement of, or announcement of an intention
to make, a tender offer or exchange offer, the consummation of which would
result in the beneficial ownership by a person or group of 15% or more of
such outstanding Common Shares. The Rights expire in April 2006 unless the
expiration date is extended or unless the Rights are earlier redeemed by
the Company.
The Rights Plan is designed to provide an adequate opportunity for the
Company's Board of Directors to consider and evaluate all strategic
alternatives of the Company in the event an unsolicited attempt is made to
acquire the Company. The Rights are intended to enable all of the
Company's shareholders to realize the full value of their investment and
to provide for fair and equal treatment for all shareholders. The adoption
of the Rights Plan will not, nor is it intended to, prevent all takeover
actions. The Rights are not being distributed in response to any proposal
to acquire the Company.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the first six months of fiscal 1996
was $1.4 million compared to $2.0 million provided by operating activities in
the first six months of fiscal 1995. Uses of cash in operations were primarily
attributable to increases in accounts receivables, as revenues grew 27.5% in
1996 over the same six month period in 1995.
Cash used in investing activities decreased from $8.4 million to $3.1 million.
Most of the decrease was due to the Company providing funding to Community
Health Computing (CHC) during the first six months of fiscal 1995 prior to the
Company's acquisition of such corporation. Cash generated by financing
activities decreased $1.9 million primarily as a result of a period to period
decrease in incremental borrowings. Additionally, financing cash inflows were
augmented by a $1.8 million incremental increase in stock option exercises,
employee stock purchases, and dividend reinvestments.
As a result of the Company's operating, investing and financing activities, the
Company's cash and cash equivalents decreased by $2.4 million, from $7.6 million
to $5.2 million in the first six months of fiscal 1996 compared to a decrease of
$0.8 million in the first six months of fiscal 1995.
The Company believes that its cash, cash equivalents, cash flows from operating
activities and, if necessary, remaining available lines of credit will be able
to fund the Company's cash flow requirements for the current fiscal year. On a
longer-term basis, the Company may decide to increase its sources of capital in
response to business conditions or to pursue new business opportunities. Such
sources of capital might include private or public equity or debt offerings.
There can be no assurance that such additional financing resources will be
available and/or on terms favorable to the Company.
RESULTS OF OPERATIONS
REVENUES AND GROSS MARGIN:
The Company's two business units are Medical Systems and Healthcare Information
Systems (HCIS).
The Medical Systems business unit includes Nuclear Medicine, Radiation Therapy
Planning (RTP), and Digital Systems Angiograpghy (DSA) equipment products, as
well as services relating to those products. Medical Systems product revenues
increased from $32.0 million in the second quarter of fiscal 1995 to $39.1
million in the second quarter of fiscal 1996, and increased from $64.0 million
to $75.9 million in the first six months of 1995 and 1996, respectively. This
product revenue increase was primarily due to a 19.1%, or $5.8 million, increase
in Nuclear Medicine product revenues for the second quarter of fiscal 1996
compared with the second quarter of fiscal 1995. For the comparable six month
periods, Nuclear Medicine product revenue increased 18.9%, or $11.3 million,
over the first six months of fiscal 1995. These increases were offset by a $1.0
and $2.4 million decrease in DSA product sales for the second quarter of fiscal
1996 and the first six months of fiscal 1996, respectively, compared with the
same periods in the previous fiscal year, as that product continues to mature.
Medical Systems service revenues increased from $10.3 million to $11.4 million
in the second quarters of fiscal 1995 and 1996, respectively, and increased from
$19.9 million to $22.3 million in the first six months of fiscal 1995 and 1996,
respectively, primarily as a result of the continued increase in the installed
product base.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Medical Systems product revenue represented 91.0% and 95.3% of the Company's
total product revenue during the second quarters of fiscal 1996 and 1995,
respectively, and 91.8% and 94.8% of the Company's total product revenue during
the first six months of fiscal 1996 and 1995, respectively. The geographical mix
of Medical Systems product revenues for the second quarter of fiscal 1996 was
73.0% in North America, 14.6% in Europe, and 12.4% in the rest of the world,
primarily Latin America and Asia, compared with 73.0% in North America, 17.0% in
Europe, and 10.0% in the rest of the world in the second quarter of fiscal 1995.
The geographical mix of Medical Systems product revenues for the first six
months of fiscal 1996 was 74.2% in North America, 15.5% in Europe, and 10.3% in
the rest of the world, primarily Latin America and Asia, compared with 73.2% in
North America, 16.7% in Europe, and 10.1% in the rest of the world in the first
six months of fiscal 1995. The mix of product revenues as a percent of total
Medical Systems product revenues for the second quarters of fiscal 1996 and 1995
were 95.6% and 94.4%, respectively, for Nuclear Medicine, 4.0% and 1.8%,
respectively, for RTP, and 0.4% and 3.8%, respectively, for DSA. The mix of
product revenues as a percent of total Medical Systems product revenues for the
first six months of fiscal 1996 and 1995 were 95.7% and 93.1%, respectively, for
Nuclear Medicine, 3.7% and 2.4%, respectively, for RTP, and 0.6% and 4.5%,
respectively, for DSA.
Medical Systems product margins decreased slightly from 37.7% to 37.5% for both
the second quarters and the first six months of fiscal 1995 and 1996,
respectively. Service margins for Medical Systems increased from 29.7% in the
second quarter of fiscal 1995 to 32.8% in the second quarter of 1996. For the
comparable six month periods, service margins for Medical Systems increased from
28.9% in fiscal 1995 to 33.0% in fiscal 1996, as the installed customer base
increased, product reliability increased and overall costs were reduced.
HCIS includes products comprising the hardware, software and related
implementation of systems designed to manage information within the radiology
and laboratory departments of healthcare organizations, as well as service
related to those products. During the first six months of fiscal 1995, the
Company's HCIS product mix included radiology products offered by the Company
and ADAC/SD&G Healthcare Systems (SD&G), which the Company acquired in November
1993. In July 1995, the Company also acquired Community Health Computing (CHC),
which provided the Company with an additional radiology product, as well as a
laboratory product. The HCIS business unit now represents the combined
businesses of SD&G, CHC, and the Company's existing radiology business.
HCIS product revenues increased from $1.6 million to $3.9 million from the
second quarter of fiscal 1995 compared with the second quarter of fiscal 1996
and increased from $3.5 million to $6.8 million from the first six months of
fiscal 1995 compared with the first six months of fiscal 1996. HCIS service
revenues increased from $0.8 million in the second quarter of fiscal 1995 to
$4.1 million in the second quarter of fiscal 1996, and increased from $1.6
million in the first six months of fiscal 1995 to $8.5 million in the first six
months of fiscal 1996. These increases are attributable to additional radiology
and laboratory products acquired in or developed subsequent to the acquisition
of CHC previously discussed.
All HCIS sales are in North America. For the second quarter of fiscal 1996 and
1995, radiology product revenues represented 48.6% and 100%, respectively, of
HCIS product revenues, and laboratory product revenues represented 51.4% and
0.0%, respectively. For the six month periods in fiscal 1996 and 1995,
respectively, radiology product revenues represented 57.6% and 100%,
respectively, of HCIS product revenues, and laboratory product revenues
represented 42.4% and 0.0%, respectively.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
HCIS product margins for the second quarters of fiscal 1995 and 1996 were 44.2%
and 49.5%, respectively, while for the first six months in fiscal 1995 and 1996,
the HCIS product margins were comparable at 48.4% and 48.3%, respectively. HCIS
service margins increased from 35.9% to 49.3% from the second quarter in fiscal
1995 to the second quarter in fiscal 1996, and increased from 27.4% to 51.3% for
the first six months of fiscal 1996 compared with the same time period in fiscal
1995, primarily due to obtaining a relatively large installed base of laboratory
product customers when the Company acquired CHC.
OPERATING AND OTHER EXPENSES:
Overall operating expenses as a percentage of revenues for the second quarter of
fiscal 1996 compared with the second quarter of fiscal 1995 increased to 26.3%
from 25.9%. This increase is primarily attributable to the acquired CHC business
which added goodwill amortization and additional administrative and
infrastructure costs related to the HCIS business unit. As a percentage of
revenue for the second quarters of fiscal 1995 and 1996, marketing and sales
expenses decreased from 15.9% to 14.8%, research and development remained
relatively consistent at 5.3% and 5.2%, respectively, and general and
administrative expenses increased from 4.7% to 5.9%. For the comparable six
month periods in fiscal 1996 and 1995, overall operating expenses as a
percentage of revenues remained consistent at 26.6%. As a percentage of revenue
for the first six months of fiscal 1995 and 1996, marketing and sales expenses
decreased from 16.5% to 14.8%, research and development expenses decreased from
5.6% to 5.2%, and general and administrative expenses increased from 4.4% to
6.2%.
Other expense, net, increased from $0.3 million in the second quarter of fiscal
1995 to $0.8 million in the second quarter of fiscal 1996. For the comparable
six month periods, other expense, net, increased from $0.4 million to $1.6
million. These increases resulted from the Company carrying higher short-term
bank borrowings during fiscal 1996, due to the acquisition of CHC.
INCOME TAXES:
The effective tax rate for the second quarter and the first six months of fiscal
1996 was 36%, compared with an effective tax rate of 35% in the second quarter
and first six months of fiscal 1995. These rates are approximately equal to
the Company's statutory Federal tax rate after utilization of business tax
credits.
OTHER:
In order to maintain successful operating results in the highly competitive
industry in which the Company does business, the Company must continue to
produce and market innovative products equal to or better than those of its
competitors. Within the industry, there is also uncertainty associated with the
potential response of customers to new private and legislative health care cost
containment initiatives, which may affect the size of the marketplace, the
receipt of orders for new products, and pricing. Although the Company has been
able to develop and market advanced, innovative and cost effective new products
in recent years, and has been able to increase its market share in the nuclear
medicine industry, there is no assurance that this will continue.
10
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
---------- -- ------- -- - ---- -- -------- -------
(a) The Company's annual Meeting of Shareholders was held on March
6, 1996.
(b) At such meeting the following Directors were duly elected: Stanley
D. Czerwinski, Graham O. King, David L. Lowe, Robert L. Miller,
Edmund H. Shea, Jr., and F. David Rollo.
(c) At such meeting the following matters were voted on: An amendment to
the Company's 1992 Stock Option Plan to increase the number of
shares authorized by 1,355,000 shares, an amendment to the Company's
Employee Stock Purchase Plan (1994) to increase the number of shares
authorized by 65,000 shares, an amendment to the Company's
Directors' Stock Option Plan (1987) to increase the number of shares
by 65,000, and an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 25,000,000 to 50,000,000.
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 April 22, 1996, concerning the Company's
adoption of a shareholder's rights plan.
11
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: May 14, 1996
ADAC Laboratories
---- ------------
(Registrant)
BY: /s/ P. Andre' Simone
------------------
P. Andre' Simone
Vice President, Finance
(Principal Financial and Accounting Officer)
12