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 June 30, 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
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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 2, 1996,
17,595,520.
(This document contains a total of 13 pages)
(Exhibit Index located on page 11)
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
June 30,
1996 October 1,
(Unaudited) 1995
----------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,161 $ 7,551
Accounts receivable, net of allowance
for returns and doubtful accounts 71,379 55,047
Inventories 31,488 28,217
Deferred income taxes 4,912 10,732
Prepaid expenses and other current assets 8,477 5,515
-------- --------
TOTAL CURRENT ASSETS 121,417 107,062
Service parts, net 14,633 13,571
Fixed assets, net 8,107 8,368
Capitalized software, net 11,373 10,280
Goodwill, net 11,099 11,692
Other assets, net 6,498 7,375
-------- --------
TOTAL ASSETS $173,127 $158,348
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 23,183 $ 18,298
Accounts payable 14,969 13,147
Dividends payable 2,109 2,027
Deferred revenues 12,888 13,506
Customer deposits and advance billings 4,526 4,201
Accrued compensation 7,730 6,335
Other accrued liabilities 11,831 13,812
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TOTAL CURRENT LIABILITIES 77,236 71,326
Non-current liabilities and deferred credits 4,382 4,254
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TOTAL LIABILITIES 81,618 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: 17,557 shares
June 30, 1996 and 16,919 shares
October 1, 1995 104,995 101,072
Accumulated deficit (13,409) (18,986)
Translation adjustment (77) 682
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TOTAL SHAREHOLDERS' EQUITY 91,509 82,768
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $173,127 $158,348
======== ========
The accompanying notes are an integral part of these condensed interim
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
------------------- ----------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES, NET:
Product $46,437 $34,034 $129,094 $101,494
Service 15,997 11,591 46,766 33,090
------- ------- -------- --------
62,434 45,625 175,860 134,584
------- ------- -------- --------
COST OF REVENUES:
Product 28,459 21,566 79,412 63,223
Service 9,841 7,496 28,902 22,799
------- ------- -------- --------
38,300 29,062 108,314 86,022
------- ------- -------- --------
GROSS PROFIT 24,134 16,563 67,546 48,562
------- ------- -------- --------
OPERATING EXPENSES:
Marketing and sales 9,529 7,187 26,350 21,897
Research and development 3,211 2,294 9,149 7,261
General and administrative 3,551 2,287 10,585 6,230
Goodwill 198 594
------- ------- -------- --------
16,489 11,768 46,678 35,388
------- ------- -------- --------
OPERATING INCOME 7,645 4,795 20,868 13,174
Other expense, net (843) (158) (2,464) (566)
------- ------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 6,802 4,637 18,404 12,608
Provision for income taxes (2,449) (1,583) (6,572) (4,370)
------- ------- -------- --------
NET INCOME $ 4,353 $ 3,054 $ 11,832 $ 8,238
======= ======= ======== ========
NET INCOME PER SHARE $ 0.24 $ 0.18 $ 0.65 $ 0.49
======= ======= ======== ========
Number of shares used in net
income per share calculations 18,403 17,439 18,128 16,928
======= ======= ======== ========
Dividends per share $ 0.12 $ 0.12 $ 0.36 $ 0.36
======= ======= ======== ========
The accompanying notes are an integral part of these condensed interim
consolidated financial statements.
3
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
-------------------
June 30, July 2,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by
operating activities $ 640 $ 3,093
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to CHC (6,408)
Proceeds from sale and leaseback
of fixed assets 527
Capital expenditures (1,756) (1,820)
Capitalized software (2,679) (954)
Other assets (390) (656)
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Net cash used in investing
activities (4,825) (9,311)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short term borrowing 4,885 7,600
Dividends paid (6,254) (5,860)
Proceeds from issuance of
common stock, net 3,923 1,555
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Net cash provided by
financing activities 2,554 3,295
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Effect of exchange rates on cash (759) 1,249
------- -------
Net decrease in cash and cash equivalents (2,390) (1,674)
Cash and cash equivalents, at beginning of
the period 7,551 7,203
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Cash and cash equivalents, at end of the
period $ 5,161 $ 5,529
======= =======
The accompanying notes are an integral part of these condensed interim
consolidated financial statements.
4
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(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 30, 1996 are not
necessarily indicative of the results that may be expected for any future
periods. For further information, refer to the annual consolidated
financial statements and notes thereto for the year ended October 1, 1995
in the Company's filing on Form 10-K.
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
--------------------
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.
3. Depreciation and Amortization
-----------------------------
Depreciation and amortization were approximately $2.2 million and $1.4
million for the three-month periods ended June 30, 1996 and July 2, 1995,
respectively, and $6.8 million and $4.3 million for the nine-month periods
ended June 30, 1996 and July 2, 1995, respectively.
4. Inventories
-----------
Inventories consist of (in thousands of dollars):
June 30, October 1,
1996 1995
-------- ----------
Purchased parts and
sub-assemblies $10,628 $14,138
Work in process 4,534 1,421
Finished goods 16,326 12,658
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$31,488 $28,217
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5
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
5. 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 nine months ended June 30,
1996 and July 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.
6. Credit and Borrowing Arrangements
---------------------------------
Interest payments for the third quarter of fiscal years 1996 and 1995 were
approximately $922 and $425, respectively. Interest payments for each of
the nine month periods ended June 30, 1996 and July 2, 1995 were
approximately $2,382 and $805, respectively.
On July 31, 1996, the Company increased its revolving credit facility to
$60.0 million. This syndicated credit facility with four banks is for
working capital uses. The credit facility expires July 31, 1999 and bears
interest at approximately Libor plus 1.00%. As of August 5, 1996 the
Company had available $19.6 million available for borrowing under this
facility.
7. 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.
8. Acquisition
-----------
On November 9, 1995, the Company acquired JD Technical Services, Inc., of
Washington, Missouri, a provider of nuclear medicine imaging system
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
9. Preferred Share Purchase Rights Plan
------------------------------------
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
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OF OPERATIONS
- --------------
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the first nine months of fiscal
1996 was $0.6 million compared to $3.1 million in the first nine months of
fiscal 1995. The decrease in cash provided from operations were primarily
attributable to increases in accounts receivables, as revenues grew 30.7% in
1996 over the same nine month period in 1995.
Cash used in investing activities decreased from $9.3 million to $4.8 million.
Most of the decrease was due to the Company previously providing funding to
Community Health Computing (CHC) during the first nine months of fiscal 1995
prior to the Company's acquisition of such corporation. Cash generated by
financing activities decreased $0.7 million primarily as a result of a period to
period decrease in incremental borrowings. Additionally, financing cash inflows
were augmented by a $3.3 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 nine months of fiscal 1996 compared to a decrease
of $1.7 million in the first nine months of fiscal 1995.
On July 31, 1996, the Company increased its revolving credit facility to $60.0
million. This syndicated credit facility with four banks is for working capital
uses. The credit facility expires July 31, 1999 and bears interest at
approximately Libor plus 1.00%. As of August 5, 1996 the Company had available
$19.6 million available for borrowing under this facility.
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 Angiography (DSA) equipment products, as
well as services relating to those products. Medical Systems product revenues
increased from $32.7 million in the third quarter of fiscal 1995 to $41.5
million in the third quarter of fiscal 1996, and increased from $96.7 million to
$117.4 million in the first nine months of 1995 and 1996, respectively. This
product revenue increase was primarily due to an 18.7%, or $5.9 million,
increase in Nuclear Medicine product revenues for the third quarter of fiscal
1996 compared with the third quarter of fiscal 1995. For the comparable nine
month periods, Nuclear Medicine product revenue increased 18.8%, or $17.2
million, over the first nine months of fiscal 1995. These increases were offset
by a $0.3 and $2.8 million decrease in DSA product sales for the third quarter
of fiscal 1996 and the first nine 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 $10.8 million to $11.8
million in the third quarters of fiscal 1995 and 1996, respectively, and
increased from $30.7 million to $34.1 million in the first nine 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 89.5% and 96.2% of the Company's
total product revenue during the third quarters of fiscal 1996 and 1995,
respectively, and 91.0% and 95.3% of the Company's total product revenue during
the first nine months of fiscal 1996 and 1995, respectively. The geographical
mix of Medical Systems product revenues for the third quarter of fiscal 1996 was
75.8% in North America, 11.9% in Europe, and 12.3% in the rest of the world,
primarily Latin America and Asia, compared with 80.3% in North America, 15.2% in
Europe, and 4.5% in the rest of the world in the third quarter of fiscal 1995.
The geographical mix of Medical Systems product revenues for the first nine
months of fiscal 1996 was 74.7% in North America, 14.2% in Europe, and 11.1% in
the rest of the world, primarily Latin America and Asia, compared with 75.6% in
North America, 16.2% in Europe, and 8.2% in the rest of the world in the first
nine months of fiscal 1995. The mix of product revenues as a percent of total
Medical Systems product revenues for the third quarters of fiscal 1996 and 1995
were 94.4% and 96.3%, respectively, for Nuclear Medicine, 4.9% and 1.7%,
respectively, for RTP, and 0.7% and 2.0%, respectively, for DSA. The mix of
product revenues as a percent of total Medical Systems product revenues for the
first nine months of fiscal 1996 and 1995 were 95.3% and 94.2%, respectively,
for Nuclear Medicine, 4.1% and 2.1%, respectively, for RTP, and 0.7% and 3.7%,
respectively, for DSA.
Medical Systems product margins increased from 36.5% to 39.2% for the third
quarters of fiscal 1995 and 1996, respectively. For the comparable nine month
periods, Medical Systems product margins increased from 37.3% to 38.1% for
fiscal 1995 and 1996, respectively. Service margins for Medical Systems
decreased from 34.6% in the third quarter of fiscal 1995 to 32.8% in the third
quarter of 1996. For the comparable nine month periods, however, service
margins for Medical Systems increased from 30.9% 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 nine 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 $1.3 million to $4.9 million from the third
quarter of fiscal 1995 compared with the third quarter of fiscal 1996 and
increased from $4.8 million to $11.7 million from the first nine months of
fiscal 1995 compared with the first nine months of fiscal 1996. HCIS service
revenues increased from $0.8 million in the third quarter of fiscal 1995 to $4.2
million in the third quarter of fiscal 1996, and increased from $2.4 million in
the first nine months of fiscal 1995 to $12.7 million in the first nine 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 third quarter of fiscal 1996 and
1995, radiology product revenues represented 49.3% and 100%, respectively, of
HCIS product revenues, and laboratory product revenues represented 50.7% and
0.0%, respectively. For the nine month periods in fiscal 1996 and 1995,
respectively, radiology product revenues represented 54.1% and 100%,
respectively, of HCIS product revenues, and laboratory product revenues
represented 45.9% 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 third quarters of fiscal 1995 and 1996 were 41.2%
and 34.5%, respectively, while for the first nine months in fiscal 1995 and
1996, the HCIS product margins were 46.5% and 42.5%, respectively. The decrease
in product margins is due to the mix in hardware and software components of
shipments. HCIS service margins increased from 44.8% to 54.3% from the third
quarter in fiscal 1995 to the third quarter in fiscal 1996, and increased from
33.5% to 52.3% for the first nine 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 third quarter of
fiscal 1996 compared with the third quarter of fiscal 1995 increased to 26.4%
from 25.8%. 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 third quarters of fiscal 1996 and 1995, marketing and sales
expenses decreased to 15.3% from 15.8%, research and development remained
relatively consistent at 5.1% and 5.0%, respectively, and general and
administrative expenses increased to 5.7% from 5.0%. The $1.3 million increase
in general and administrative expenses over the prior year's third quarter
resulted from the additional administrative and infrastructure costs related to
the acquired HCIS business unit. For the comparable nine month periods in
fiscal 1996 and 1995, overall operating expenses as a percentage of revenues
remained consistent at 26.5% and 26.3%, respectively. As a percentage of
revenue for the first nine months of fiscal 1996 and 1995, marketing and sales
expenses decreased to 15.0% from 16.3%, research and development expenses
decreased to 5.2% from 5.4%, and general and administrative expenses increased
to 6.0% from 4.6%.
Other expense, net, increased to $0.8 million in the third quarter of fiscal
1996 from $0.2 million in the third quarter of fiscal 1995. For the comparable
nine month periods, other expense, net, increased to $2.5 million from $0.6
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 third quarters of fiscal 1996 and 1995 were 36%
and 34%, respectively. The effective tax rate for the first nine months of
fiscal 1996 was 36%, compared with an effective tax rate of 35% for the first
nine 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
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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 10.81 - Credit Agreement between the Registrant and ABN
Amro Bank N. Y., as agent for the Lenders, dated
July 31, 1996.
Exhibit 11.1 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
(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.
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: August 13, 1996
ADAC Laboratories
---- ------------
(Registrant)
BY: /s/ P. Andre' Simone
------------------
P. Andre' Simone
Chief Financial Officer
12