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 29, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-9428
ADAC LABORATORIES
(Exact name of registrant as specified in its charter)
California 94-1725806
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
540 Alder Drive
Milpitas, California 95035
-------------------- -----
(Address of principal executive offices) (Zip Code)
(408) 321-9100
--------------
(Registrant's telephone number including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----
Number of shares of common stock, no par value, outstanding at August 7, 1997,
18,806,418.
(This document contains a total of 19 pages)
ADAC LABORATORIES
QUARTERLY REPORT ON FORM-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three-Month
and Nine-Month Periods Ended June 29, 1997 and June 30, 1996 3
Condensed Consolidated Balance Sheets at June 29, 1997 and
September 29, 1996 4
Condensed Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended June 29, 1997 and June 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Part II. Other Information
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
2.1 Agreement and Plan of Reorganization dated as of March 31, 1997 by and
among the Company, ADAC Acquisition Corp., Cortet, Inc. and the
Designated Shareholders of Cortet
2.1 Amended and Restated Articles of Incorporation of the Company
2.2 Bylaws, as amended
10.1 Second Amendment to Credit Agreement dated as of May 1, 1997 and First
Amendment to Credit Agreement dated as of December 27, 1996, each by
and among the Company, the Lenders named therein and ABN AMRO BANK
N.V., as agent for the Lenders
10.2 Directors' Stock Option Plan (1987), as amended
10.3 1992 Stock Option Plan, as amended
10.4 Employee Stock Purchase Plan (1994), as amended
11.1 Computation of Net Income Per Share
2
PART I - FINANCIAL INFORMATION
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Nine
Months Ended Months Ended
------------ ------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
---- ---- ---- ----
REVENUES, NET:
Product $53,657 $46,437 $158,183 $129,094
Service 17,853 15,997 51,668 46,766
------- ------- -------- --------
71,510 62,434 209,851 175,860
------- ------- -------- --------
COST OF REVENUES:
Product 30,799 28,459 91,061 79,412
Service 11,042 9,841 32,606 28,902
------- ------- -------- --------
41,841 38,300 123,667 108,314
------- ------- -------- --------
Gross Profit 29,669 24,134 86,184 67,546
------- ------- -------- --------
OPERATING EXPENSES:
Marketing and sales 10,313 9,529 31,834 26,350
Research and development 4,018 3,211 10,815 9,149
General and administrative 4,514 3,551 13,184 10,585
Goodwill 198 198 594 594
In-process research and
development and
acquisition expenses 5,862 5,862
------- ------- -------- --------
24,905 16,489 62,289 46,678
------- ------- -------- --------
Operating Income 4,764 7,645 23,895 20,868
------- ------- -------- --------
Interest and other expense, net: (1,336) (843) (3,756) (2,464)
------- ------- -------- --------
Income before provision
for income taxes 3,428 6,802 20,139 18,404
Provision for income taxes (3,322) (2,449) (9,388) (6,572)
------- ------- -------- --------
Net income $ 106 $ 4,353 $ 10,751 $ 11,832
======= ======= ======== ========
Net income per share $ 0.01 $ 0.24 $ 0.55 $ 0.65
======= ======= ======== ========
Number of shares used
in per share calculation 19,775 18,403 19,536 18,128
======= ======= ======== ========
Dividends per share - $ 0.12 - $ 0.36
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
June 29, September 29,
1997 1996
(Unaudited)
----------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,143 $ 3,081
Accounts receivable 95,565 80,654
Inventories 26,029 31,975
Deferred income taxes 7,931 8,095
Prepaid expenses and other current assets 10,747 11,027
-------- --------
TOTAL CURRENT ASSETS 146,415 134,832
Service parts 16,695 15,482
Fixed assets 10,112 8,393
Capitalized software 13,465 11,656
Goodwill 10,308 10,901
Other assets 4,165 5,364
-------- --------
TOTAL ASSETS $201,160 $186,628
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 23,898 $ 27,226
Accounts payable 9,171 13,923
Dividends payable - 2,137
Deferred revenues 12,075 13,302
Customer deposits and advance billings 2,108 2,302
Accrued compensation 8,218 7,825
Other accrued liabilities 19,650 13,797
-------- --------
TOTAL CURRENT LIABILITIES 75,120 80,512
Deferred income taxes 2,275 2,275
Liabilities and deferred credits 2,878 4,370
-------- --------
TOTAL LIABILITIES 80,273 87,157
-------- --------
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: 18,796 shares at
June 29, 1997 and 17,781 shares at
September 29, 1996 122,772 110,661
Retained earnings (accumulated deficit) 579 (10,172)
Translation adjustment (2,464) (1,018)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 120,887 99,471
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $201,160 $186,628
======== ========
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 29, June 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,751 $ 11,832
Adjustments to reconcile net income to net
cash provided by operations
Depreciation and amortization 7,685 6,799
Changes in assets and liabilities (12,662) (17,991)
-------- --------
Cash provided by
operating activities 5,774 640
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,087) (1,756)
Other (3,825) (3,069)
-------- --------
Cash used in investing
activities (7,912) (4,825)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under
short term debt arrangements, net (3,328) 4,885
Dividends paid (2,137) (6,254)
Proceeds from issuance of
common stock, net 12,111 3,923
-------- --------
Cash provided by financing
activities 6,646 2,554
-------- --------
Effect of exchange rates on cash (1,446) (759)
-------- --------
Net increase/(decrease) in cash and cash
equivalents 3,062 (2,390)
Cash and cash equivalents, at beginning of
the period 3,081 7,551
-------- --------
Cash and cash equivalents, at end of the
period $ 6,143 $ 5,161
======== ========
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 29, 1997 are not
necessarily indicative of the results that may be expected for any future
periods. 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 29, 1996.
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 share has been computed using the weighted average number of
common shares and common share equivalents outstanding during each period.
Common share equivalents represent the dilutive effect of common stock
options and warrants using the treasury stock method.
3. Depreciation and Amortization
-----------------------------
Depreciation and amortization was approximately $2.8 million and $2.2
million for each of the three-month periods ended June 29, 1997 and June
30, 1996.
4. Inventories
-----------
Inventories consist of:
June 29, September 29,
1997 1996
---- ----
(in thousands)
Purchased parts and
sub-assemblies $11,356 $16,000
Work in process 4,146 5,057
Finished goods 10,527 10,918
------- -------
$26,029 $31,975
======= =======
5. Other Accrued Liabilities
-------------------------
June 29, September 29,
1997 1996
---- ----
(in thousands)
Accrued customer
service costs $ 4,638 $ 3,663
Other accrued expenses 15,012 10,134
------- -------
$19,650 $13,797
======= =======
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
6. 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 three- and nine-month
periods ended June 29, 1997 and June 30, 1996 are based on the estimated
effective income tax rates for the fiscal years ending September 28, 1997
and September 29, 1996 of 36.6% and 36.0%, respectively, excluding with
respect to fiscal 1997 the effects of the one-time charge for in-process
research and development and other acquisition costs and expenses.
7. Credit and Borrowing Arrangements
---------------------------------
The Company has a $100.0 million secured revolving credit facility with a
bank syndicate that expires on July 30, 1999. The credit facility offers
borrowings in either U.S. dollars or in foreign currencies. The Company may
elect to pay interest based on a floating base rate or LIBOR. The base rate
is equal to the greater of (i) the agent's prime rate and (ii) the Federal
Funds Rate plus 0.50%. The Company pays interest on LIBOR loans and
commitment fees on its total borrowings based on the debt level in relation
to the Company's cash flow. Commitment fees range from 0.25% to 0.475% of
borrowings and the LIBOR rates are based on LIBOR plus rates ranging from
0.875% to 1.500%. As of June 29, 1997, the Company had $76.1 million
available for borrowing under this facility.
8. 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.
9. Acquisition
-----------
On May 22, 1997, the Company acquired Cortet, Inc. (Cortet), of Winter
Park, Florida, in exchange for 159,087 shares of the Company's common stock
valued at approximately $3.9 million and the assumption of certain closing
costs and related expenses. Cortet is a developer of client-server
information systems for use in cardiac catheterization laboratories. The
acquisition was accounted for using the purchase method of accounting. In
connection with the acquisition, the Company recognized a one-time, pre-tax
charge to operations of $5.9 million for charges related to the purchase of
in-process research and development and certain uncompleted acquisition
costs and related expenses.
10. Other
-----
On September 30, 1996, one of the Company's subsidiaries, ADAC Radiology
Services, Inc. (ARS), acquired a one-year option to purchase Medical
Transition Strategies, Inc. (MTS) for $0.5 million in cash plus an
additional $1.0 million payable over five years. MTS is in the business of
forming and managing radiology networks.
The exercise price of the option is equal to $50,000 per validated network under
management plus a percentage of each such network's net revenue in calendar year
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
1998. The option price and the option exercise price are, at the election
of the Company, payable in cash or common stock. If the option is not
exercised by September 30, 1997, the unpaid portion of the $1.0 million
becomes immediately due and payable and any loans made by ARS to MTS will
be canceled and forgiven. In addition, unless MTS fails to perform certain
obligations or there is a material adverse change in MTS's business
resulting from MTS's acts or omissions, ARS must, if certain of MTS's
network revenue goals are achieved, pay MTS a break-up fee of $0.5 million.
11. Recent Pronouncements
---------------------
During October 1995, the Financial Accounting Standard Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation,"
which established a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies
who elect to adopt the new method of accounting. The Company intends to
continue to account for stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123 will require the Company to
provide additional disclosures in the financial statements for the fiscal
year ending September 30, 1997.
During July 1996, the Financial Accounting Standard Board issued Statement
No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." This statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be applied
prospectively.
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for earnings per
share. SFAS 128 will become effective for the Company's quarter ending
December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for fiscal years
beginning after December 15, 1997, with reclassification of earlier
financial statements for comparative purposes. Comprehensive income
generally represents all changes in stockholders' equity except those
resulting from investments or contributions by stockholders. 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, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports.
It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." The new standard becomes effective for fiscal years beginning
after December 15, 1997, and requires that comparative information from
earlier years be restated to conform to the requirements of this standard.
The Company is evaluating the requirements of SFAS 131 and the effects, if
any, on the Company's current reporting and disclosures.
At present, the Company's adoption of these pronouncements is not expected
to have a material effect on the Company's financial position or results of
operations.
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- and
nine-month periods ended June 29, 1997 are not necessarily indicative of the
results that may be expected for any future periods. 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 29, 1996.
RESULTS OF OPERATIONS
THE THREE- AND NINE-MONTH PERIODS ENDED JUNE 29, 1997 COMPARED TO THE THREE- AND
NINE-MONTH PERIODS ENDED JUNE 30, 1996
The Company generated record revenues of $71.5 million for the three-month
period ended June 29, 1997, an increase of 15% over the $62.4 million reported
for the same period in fiscal 1996. This increase resulted from a 16% increase
in product revenue and a 12% increase in service revenue.
Gross profit margin increased to 41.5% in the third quarter of fiscal 1997 from
38.7% in the third quarter of fiscal 1996, with product gross margins improving
3.9 percentage points to 42.6% over that time period.
Excluding the effects of the $5.9 million one-time charge taken by the Company
in the third quarter of fiscal 1997 for in-process research and development
related to the purchase of Cortet and certain uncompleted acquisition costs
and related expenses, the Company achieved net income of $5.8 million in the
third quarter of fiscal 1997, a $1.5 million increase over the $4.4 million
reported for the same quarter in fiscal 1996, and net income per share of $0.30
for the third quarter of fiscal 1997, representing a 25% increase from the $0.24
reported for the same quarter in fiscal 1996.
Including the one-time charge, net income and net income per share for the third
quarter of fiscal 1997 were $0.1 million and $0.01, respectively.
REVENUES AND GROSS MARGIN:
The Company's two primary business units are Medical Systems and Healthcare
Information Systems (HCIS).
MEDICAL SYSTEMS. In the Company's Medical Systems business, the Company designs,
develops, manufactures and sells nuclear medicine and related products and
radiation therapy planning (RTP) products, and provides customer service for
those products.
Summary information related to Medical Systems' product and service revenues and
gross margins is as follows:
Percentage
Change from Fiscal
Three Months Ended Nine Months Ended 1996 to 1997
------------------ ----------------- ------------------
June 29, June 30, June 29, June 30, Three Nine
1997 1996 1997 1996 Months Months
------- -------- -------- ------- ------ ------
(in thousands)
Product:
Revenues, net $50,242 $41,547 $144,013 $117,441 20.93% 22.63%
Product mix:
Nuclear Medicine 89.2% 95.1% 91.5% 96.0%
RTP 10.8% 4.9% 8.5% 4.0%
Geographical mix:
North America 71.3% 75.8% 74.3% 74.7%
Europe 15.6% 11.9% 13.5% 14.2%
Other 13.1% 12.3% 12.2% 11.1%
Gross margin 43.6% 39.2% 43.0% 38.1%
Service:
Revenues, net $14,028 $11,784 $39,871 $34,100 19.0% 16.9%
Gross margin 36.0% 32.8% 33.6% 33.0%
Medical Systems product revenues for the quarter and nine-month periods ended
June 29, 1997 increased more than 20% over the corresponding periods in fiscal
1996 primarily due to increased sales of the Company's nuclear medicine products
and product enhancements, as well as the Company's RTP product, Pinnacle3(tm),
which received 510(k) clearance from the United States Food and Drug
Administration (FDA) in April 1997. Geographically, the increase in Medical
Systems product revenues was driven year-to-date by the North and South American
markets and for the quarter by Europe. Product gross margins for Medical
Systems increased over the corresponding periods in fiscal 1996 due to
reductions in product cost and sales of Molecular Coincidence Detection (MCD(tm)
and Pinnacle3.
Medical Systems' service revenues increased over the corresponding periods in
fiscal 1996 as a result of an increase in the Company's installed customer base
as well as increased revenues associated with the Company's multi-vendor service
business. Gross margins increased as the revenues increased and costs remained
relatively fixed.
HEALTHCARE INFORMATION SYSTEMS. In HCIS, the Company designs, develops, markets
and distributes client/server information systems for the healthcare industry,
including radiology, laboratory and cardiology information systems. The Company
also provides support services for these systems.
Summary information related to HCIS' product and service revenues and gross
margins is as follows:
Three Months Ended Nine Months Ended Change from Fiscal
1996 to 1997
------------------
June 29, June 30, June 29, June 30, Three Nine
1997 1996 1997 1996 Months Months
-------- ------- -------- -------- ------ ------
(in thousands)
Product:
Revenues, net $3,390 $4,890 $13,898 $11,653 (30.7)% 19.3%
Product mix:
Radiology 77.4% 49.3% 54.8% 54.1%
Laboratory 18.5% 50.7% 42.7% 45.9%
Cardiology 4.1% 0.0% 2.5% 0.0%
Geographical mix:
North America 100.0% 100.0% 100.0% 100.0%
Gross margin 27.9% 34.5% 35.2% 42.5%
Service:
Revenues, net $3,825 $4,213 $11,797 $12,666 (9.2%) (6.9%)
Gross margin 45.9% 54.3% 47.9% 52.3%
HCIS product revenues for the nine-month period ended June 29, 1997 increased
19.3% over the corresponding period in fiscal 1996 as a result of increased
sales of the Company's laboratory information system primarily in the early part
of fiscal 1997, and of the Company's radiology information system. However,
HCIS product revenues for the third quarter of fiscal 1997 decreased 30.7%
compared to the same period in fiscal 1996 due to a $1.85 million decline in
sales of the Company's laboratory information system. These revenues declined
as customers delayed their purchases of the Company's laboratory product in
anticipation of the next release which has been delayed for more than six
months. Gross margins decreased from the third quarter of fiscal 1996 to the
third quarter of fiscal 1997 due to lower revenues being spread over fixed
expenses, including laboratory implementation expenses, and higher costs
associated with implementations of the Company's radiology information system,
and decreased for the nine-month period ended June 29, 1997 compared to the same
period in fiscal 1996 primarily as a result of these higher implementation
costs.
HCIS service revenues and margins decreased for both the quarter and year-to-
date periods from the corresponding periods in fiscal 1996 primarily as a result
of lower dollar volume in service renewals from HCIS' legacy client base and
increased training, personnel and other support costs.
Operating and Other Expenses:
Summary information showing the Company's operating and other expenses as a
percentage of revenue is as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------- ------- ------- --------
Operating costs and expenses:
Marketing and sales 14.4% 15.3% 15.2% 15.0%
Research and development,
net of software 5.6% 5.1% 5.2% 5.2%
capitalization
General and administrative 6.3% 5.7% 6.3% 6.0%
Goodwill amortization .3% .3% .3% .3%
In-process research and
development and acquisition expenses 8.2% .0% 2.8% .0%
-------- ------- ------- --------
34.8% 26.4% 29.8% 26.5%
======== ======= ======= ========
Interest and other expense, net 1.9% 1.4% 1.8% 1.4%
Marketing and sales expenses for the nine-month period ended June 29, 1997
increased slightly as a percentage of revenue over the same period in fiscal
1996, but declined as a percentage of revenue for the third quarter of fiscal
1997 compared to the same quarter in fiscal 1996 primarily as a result of lower
compensation costs in the current quarter. As a result of continued investment
in the development of new products and product enhancements, net research and
development expenditures increased $0.8 million and $1.7 million for the third
quarter and nine-month period ended June 29, 1997 over the same periods in
fiscal 1996. Capitalized software for the third quarter of fiscal 1997 was $1.2
million versus $0.7 million in the third quarter of fiscal 1996, bringing the
year-to-date amount to $3.4 million for fiscal 1997 compared with $2.7 million
for the same period in fiscal 1996. General and administrative expenditures as a
percentage of revenue increased for the third quarter and the nine-month period
ended June 29, 1997 over the corresponding periods in fiscal 1996 due to higher
compensation costs, expansion of the Company's networking and MIS capabilities
and personnel costs associated with the start-up of the Company's radiology
services business.
Total operating and other expenses for the quarter and nine-month period ended
June 29, 1997 also included a $5.9 million charge related to the purchase of in-
process research and development and certain uncompleted acquisition and related
costs and expenses. See Note 9 of Notes to Condensed Consolidated Financial
Statements.
Interest and other expense, net, increased due to foreign currency transaction
losses which were partially offset by decreased interest expense due to lower
borrowings.
INCOME TAXES:
The effective tax rate as a percentage of pretax income was 36.6% for the first
nine months of fiscal 1997, excluding the effects of the one-time charge for in-
process research and development and other acquisition costs and expenses,
compared with 36.0% for the first nine months of fiscal 1996.
INFLATION:
The Company does not believe that inflation has had a material effect on its
revenues or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash and cash equivalents for the first nine months of fiscal 1997 increased
by $3.1 million compared to a decrease of $2.4 million for the corresponding
period in fiscal 1996. This increase was primarily the result of lower inventory
and increased stock option activity. The primary uses of cash during the nine-
month period ended June 29, 1997 were for (i) an increase in accounts
receivable; (ii) a decrease in accounts payable; (iii) capital expenditures;
(iv) a reduction in long-term debt; and (v) the effects of exchange rates.
The increase in accounts receivable reflects higher sales in South America and
delays in product installations and implementations due to customer site
preparation and other factors. Accounts payable decreased due to a reduction of
raw material purchases as a result of factory efficiency programs and a change
in the timing of payments, which were partially offset by the increase in
expenses related to the volume of business. The increase in capital
expenditures consists primarily of capitalized software research and development
costs in both the Medical Systems and HCIS business units.
The improved cash flow allowed the Company to pay down bank loans during fiscal
1997, which reduced the outstanding borrowings under the Company's lines of
credit to $23.9 million from $27.2 million at June 29, 1997 and June 30, 1996,
respectively. The change in the foreign exchange translation adjustment was
principally due to increases in the value of the dollar versus the major
European currencies.
The Company believes that its cash and cash equivalents, cash flow from
operations, and, if necessary, remaining lines of credit will be sufficient to
fund the Company's operating cash flow 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 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
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations, including the discussion of product mix and liquidity and
capital resources, contains forward looking statements within the meaning of the
federal securities laws. These statements are subject to a number of risks and
uncertainties that 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.
DEPENDENCE ON DEVELOPMENT AND COMMERCIALIZATION OF 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 nuclear medicine market is relatively mature, and
from time to time in recent years has experienced a decline, the Company must
continue to develop and successfully commercialize innovative new products and
product enhancements such as Molecular Coincidence Detection MCD(tm), and the
current updates to the Company's laboratory and radiology information system
products in order to pursue its growth strategy. Sales of MCD and the Company's
laboratory information systems product declined in the third fiscal quarter of
1997 compared to the second fiscal quarter of 1997, putting additional revenue
and margin pressure on the Company's base Medical Systems business. Failure of
the Company to market and sell these products effectively in future quarters
could have a material adverse effect on the Company's results of operations.
The development of new products and product enhancements entails considerable
time and expense, including research and development costs, and the time,
expense and uncertainty involved in obtaining any necessary regulatory
clearances. The success of MCD depends on receipt of appropriate regulatory
approvals for, and the commercial availability of,
fleuro-deoxy-glucose (FDG). At this time, the infrastructure for the commercial
supply of FDG is not well developed and certain regulatory approvals or
clearances for FDG have not yet been obtained. In addition, although
reimbursement has been approved locally by certain private payors and local
Medicare offices, widespread reimbursement by Medicare and private payors for
the use of FDG in connection with MCD remains uncertain. Continued uncertainty
over reimbursement for the use of MCD could have an adverse effect on sales of
MCD, which could have a material adverse effect on the Company's results of
operations.
HEALTHCARE INFORMATION SYSTEMS
Although HCIS markets and distributes products in three broad product families,
radiology, laboratory and cardiology, this business unit has generated a
cumulative operating loss over the past three years, including a substantial
operating loss in the quarter ended June 29, 1997, and is expected, even
assuming revenue increases, to generate modest operating losses in the next
several quarters. The Company is continuing to invest in HCIS to complete the
development of the current updates to its laboratory and radiology products,
which the Company believes are required to maintain its competitiveness, satisfy
customer needs and generate positive customer reference sites to support future
sales. There can be no assurance that HCIS will not require even further
investment to complete this development or that the development can be completed
in a timely manner, which could have a material adverse effect on the results of
operations of 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 these 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.
In addition, as the Company enters new markets, such as the laboratory
information systems market, there can be no assurance that the Company will be
able to penetrate such markets successfully.
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 and shipments 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 steadily 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 and other factors. To the
extent installations become delayed, there can be no assurance that the orders
will mature into revenue.
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.
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 the United States Food
and Drug Administration review will not involve delays adversely affecting the
Company. The Company is also subject to 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.
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. See Note 5 of
Notes to Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K for the year ended September 29, 1996 incorporated by
reference herein regarding the Company's settlement of certain patent
infringement claims in September 1994.
RELIANCE ON SUPPLIERS
Certain components used by the Company to manufacture its products, such as the
workstations and 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
---------------------
(c) On May 6, 1997, the Company granted Bain & Company, Inc. (Bain) a
warrant to purchase up to 24,000 shares of common stock at an exercise
price of $22.625 per share in connection with the rendering by Bain of
certain consulting services to the Company. The warrant was issued
pursuant to the exemption from the registration requirements of the
Securities Act provided by Section 4(2) of the Securities Act.
On May 22, 1997, the Company issued 159,087 shares of common stock to
the shareholders of Cortet in connection with the merger of
Cortet with and into a wholly owned subsidiary of the Company with Cortet
as the surviving corporation. See Note 9 of Notes to Condensed
Consolidated Financial Statements. The shares were issued to the
shareholders of Cortet pursuant to the exemption from the registration
requirements of the Securities Act provided by Rule 505 of Regulation D
promulgated under the Securities Act.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company held its 1997 Annual Meeting of Shareholders on May 15,
1997 (the "Annual Meeting").
(b) At the Annual Meeting, the following directors were duly elected:
Stanley D. Czerwinski, R. Andrew Eckert, Graham O. King, David L.
Lowe, Edmund H. Shea, Jr. and F. David Rollo.
(c) At the Annual Meeting, the following votes were cast for each of the
items voted upon at the meeting:
1) Election of Directors:
In Favor Withheld
-------- --------
Stanley D. Czerwinski 15,252,747 851,730
R. Andrew Eckert 15,261,084 843,393
Graham O. King 15,267,265 837,212
David L. Lowe 15,264,589 839,888
F. David Rollo 15,273,066 831,411
Edmund H. Shea, Jr. 15,265,586 838,891
2) Proposal to approve an amendment to the Company's 1992 Stock Option
Plan to increase the number of shares authorized thereunder by 712,000
shares: FOR - 11,929,860; AGAINST - 3,974,959; ABSTAIN - 43,924; and
BROKER NON-VOTES - 155,734.
3) Proposal to approve an amendment to the Company's Employee Stock
Purchase Plan to increase the shares authorized thereunder by 85,000
shares: FOR - 13,221,319; AGAINST - 2,684,446; ABSTAIN - 42,978; and
BROKER NON-VOTES -155,734.
4) Proposal to approve an amendment to the Company's Directors' Stock
Option Plan to increase the number of shares authorized by 56,665
shares: FOR - 11,070,995; AGAINST - 4,726,678; ABSTAIN - 151,070; and
BROKER NON-VOTES -155,734.
5) Proposal to approve the amendment and restatement of the Company's
Articles of Incorporation to delete therefrom provisions
relating to the maximum and minimum number of directors that may serve
on the Company's board of directors: FOR - 11,297,829; AGAINT -
160,118; ABSTAIN - 108,606; and BROKER NON-VOTES - 4,537,924.
6) Proposal to approve amendments to the Company's Bylaws, including
an increase in the maximum and minimum number of directors that may
serve on the Company's board of directors: FOR - 11,127,345; AGAINST -
386,916; ABSTAIN -52,291; and BROKER NON-VOTES - 4,537,925.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
2.1 Agreement and Plan of Reorganization dated as of March 31, 1997 by
and among the Company, ADAC Acquisition Corp., Cortet, Inc. and the
Designated Shareholders of Cortet
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws, as amended
10.1 Second Amendment to Credit Agreement dated as of May 1, 1997, and
First Amendment to Credit Agreement dated as of December 27, 1996,
each by and among the Company, the Lenders named therein and ABN AMRO
BANK N.V., as agent for the Lenders
10.2 Directors' Stock Option Plan (1987), as amended
10.3 1992 Stock Option Plan, as amended
10.4 Employee Stock Purchase Plan (1994), as amended
11.1 Computation of Net Income Per Share
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 13, 1997
ADAC Laboratories
-----------------
(Registrant)
BY: /s/ P. Andre' Simone
--------------------
P. Andre' Simone
Vice President and Chief Financial Officer
EXHIBIT INDEX
-------------
Page
2.1 Agreement and Plan of Reorganization dated as of March 31, 1997
by and among the Company, ADAC Acquisition Corp., Cortet, Inc.
and the Designated Shareholders of Cortet
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws, as amended
10.1 Second Amendment to Credit Agreement dated as of May 1, 1997,
and First Amendment to Credit Agreement dated as of December 27,
1996, each by and among the Company, the Lenders named therein
and ABN AMRO BANK N.V., as agent for the Lenders
10.2 Directors' Stock Option Plan (1987), as amended
10.3 1992 Stock Option Plan, as amended
10.4 Employee Stock Purchase Plan (1994), as amended
11.1 Computation of Net Income Per Share
27 Financial Data Schedule