SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 29, 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.)
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)
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Securities registered pursuant to Section 12(b)of the Act:
Name of each exchange
Title of Each Class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of class)
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 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
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1
The aggregate market value of the voting stock (which is the outstanding Common
Stock) of the Registrant held by non-affiliates thereof, based upon the closing
price of the Common Stock on December 2, 1996, on the NASDAQ National Market
System of $22.50 per share was approximately $389,058,700. For the purpose
of the foregoing computation, only the directors and executive officers of the
Registrant were deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of December 2, 1996, Registrant had outstanding 17,853,734 shares of Common
Stock, no par value, which is the only class of shares publicly traded.
DOCUMENTS INCORPORATED BY REFERENCE
- -----------------------------------
Parts of the Proxy Statement for Registrant's 1997 Annual Meeting of
Shareholders, to be filed with the Commission on or before 120 days after the
end of the 1996 fiscal year, are incorporated by reference into Part III hereof.
Indicate by check mark if disclosures of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information definitive
proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendments to this Form 10-K.
( )
2
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE DESCRIBED IN ANY SUCH FORWARD LOOKING STATEMENTS.
RISKS INHERENT IN ADAC LABORATORIES' BUSINESS AND FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE WITHOUT LIMITATION THE CONSIDERATIONS SET
FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- BUSINESS CONSIDERATIONS". THE COMPANY EXPRESSLY
DISCLAIMS ANY OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
GENERAL
ADAC Laboratories ("ADAC" or "the Company") designs, develops,
manufactures, sells and services medical imaging and health care information
systems used in hospitals and clinics worldwide. The Company's products include
systems for nuclear medicine, laboratory, radiology, cardiology and oncology.
In October 1996, ADAC was awarded the Malcolm Baldrige National Quality
Award in the large manufacturing category by the United States Department of
Commerce in recognition of its peformance mangement system and its
achievements in quality and business performance. ADAC is the first healthcare
manufacturer ever to receive this award.
ADAC was incorporated in California on October 14, 1970. Its principal
offices are located at 540 Alder Drive, Milpitas, California, 95035. Its
telephone number at that location is (408) 321-9100.
MEDICAL SYSTEMS
Nuclear Medicine. Nuclear medicine is a diagnostic imaging procedure
pursuant to which a patient is administered a radiotracer compound. This
compound is either injected or swallowed and flows to the organ(s) under
examination. The patient is then scanned with a gamma camera which detects the
radiotracer emissions from these organ(s). The data from the emissions are
then processed to provide the physician with images and information regarding
the functional and metabolic performance of the organ(s). The physician uses
this information for the diagnosis of diseases and the evaluation of disease
progression (staging) for cardiology, oncology and neurology.
ADAC's gamma cameras are designed to perform Single Photon Emission
Computed Tomography ("SPECT") imaging. In addition to SPECT, ADAC has recently
developed the technology for certain of its dual head gamma cameras to perform
positron emission tomography imaging using Molecular Coincidence Detection
("MCD/TM/").
The nuclear medicine market is characterized by two distinct segments:
single head cameras and multi-head cameras. ADAC is a market leader in both
segments with the ARGUS EPIC/TM/, CIRRUS EPIC/TM/, and GENESYS/TM/ single head
products which have one detector head and the DUAL GENESYS/TM/, VERTEX EPIC/TM/,
VERTEX PLUS EPIC/TM/, SOLUS EPIC/TM/ and CARDIO EPIC/TM/ dual head products
which have two detector heads. These systems are interfaced with ADAC's
PEGASYS/TM/, the leading UNIX-based nuclear medicine workstation.
ADAC generated approximately 75% of its nuclear medicine product revenue in
fiscal 1996 in the dual head market. Dual head cameras are complex systems that
provide enhanced diagnostic accuracy and increased patient throughput efficiency
primarily for oncology and cardiology procedures. The Company believes these
procedures comprise approximately 70% of
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all nuclear medicine procedures performed. Single head cameras are less complex
and expensive. Generally, the most likely purchasers of these cameras are
capital-constrained institutions and those adding extra capacity.
The VERTEX camera is the cornerstone of ADAC's product line. It has the
unique capability of variably positioning its two detectors in either a 180
degree orientation for whole body imaging or a 90 degree orientation for cardiac
imaging. This capability enables nuclear medicine departments to increase their
patient throughput by decreasing the time required to perform the procedures.
In 1994, ADAC introduced the EPIC/TM/ digital detector. This innovative
new technology rendered analog technology obsolete and created a new
generation of high performance cameras. The EPIC digital detector
significantly improves the reliability and stability of image quality compared
to the analog detector. Also, the EPIC's auto-tuning and remote diagnostics
capabilities have improved both ADAC's field service efficiency as well as
customer satisfaction.
In June 1995, the Company further extended its dual head gamma camera
product family with the introduction of two new digital imaging systems: the
SOLUS EPIC, a fixed 180 degree camera for oncology, and the CARDIO EPIC, a fixed
90 degree camera for cardiology. These systems are focused on satisfying the
needs of special niche markets by providing less expensive products with VERTEX
PLUS EPIC imaging quality and throughput advantages.
In fiscal 1996, the Company's dual head product family (VERTEX EPIC, VERTEX
PLUS EPIC, CARDIO EPIC AND SOLUS EPIC) contributed approximately 72% of the
Company's nuclear medicine product revenues.
In June 1995, ADAC introduced a new technology called Molecular Coincidence
Detection ("MCD"/TM/). This technology enables ADAC's VERTEX PLUS EPIC and SOLUS
EPIC cameras to perform coincidence imaging previously only available on
expensive dedicated Positron Emission Tomography ("PET") imaging systems, which
are generally priced between $1 million and $2 million. Coincidence imaging is a
valuable diagnostic tool because of its high resolution and high accuracy in
oncology, cardiology and neurology. It is particularly useful for identifying
soft tissue cancerous lesions throughout the body. Due to the high capital cost
of PET systems, positron imaging has been too expensive for all but a few
hospitals and clinics. MCD is expected to provide the capability to perform
positron imaging using ADAC's cameras at a fraction of the cost of a dedicated
PET system. The Company received United States Food and Drug Administration
("FDA") 510(k) clearance for MCD in November 1995. The Company is currently
conducting MCD multicenter clinical trials in an effort to document the clinical
efficacy and cost effectiveness of MCD compared to conventional diagnostic
techniques. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Business Considerations".
Vantage/TM/, introduced in December 1994, is an optional upgrade to the
VERTEX EPIC and the CARDIO EPIC. This option performs non-uniform attenuation
correction which improves the diagnostic accuracy of nuclear medicine imaging by
correcting image distortions created by non-uniform variations in tissue density
in the body. This capability is particularly important in nuclear cardiology and
is believed to be an important advantage over cardiac ultrasound, the alternate
competitive procedure. The Company is continuing to conduct multicenter trials
to demonstrate VANTAGE's improved cost-effectiveness and quality compared to
current cardiac imaging techniques. In October 1996, results from a multicenter
clinical trial were presented, which suggested that VANTAGE improved the
clinical accuracy of cardiac diagnosis compared to such techniques. The Company
received FDA 510(k) clearance for VANTAGE in April 1995.
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The Company also manufactures and sells the TRANSCAM/TM/, THYRUS, and
POLARIS gamma cameras, which are niche cameras produced by the Company's Danish
subsidiary, ADAC A/S. These cameras offer specialized functionality for specific
clinical procedures.
In September 1996, the Medical Systems Business unit in Milpitas,
California was certified to the requirements of the international quality system
requirements of ISO 9001.
Radiation Therapy Planning. The Company designs, develops, markets and
supports turnkey Radiation Therapy Planning Systems that assist hospital
radiation therapy departments and cancer treatment centers in planning patient
treatments. The systems combine third party workstations and printers with the
Company's proprietary application software, Pinnacle/3TM/.
Pinnacle/3TM/ is a treatment planning system that includes two dimensional
and three dimensional planning, as well as stereotactic radiosurgery planning
capabilities. Pinnacle/3/'s three-dimensional volumetric image processing and
dose computation capabilities enable physicians to plan the precise application
of high energy radiation to a specific targeted area for the treatment of cancer
and other diseases. The Company believes Pinnacle/3/ provides improved image
processing and dose calculation methods compared to currently available
products. The Company received clearance from the FDA to market Pinnacle/3/
in the United States in 1996, and has also introduced Pinnacle/3/ into
international markets with positive results.
In November 1996, the Company acquired Geometrics Corporation, a developer
of specialized medical software based in Madison, Wisconsin, in exchange for
approximately 191,000 shares of Common Stock valued at approximately $3.9
million. Geometrics Corporation had designed, developed and licensed to the
Company the core technology included in the Company's Pinnacle/3/ product.
Geometrics Corporation will operate as the product development unit of the
Company's Radiation Therapy Planning division. In the future, the Company
intends to leverage Geometrics' software development expertise to benefit
its Radiation Therapy Planning as well as its other divisions.
The Company believes its Radiation Therapy Planning division may
experience significant revenue and operating income growth in fiscal 1997 due
to the receipt of FDA clearance and product introductions in the United States
and internationally. Historically, the Radiation Therapy Planning division has
not contributed significantly to the Company's consolidated revenues or
operating income.
Digital Angiography. ADAC services existing ADAC X-Ray imaging and
digital angiography computer systems for both radiology and cardiology
applications. Sales of digital angiography products have not been a significant
contributor to the Company's revenues or operating income over the past three
years.
ADAC Medical Systems' revenue and operating income in fiscal 1996 were
approximately 87% and 98% of the Company's total revenues and operating
income, respectively.
HEALTHCARE INFORMATION SYSTEMS
Information systems for the healthcare industry consist of computer
equipment and software applications designed to offer healthcare providers the
necessary tools to process and archive patient and clinical information. The
healthcare environment is changing to one where managed care and health
maintenance organizations demand information technology to capture and manage
costs as well as to measure the quality and results of patient care.
5
The Company's principal HealthCare Information Systems products are
QuadRIS/TM/, a radiology information systems product, and LabStat/TM/, a
laboratory information systems product. These products are based on advanced
client/server architectures, operating on Oracle/TM/ database servers and the
Microsoft Windows 95/TM/ operating system and are designed to work in a
distributed computing environment to meet the needs of rapidly changing
integrated healthcare delivery systems. In this environment, the products must
meet the demands of multiple healthcare facilities that act as a single
integrated delivery network. Both QuadRIS and LabStat are currently available
on Hewlett Packard, IBM and Stratus UNIX servers. The Company has plans to
make these products available on additional platforms, including SUN and DEC,
in fiscal 1997.
The Company also supports a line of other more mature products, including
MARS II/TM/, IMAGES/3000/TM/, RadCare/(R)/, MRM, RadStat/(R)/, and LabCare/TM/,
which are installed in over 350 hospitals throughout the United States and
Canada. These hospitals represent a cross-section of major teaching hospitals,
large and small community hospitals, children's hospitals, and city and state
institutions.
A key objective of ADAC is to expand the Company's healthcare information
systems business. In November 1993, ADAC acquired SD&G Healthcare Systems Inc.,
which increased the Company's market share and revenues in the radiology
information systems business. In July 1995, ADAC acquired Community Health
Computing ("CHC"). This acquisition strengthened ADAC's market share and
revenue in the radiology information systems business and established its
presence in the laboratory information systems business. See Note 3 of Notes to
Consolidated Financial Statements. ADAC's information systems products and
services were subsequently combined to form a subsidiary business unit, ADAC
HealthCare Information Systems. The Company currently expects that it will
continue to grow this business through product line extensions, other internal
developments and acquisitions.
ADAC HealthCare Information Systems revenue and operating income in
fiscal 1996 were approximately 13% and 2% of the Company's total revenues and
operating income, respectively.
OTHER
From time to time, the Company explores other opportunities for expanding
its business. For example, ADAC recently formed a new business unit, ADAC
Radiology Services ("ARS"). The goal of ARS is to work closely with
radiologists, referring physicians, hospitals and payors to provide technology
and management solutions that enhance the delivery of radiology care. On
September 30, 1996, ARS acquired an interest in Medical Transition
Strategies, Inc. ("MTS"). MTS is in the business of forming and managing
radiology networks. See Note 10 of Notes to Consolidated Financial Statements.
FIELD SERVICE
The Company maintains its own service force in North America and Europe.
The Company's network of service engineers and applications specialists provides
installation, warranty, repair, and training services. Together with its
distributors, the Company services over 6,800 installed systems at over 2,400
sites worldwide.
6
The Company's products are generally sold with warranty periods of one
year. At the end of the warranty period, the Company provides customers with
the option of purchasing a service contract or obtaining continuing service on
a time and materials basis. The Company's warranty program is similar to those
offered by other manufacturers of medical electronic equipment.
In November 1995, ADAC acquired JD Technical Services, Inc. which
expanded the Company's capabilities to service and support gamma cameras of
the other major vendors and to enter the nuclear medicine instrumentation
remanufacturing business. See Note 3 of Notes to Consolidated Financial
Statements.
Service revenues represented 26%, 26% and 23% of the Company's total
revenues in fiscal 1996, 1995 and 1994, respectively.
MARKETING AND SALES
ADAC has a direct sales force in the United States. The Company also
conducts certain sales and/or service activities through its subsidiaries in
Brazil, the Netherlands, Germany, France, Italy, Denmark, the United Kingdom and
Canada. Sales and service in other countries are generally handled by
distributors. See Note 12 of Notes to Consolidated Financial Statements.
North America is the largest market for the Company's products and
services followed by Europe, Japan, Asia Pacific and Latin America. ADAC is
represented in all these geographic areas. Until 1995, ADAC had not been
represented in Japan, the third largest nuclear medicine market in the world.
In December 1994, ADAC signed a distribution agreement with Sumitomo Metal
Industries. ADAC recently received approval from the Japanese Ministry of
Health and Welfare to market VERTEX PLUS EPIC, SOLUS EPIC, CARDIO EPIC and MCD
in Japan.
RESEARCH AND DEVELOPMENT
Developing products, systems and services based on advanced technological
concepts is essential to ADAC's ability to compete effectively. The Company
currently maintains a product development and engineering staff responsible for
product design and engineering. As part of ADAC's research and development
programs, the Company has established the Advanced Clinical Research Program,
which provides annual grants to clinical trial sites at major institutions to
assist the Company in product development concepts and to measure and establish
product efficacy. There can be no assurance that the Company's product
development efforts will result in development or commercialization of
successful products or product enhancements. Research and development
expenditures, net of software capitalization, totaled $12,516,000, $10,081,000
and $11,202,000 in fiscal 1996, 1995 and 1994, respectively.
COMPETITION
The medical systems and health care information system markets 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 produced by the Company or that could render the
Company's products obsolete or noncompetitive. In addition, as the Company
enters new markets, there can be no assurance that the Company will be able to
penetrate such markets successfully.
In the nuclear medicine market, the Company competes with approximately
eight other suppliers. According to 1996 data provided by the National
Electronics Manufacturers Association,
7
the industry trade group, ADAC's share of the U.S. market in 1996 based on
sales volume is believed to be approximately 50% giving ADAC a substantial
lead over its nearest competitors.
The Company believes that the key to success in its markets is to deliver
cost-effective and technologically superior products which meet or exceed
customer quality and service expectations. ADAC's ability to compete
successfully depends on its ability to commercialize new products ahead of its
competitors. In addition to the rapid development of innovative and cost-
effective new products, the Company believes that other competitive factors
include patient throughput, system functionality and reliability, image quality,
computer processing speed, customer service and support, and worldwide
distribution network. The Company's products must focus on solutions for the
managed care environment in order to provide improved clinical outcomes at lower
clinical process costs.
According to Sheldon I. Dorenfest & Associates' HCIS Review 1996, ADAC is
the leader in the stand-alone radiology information systems market with an
estimated 11% U.S. market share in 1995. Although the Company also entered
the laboratory information systems market in 1995, to date the Company has not
yet generated significant new product sales in that business. There can be no
assurance that the Company will be able to successfully penetrate the laboratory
information systems market. The Company believes that key competitive factors
in the HealthCare Information Systems business include system architecture,
functionality of the application software, post-sales support services, time to
market, integration expertise with hospital information systems and
price/performance.
MANUFACTURING AND SUPPLIERS
The Company manufactures most of the sub-systems used in its products.
Manufacturing includes mechanical assembly, final system integration and
testing. In addition, the Company purchases certain sub-systems, including
Sun/TM/ workstations and disk drives, from third party suppliers.
Although most materials and purchased components for Medical Systems
products are available from more than one source of supply, certain essential
components such as the Sun workstations and sodium iodide crystals 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 such as Hewlett-Packard Company, Oracle Corporation
and others. 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.
GOVERNMENT REGULATION
ADAC's Medical Systems business, as well as certain portions of its
HealthCare Information Systems business, are regulated by the United States Food
and Drug Administration. The FDA regulates the development, testing,
manufacturing, packaging, distribution and marketing of medical devices under
the Medical Device Amendments of 1976 to the Federal, Food, Drug and Cosmetic
Act (the "1976 Law"), the Safe Medical Devices Act of 1990, the Medical Device
Amendments of 1992 and additional regulations promulgated by the FDA. The State
of California (through its Department of Health Service), where the Company
maintains its factory, as well as other states, also regulate the manufacture of
medical devices.
8
In general, these laws require that manufacturers adhere to certain
standards designed to ensure the safety and effectiveness of medical devices.
Under the 1976 Law, each medical device manufacturer must comply with
requirements applicable to manufacturing practices, clinical investigations
involving humans, sale and marketing of medical devices, post-market
surveillance, repairs, replacements and refunds, recalls and other matters. The
FDA is authorized to obtain and inspect devices and their labeling and
advertising, and to inspect the facilities in which they are manufactured.
The 1976 Law also requires compliance with specific manufacturing and
quality assurance standards, including regulations promulgated by the FDA with
respect to good manufacturing practices. FDA regulations require that each
manufacturer establish a quality assurance program by which the manufacturer
monitors the manufacturing process and maintains records that show compliance
with FDA regulations and the manufacturer's written specifications and
procedures relating to the devices. Compliance is necessary to receive FDA
clearance to market new products and is necessary for a manufacturer to be able
to continue to market cleared product offerings. Recently, the FDA promulgated
new design process regulations that revise the good manufacturing practices
applicable to medical device manufacturers. Among other things, these new
regulations require that manufacturers establish peformance requirements before
production, insure that device components are compatible, select adequate
packaging materials, and, if appropriate do risk analyses. The regulations take
effect on June 1, 1997, but include a twelve month transition period during
which enforcement action with respect to design controls will not be taken.
The FDA makes unannounced inspections of medical device manufacturers and
may issue reports of observations where the manufacturer has failed to comply
with the applicable regulations and/or procedures. Failure to comply with
applicable regulatory requirements can, among other things, result in warning
letters, civil penalties, injunctions, suspensions or losses of regulatory
clearances, product recalls, seizure or administrative detention of products,
operating restrictions through consent decrees or otherwise, and criminal
prosecution.
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.
The FDA requires that a new medical device or a new indication for use of
or other significant change in an existing medical device obtain either 510(k)
premarket notification clearance or an approved Pre-Market Approval Application
("PMAA") before orders can be obtained and the product distributed in the United
States. The 510(k) clearance process is applicable when the new product being
submitted is substantially equivalent to an existing commercially available
product. If a product does not meet the eligibility requirements for the 510(k)
process, then it must instead be submitted under the PMAA process. The process
of obtaining 510(k) clearance may take at least three months from the date of
filing of the application and generally requires the submission of supporting
data, which can be extensive and extend the process for a considerable period of
time. Under the PMAA process, the applicant must submit even more extensive
supporting data and clinical information, which can extend the process for as
much as two years. Generally, the Company has not been required to resort to
the PMAA process for approval of its products.
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The sale of medical devices outside the United States is subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance in foreign countries may be longer or shorter than
in the United States. In 1995, ADAC implemented a program to enter the Japanese
market and has received Japanese Ministry of Health and Welfare (JMHW) approval
to market the VERTEX PLUS EPIC, SOLUS EPIC, CARDIO EPIC and MCD . In addition,
ADAC is undertaking to meet the requirements of the European Medical Device
Directive which will become effective in most European countries by June 1998.
See "Management's Discussion & Analysis of Financial Condition and Results of
Operations--Business Considerations".
Certain additional requirements of other Federal laws and of state, local
and foreign governments exist which may apply to the manufacture and marketing
of the Company's products and to products such as radiopharmaceuticals which are
used in conjunction with the Company's products.
With the Company's overall emphasis on total quality management, quality
system compliance is expected to continue to improve in 1997. The Company is
anticipating that some costs will be incurred for compliance with the European
Medical Device Directive and the Japanese Medical Device listing. These costs
are expected to be absorbed by revenues derived from the Company's expansion
into these markets.
The Company is subject to various environmental laws and regulations both
in the United States and abroad. The operations of the Company, like those of
other medical device companies, involve the use of substances regulated under
environmental laws.
The Company believes that compliance with the foregoing laws, regulations
and other requirements will not have a material adverse effect on the Company's
business in fiscal 1997.
PATENT, COPYRIGHTS AND ROYALTIES
The Company relies on a combination of trade secret, copyright, patent and
trademark laws and contractual provisions to protect its proprietary rights.
The Company has a policy of undertaking an ongoing review of its products with
patent counsel to determine to what extent its products may be protectable under
the patent or copyright laws. ADAC also has a program in place to develop
patent portfolios to protect its intellectual property. At December 2, 1996,
the Company held 22 United States patents, including Patent Des. 323,386, a
system design patent for the GENESYS gamma camera, and 53 foreign patents. The
Company has a total of thirty-five patent applications pending at various stages
of completion. Several patent applications have been submitted for MCD. While
the Company believes that it benefits from such patents, competitors may develop
competing products by "designing around" patents held by the Company or may
claim that the Company's products infringe their proprietary rights. See Note 5
of Notes to Consolidated Financial Statements.
The Company develops application software for its products and also
licenses software components from third parties. Third party software
developers include software companies and clinical development sites that
provide turnkey products or software code. Under its agreements with third
parties, the Company generally obtains a license to use the third party
software and to include such software in its own products for a specified
period of time in exchange for the payment of a royalty to the developer.
These agreements may be either exclusive or non-exclusive.
EMPLOYEES
As of December 2, 1996, the Company had approximately 720 full-time
employees worldwide, including 600 employed in its Medical Systems business
unit and 120 in its HealthCare Information
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Systems business unit. None of the Company's employees is represented by a labor
union. The Company business unit believes its relations with its employees are
good. Many of the Company's employees are highly skilled and competition in
recruiting and retaining such employees is intense. The Company believes its
continued success is dependent in part upon its ability to continue to attract
and retain highly qualified personnel.
ITEM 2. PROPERTIES
The Company's principal administrative, manufacturing and research
operations occupy approximately 150,000 square feet of leased space in buildings
located in Milpitas, California, under leases expiring through 1999. The
Company's principal healthcare information systems operations occupy
approximately 54,000 square feet of leased space in buildings located in
Houston, Texas, under leases expiring in 2002. Other smaller facilities are
leased in various states and foreign countries. Management believes that the
Company's facilities are adequate at least through fiscal 1997 to meet presently
anticipated manufacturing and other requirements.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is included under Note 5 of Notes to
Consolidated Financial Statements included under Item 8, Financial Statements
and Supplemental Data.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the NASDAQ National Market System
under the NASDAQ symbol "ADAC". There were approximately 2,915 holders of
record of the Company's Common Stock on December 2, 1996. The table below
provides the quarterly dividends declared and the quarterly high and low closing
prices in the NASDAQ National Market System, as reported by NASDAQ, during the
last two fiscal years of the Company; the following quarters correspond to the
Company's fiscal quarters.
In October 1996, the Company's Board of Directors decided to discontinue
payment of its quarterly cash dividend in order to reinvest the funds in the
Company to further its growth strategy and enhance shareholder value.
Accordingly, the Company presently intends to retain its earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
FISCAL 1996 FISCAL 1995
----------- -----------
PER SHARE PER SHARE
----------- -----------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------- ----------- -------- ----------- ------ -------
First Quarter $12 5/8 $ 11 $.12 9 1/8 7 1/4 $.12
Second Quarter 17 5/8 11 5/8 .12 8 1/2 7 1/4 .12
Third Quarter 22 3/4 15 3/8 .12 13 7 7/8 .12
Fourth Quarter 25 16 .12 13 3/4 10 1/2 .12
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ITEM 6. SELECTED FINANCIAL DATA
ADAC LABORATORIES AND SUBSIDIARIES
FISCAL YEAR
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
- ------------------------------------------------ --------- --------- --------- ------------ --------
Revenues $240,785 $184,809 $176,280 $156,946 $121,213
Cost of revenues 147,633 117,320 106,665 89,516 68,511
Operating expenses 63,833 49,264 51,978 47,668 39,330
Other income (expense) (3,407) (1,222) (6,452) (242) 818
- ------------------------------------------------ -------- -------- -------- -------- --------
Income before income taxes 25,912 17,003 11,185 19,520 14,190
Provision (credit) for income taxes 9,275 5,930 (6,336) 1,461 1,331
- ------------------------------------------------ -------- -------- -------- -------- --------
Net income (1), (2) $ 16,637 $ 11,073 $ 17,521 $ 18,059 $ 12,859
- ------------------------------------------------ ======== ======== ======== ======== ========
Net income per share (1) $ .90 $ .65 $ 1.06 $ 1.10 $ .81
Number of shares used in income
per share calculations 18,507 17,079 16,508 16,458 15,932
Dividends declared per share $ .48 $ .48 $ .48 $ .48 $ .36
- ------------------------------------------------ -------- -------- -------- -------- --------
Total assets $186,628 $159,097 $121,603 $ 95,081 $ 77,216
================================================ ======== ======== ======== ======== ========
(1) Net income and dividends per share have been restated for fiscal 1992 to
reflect the one-for-three reverse stock split which was effective March 1993.
(2) Net income in 1994 includes the net favorable effect of non-recurring items
of approximately $4.6 million. Non-recurring items include: a) litigation
defense costs, b) restructuring charges, and c) income tax benefit in excess of
federal statutory income tax expense rate of 35%.
ITEM 7. 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 Consolidated Financial Statements and related Notes thereto
contained elsewhere within this document.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES AND GROSS MARGIN:
The Company's two business units are Medical Systems and Healthcare
Information Systems (HCIS).
Medical Systems. The Medical Systems business unit includes Nuclear
Medicine, Radiation Therapy Planning (RTP) and, to a lesser extent, Digital
Systems Angiography (DSA) products, as well as customer service related to those
products.
12
Summary information related to Medical Systems' product and service
revenues and gross margins is as follows:
FISCAL YEAR INCREASE
1996 1995 (DECREASE)
--------- --------- ------------------------
Product:
Revenues:
Volume $163,032 $129,445 $33,587 25.9%
Product mix:
Nuclear Medicine 95.1% 95.1%
RTP 4.4% 2.0%
DSA 0.5% 2.9%
Geographical mix:
North America 75.5% 73.3%
Europe 14.4% 16.3%
Other 10.0% 10.4%
Gross margin 39.0% 37.3%
Service:
Revenues $ 46,445 $41,999 $ 4,446 10.6%
Gross margin 32.7% 32.5%
Medical Systems' product revenues increased in nuclear medicine due to
continued customer acceptance of the Company's nuclear medicine product family,
including new product introductions, and enhancement options. RTP's product
revenues also increased due to the FDA's clearance of Pinnacle/3/TM/. DSA's
product revenues continued to decline as that product continued to mature.
Medical Systems' revenues increased in dollar volume in all of the Company's
geographical markets, while the growth rate was the highest in the North
American market. Product gross margins for Medical Systems primarily increased
due to reductions in product cost.
Medical Systems' service revenues increased as a result of an increase in
the Company's installed customer base, and service gross margins increased
primarily from an increase in the Company's installed customer base and
increased product reliability.
Healthcare Information Systems ("HCIS"). HCIS includes products comprising
the hardware, software and related implementations of systems designed to manage
information within the laboratory and radiology departments of healthcare
organizations, as well as service related to those products.
13
Summary information related to HCIS' product and service revenues and gross
margins is as follows:
FISCAL YEAR INCREASE
1996 1995 (DECREASE)
------------------------------------------
Product:
Revenues:
Volume $14,582 $7,270 $ 7,312 100.6%
Product mix:
Laboratory 42.6% 8.1%
Radiology 57.4% 91.9%
Geographical mix:
North America 100.0% 100.0%
Gross margin 40.5% 33.8%
Service:
Revenues $16,726 $6,095 $10,631 174.4%
Gross margin 50.5% 49.8%
Increases in HCIS' product revenues are attributable the Company's
QuadRIS radiology and LabStat laboratory information systems acquired in or
developed subsequent to the Company's acquisition of CHC. The Company acquired
CHC in July 1995. HCIS' product revenues grew in both laboratory and radiology
product families, and product mix shifted more towards laboratory compared to
the prior year as that product family increased the volume of installations
after introduction of the LabStat product in early fiscal 1996. The increase
in HCIS' product gross margins is primarily attributable to efficiency gains
by increased shipments and installation of both the laboratory and radiology
product families compared with the infrastructure required to deliver such
products.
HCIS' service revenues increased due to the increased installed base of
both the laboratory and radiology product families at customer sites. The
increase in HCIS' service gross margins is also attributable to efficiency gains
in the infrastructure required to support the installed customer base.
OPERATING AND OTHER EXPENSES:
As a percentage of total revenue the Company's operating and other expenses
are as follows:
FISCAL YEAR
1996 1995
----- ------------
Operating costs and expenses:
Marketing and sales 15.1% 16.2%
Research and development,
net of software capitalization 5.2% 5.5%
General and administrative 5.9% 4.9%
Goodwill amortization 0.3% 0.1%
---- ----
26.5% 26.7%
==== ====
Other expense, net 1.4% 0.7%
==== ====
Marketing and sales expenses as a percentage of revenue declined
primarily due to support costs of a semi-variable nature being spread over a
greater revenue dollar volume. Research and development expenditures represent
continued investment in new product development and product enhancement. Total
research and development expenditures as a percent of revenue increased, as a
result of increased
14
expenditures for internally developed software components meeting technological
feasibility related to new product introductions and product enhancements
throughout the business, while research and development exependitures, net,
decreased slightly. Capitalized software costs for fiscal 1996 and 1995 were
$3,477 and $1,996, respectively. General and administrative expenditures as a
percentage of revenue increased primarily due to overall increased
infrastructure resulting from general and administrative functions related to
the fiscal 1996 and late fiscal 1995 acquisitions of J.D. Technical, a
refurbisher of nuclear medicine imaging equipment, and CHC, respectively, both
of which have costs of a semi-variable nature being spread over a lower
revenue base relative to those areas of business. Goodwill amortization
relates to the acquisition of CHC in late fiscal 1995.
Other expense, net, primarily consists of interest expense, which increased
due to the Company's increased level of bank borrowings during fiscal 1996 over
fiscal 1995. Foreign currency transaction gains and losses are also included in
other expense, net.
INCOME TAXES:
Fiscal 1996's effective tax rate as a percentage of pretax income was 35.8%
versus 34.9% in fiscal 1995. This increase was primarily a result of a
prospective reinstatement of the research and development tax credit and full
utilization of net operating losses in certain of the Company's European tax
jurisdictions.
SEGMENT INFORMATION:
Segment and foreign operations information is contained in Note 12 of Notes
to the Consolidated Financial Statements.
INFLATION:
The Company does not believe that inflation has had a material effect on
its revenues or results of operations.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES AND GROSS MARGIN:
Medical Systems. Summary information related to Medical Systems' product
and service revenues and gross margins is as follows:
FISCAL YEAR INCREASE
1995 1994 (DECREASE)
------------------------------------------
Product:
Revenues:
Volume $129,445 $125,003 $4,442 3.6%
Product mix:
Nuclear Medicine 95.1% 93.8%
RTP 2.0% 2.0%
DSA 2.9% 4.2%
Geographical mix:
North America 73.3% 76.7%
Europe 16.3% 18.3%
Other 10.4% 5.0%
Gross margin 37.3% 42.9%
15
FISCAL YEAR INCREASE
1995 1994 (DECREASE)
----------------------------------------------
Service:
Revenues $41,999 $36,779 $5,220 14.2%
Gross margin 32.5% 26.2%
Medical Systems' product revenues increase was primarily due to a 4.9% or
$5,770 increase in nuclear medicine product sales, which was offset by a
$1,477 decrease in DSA product sales as that product matured. Medical Systems'
product gross margins decreased primarily due to the continued industry-wide
pricing pressures first experienced during the last half of fiscal 1994 as the
overall market for nuclear medicine products in the United States declined.
Medical Systems' service revenues increased primarily as a result of the
continued increase in the installed product base. Service gross margins for
Medical Systems increased as the installed customer base increased, product
reliability increased and overall costs were reduced.
Healthcare Information Systems. Summary information related to HCIS'
product and service revenues and gross margins is as follows:
FISCAL YEAR INCREASE
1995 1994 (DECREASE)
----------------------------------------
Product:
Revenues:
Volume $7,270 $10,482 $(3,212) (30.6)%
Product mix:
Laboratory 8.1% 0.0
Radiology 91.9% 100.0%
Geographical mix:
North America 100.0% 100.0%
Gross margin 33.8% 58.2%
Service:
Revenues $6,095 3,995 $ 2,100 52.6%
Gross margin 49.8% 29.0%
Although HCIS product orders remained constant for both 1994 and 1995,
product revenues declined. The decline in HCIS product revenues resulted from
reduced sales of maturing radiology products that were not yet fully offset by
sales of newer radiology products under development. The acquired CHC business
contributed $845 in product revenue during 1995. Product margins for HCIS
declined as proprietary third-party hardware platforms were replaced with non-
proprietary open-systems hardware platforms with lower margins. In addition,
laboratory product margins were lower during the initial stages of new product
introduction.
The acquired CHC business contributed $2,792 of service revenue during
1995. HCIS service margins increased primarily due to obtaining a relatively
large installed base of laboratory product customers when the Company acquired
CHC.
16
OPERATING AND OTHER EXPENSES:
As a percentage of total revenue, operating costs and expenses and other
expenses, net, are as follows:
FISCAL YEAR
1995 1994
--------------------
Operating costs and expenses:
Marketing and sales 16.2% 17.3%
Research and development,
net of software capitalization 5.5% 6.4%
General and administrative 4.9% 4.4%
Goodwill amortization 0.1% 0.0%
---- ----
Subtotal, before restructuring charges 26.7% 28.1%
Restructuring charges 0.0% 1.4%
---- ----
Total operating costs and expenses 26.7% 29.5%
==== ====
Other expense, net 0.7% 0.1%
==== ====
Operating costs and expenses before restructuring charges decreased as a
percentage of revenue. This reduction was a result of the Company's continued
cost reduction efforts started during the second half of 1994 concurrent with
the restructuring. As a percentage of revenue, marketing and sales expenses
decreased and research and development expenses decreased. Research and
development expenses represent continued investment in new product development
and are net of software capitalization. Software capitalized during fiscal 1995
and 1994 was $1,996 and $1,402, respectively. The general and administrative
expense increase was mostly attributable to the acquired CHC business.
During the third quarter of 1994, the Company implemented a restructuring
plan to eliminate functions and positions dedicated to rework and non-critical
activities, consolidate certain job functions, redesign and streamline
manufacturing systems and processes, and undertake a major program of proactive
and preventive maintenance of the Company's installed base of equipment to
further enhance the equipment's reliability. As a result, the Company recorded
a restructuring charge of $2,453 for these costs.
Other expense, net, excluding 1994's litigation defense costs and related
settlement, increased as a result of the Company carrying short-term bank
borrowings during 1995 to fund loans made to CHC prior to the Company's
acquisition of such company and, subsequently, to fund the acquisition of CHC.
Fiscal 1994's other expense includes $4,240 in litigation defense costs and
$2,000 in settlement costs related to the Elscint litigation as discussed in
Note 5 of Notes to Consolidated Financial Statements. Excluding the litigation
defense costs, fiscal 1994's other expense, net, was $212.
INCOME TAXES:
Fiscal 1995's effective tax rate was 34.9%, which is approximately equal to
the Company's statutory Federal tax rate after utilization of business tax
credits. In fiscal 1994, the Company recorded a tax benefit resulting from the
release of a valuation allowance against deferred tax assets related to Federal
net operating loss carryforwards.
Effective October 4, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." On
adoption of SFAS No. 109, management established a valuation allowance for the
entire balance of its net deferred tax asset due to uncertainty with regard to
the outcome of the Elscint litigation summarized in Note 5 of Notes to
Consolidated Financial Statements, and concerns over healthcare reform
legislation. Following the settlement of this litigation in September 1994
(the end of fiscal 1994), combined with new legislative developments in
healthcare reform, the valuation allowance against the deferred tax asset was
no longer deemed appropriate in the fourth quarter and therefore was released
in the period.
17
This resulted in a gross income tax benefit of $7,222, for a net income tax
benefit for the year of $6,336 (see Note 11 of Notes to Consolidated Financial
Statements).
SEGMENT INFORMATION:
Segment and foreign operations information is contained in Note 12 of Notes
to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Summary information regarding the Company's cash flows, liquidity, and
capital resources is as follows:
Fiscal
1996
---------
Net cash and equivalents generated (used in):
Operating activities $(7,631)
Investing activities (5,256)
Financing activities 10,117
-------
Subtotal (2,770)
-------
Effect of exchange rates on cash (1,700)
-------
Net cash and equivalents generated (used) $(4,470)
=======
Cash and equivalents at year end $ 3,081
=======
Bank lines of credit at year end $60,000
=======
Fiscal 1996's net uses of cash in operations were primarily due to
increases in accounts receivable resulting primarily from increased sales
volume, increases in prepaid expenses related to a higher level of prepayments
to inventory vendors along with new prepaid royalty arrangements related to new
product and product enhancements, increased inventory levels to meet anticipated
higher future sales levels, and an increased level of service parts to service
the increased customer installed base. These increases were partially offset by
a continued decrease in deferred income tax assets as the Company utilized its
tax basis net operating losses.
Net cash used in investing activities during fiscal 1996 primarily related
to capital expenditures and increases in capitalized software expenditures.
Fiscal 1995's net cash from investing activities included the acquisition of
CHC.
Fiscal 1996's cash generated by financing activities mostly resulted from
increased short term bank borrowings and proceeds from the issuance of common
stock, primarily from the exercise of stock options and dividend reinvestments.
Offsetting these items were the payment of dividends. In October 1996, the
Company's Board of Directors decided to discontinue the payment of its quarterly
cash dividend in order to reinvest the funds in the Company to further its
growth and enhance shareholder value.
Net cash and equivalents also decreased during fiscal 1996 as a result of a
strengthening dollar in relation to other currencies; the Company's European
operations functional currencies are their local currencies.
Primarily as a result of the above noted operating, financing and investing
activities, and the effect of exchange rates on cash, cash and cash equivalents
decreased on an overall basis during fiscal 1996.
Borrowings outstanding under the lines of credit at the end of fiscal 1996
were $27,226. See Note 4 of Notes to Consolidated Financial Statements.
18
The Company believes that its cash, cash equivalents, cash flows from
operating activities 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 and/or on terms
favorable to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding the issuance of recent accounting pronouncements and
their expected effect on the Company's financial position and results of
operations is contained in Note 14 of Notes to Consolidated Financial
Statements.
BUSINESS CONSIDERATIONS
From time to time, the Company may disclose, through press releases,
filings with the SEC or otherwise, certain matters that constitute forward
looking statements within the meaning of the Federal securities laws. Such
statements are subject to a number of risks and uncertainties, which could cause
actual results to differ materially from those projected, including without
limitation those set forth below. The Company expressly disclaims any
obligation to update any forward looking statements.
COMPETITION
The medical systems and health care information system markets 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 produced 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.
DEPENDENCE ON DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS
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 innovative new products and product enhancements such
as MCD in order to pursue its growth strategy. The development of new products
and product enhancements entails considerable time and expense, including
research and development costs, and the time, expense and uncertainty involved
in clinical trials and in obtaining any necessary regulatory clearances. The
success of some Medical Systems products depends on receipt of appropriate
regulatory approvals for and the commercial availability of specific
radiopharmaceuticals. For example, MCD requires the use of positron emitting
isotopes. At this time, the infrastructure for the commercial supply of such
isotopes is not well-developed, certain applicable regulatory approvals for
such isotopes have not yet been obtained, and reimbursement for the use of
such isotopes in connection with MCD is uncertain. There can be no assurance
that the Company will be able to commercialize its existing products or any
new products or enhancements successfully.
19
FUTURE OPERATING RESULTS
The Company's future operating results may vary substantially from period
to period. The timing and amount of revenues are subject to a number of factors
that make estimation of revenues and operating results prior to the end of the
quarter very uncertain. The timing of revenues can be affected by delays in
product introductions, shipments and installations, as well as general economic
and industry conditions. Furthermore, of the orders received by the Company in
any fiscal quarter, a disproportionately large percentage has typically been
received and shipped toward the end of that quarter. Accordingly, results for a
given quarter can be adversely affected if there is a substantial order
shortfall late in that quarter. In addition, although both the Company's
bookings and revenue have increased steadily in recent periods, bookings
cannot necessarily be relied upon as an accurate predictor of future revenues.
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 FDA
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, 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 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 Sun workstations and the sodium iodide crystals used in the Company's
nuclear medicine systems, are presently available from only one supplier. The
Company also relies on several significant vendors for hardware and software
components for its HealthCare Information Systems products. The loss of any of
these suppliers, including any single-source supplier, would require obtaining
one or more replacement suppliers as well as potentially requiring a significant
level of hardware and software development to incorporate the new parts into the
Company's products. Although the Company has obtained insurance to
20
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.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
REVENUES, NET:
Product $177,613 $136,715 $135,485
Service 63,172 48,094 40,795
- ----------------------------------------------------------------------------------------------
240,785 184,809 176,280
-------- -------- --------
COST OF REVENUES:
Product 108,091 85,914 78,069
Service 39,542 31,406 28,596
- ----------------------------------------------------------------------------------------------
147,633 117,320 106,665
-------- -------- --------
Gross profit 93,152 67,489 69,615
- ----------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing and sales 36,275 29,928 30,565
Research and development 12,516 10,081 11,202
General and administrative 14,250 9,081 7,758
Goodwill amortization 792 174
Restructuring charges 2,453
- ----------------------------------------------------------------------------------------------
63,833 49,264 51,978
-------- -------- --------
Operating income 29,319 18,225 17,637
- ----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Litigation defense costs (6,240)
Interest and other, net (3,407) (1,222) (212)
- ----------------------------------------------------------------------------------------------
(3,407) (1,222) (6,452)
-------- -------- --------
Income before provision for income taxes 25,912 17,003 11,185
Provision (credit) for income taxes 9,275 5,930 (6,336)
- ----------------------------------------------------------------------------------------------
Net income $ 16,637 $ 11,073 $ 17,521
- ----------------------------------------------------------------------------------------------
Net income per share $.90 $.65 $1.06
Number of shares used in per share calculations 18,507 17,079 16,508
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
22
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
SEPTEMBER 29, OCTOBER 1,
(AMOUNTS IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------ -------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,081 $ 7,551
Accounts receivable, net of allowance for returns and doubtful
accounts of $2,146 in 1996 and $2,044 in 1995 80,654 55,047
Inventories 31,975 28,217
Deferred income taxes 8,095 11,481
Prepaid expenses and other current assets 11,027 5,515
- ------------------------------------------------------------------ -------- --------
Total current assets 134,832 107,811
- ------------------------------------------------------------------ -------- --------
Service parts, net 15,482 13,571
Fixed assets, net 8,393 8,368
Capitalized software, net 11,656 10,280
Goodwill, net 10,901 11,692
Other assets, net 5,364 7,375
- ------------------------------------------------------------------ -------- --------
Total Assets $186,628 $159,097
- ------------------------------------------------------------------ ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 27,226 $ 18,298
Accounts payable 13,923 13,147
Dividends payable 2,137 2,027
Deferred revenues 13,302 13,506
Customer deposits and advance billings 2,302 4,201
Accrued compensation 7,825 6,335
Other accrued liabilities 13,797 13,812
- ------------------------------------------------------------------ -------- --------
Total current liabilities 80,512 71,326
- ------------------------------------------------------------------ -------- --------
Non-current deferred income taxes 2,275 749
Non-current liabilities and deferred credits 4,370 4,254
- ------------------------------------------------------------------ -------- --------
Total Liabilities 87,157 76,329
- ------------------------------------------------------------------ -------- --------
Commitments and contingencies (Note 5)
- ------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none in 1996 and 1995
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 17,781 shares as of September 29, 1996
and 16,919 shares as of October 1, 1995, respectively 110,661 101,072
Accumulated deficit (10,172) (18,986)
Translation adjustment (1,018) 682
- ------------------------------------------------------------------ -------- --------
Shareholders' Equity 99,471 82,768
- ------------------------------------------------------------------ -------- --------
Total Liabilities and Shareholders' Equity $186,628 $159,097
- ------------------------------------------------------------------ ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
(AMOUNTS IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,637 $ 11,073 $ 17,521
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,035 6,377 5,775
Provision for product returns and doubtful accounts 1,482 1,502 1,023
Changes in operating assets and liabilities:
Accounts receivable (27,089) (8,966) (6,058)
Inventories (3,758) (5,276) (1,105)
Deferred income taxes 4,912 4,145 (7,421)
Prepaid expenses and other current assets (5,512) (2,763) (322)
Service parts (3,712) (1,971) (3,175)
Accounts and dividends payable 886 (3,109) 2,710
Deferred revenues (204) 7,059 (1,805)
Customer deposits and advance billings (1,899) (3,135) (242)
Accrued compensation 1,490 508 1,790
Other accrued liabilities (15) (1,114) 3,392
Non-current liabilities and deferred credits 116 875 (169)
- ------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (7,631) 5,205 11,914
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,789) (2,588) (4,372)
Proceeds from sale and leaseback of fixed assets 1,553 6,000
Increase in other assets (2,467) (2,997) (2,793)
Acquisition of business, net of cash acquired (16,152)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,256) (20,184) (1,165)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short-term debt arrangements, net 8,928 18,298 (3,700)
Proceeds from issuance and repurchase of common stock, net 9,589 3,986 100
Employee stock purchase (loan) repayment 453
Dividends paid (8,400) (7,885) (7,675)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,117 14,399 (10,822)
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (1,700) 928 613
- ------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (4,470) 348 540
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at beginning of the year 7,551 7,203 6,663
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of the year $ 3,081 $ 7,551 $ 7,203
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 3,325 $ 1,609 $ 439
Income taxes paid 442 289 457
The accompanying notes are an integral part of these consolidated financial
statements.
24
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Accumulated Translation Note
-------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Shares Amount Deficit Adjustment Receivable Total
- -----------------------------------------------------------------------------------------------------------------------------
Balances, October 3, 1993 15,219 $ 86,538 $(30,486) $ (859) $(453) $54,740
Employee stock purchases and
exercises of employee stock options 759 2,273 2,273
Shares repurchased (86) (487) (240) (727)
Shares sold under dividend reinvestment plan 6 49 49
Repayment of employee note 453 453
Shares withheld in payment of stock
options exercised (124) (411) (1,084) (1,495)
Pooling of interest with SD&G 273 (210) (210)
Income tax benefit resulting from
exercises of stock options 9,124 9,124
Translation adjustment 613 613
Dividends declared ($0.48 per share) (7,675) (7,675)
Net income 17,521 17,521
- -----------------------------------------------------------------------------------------------------------------------------
Balances, October 2, 1994 16,047 97,086 (22,174) (246) 74,666
Employee stock purchases and
exercises of employee stock options 937 4,733 4,733
Shares sold under dividend reinvestment plan 17 181 181
Shares withheld in payment of stock
options exercised (82) (1,087) (1,087)
Income tax benefit resulting from
exercises of stock options 159 159
Translation adjustment 928 928
Dividends declared ($0.48 per share) (7,885) (7,885)
Net income 11,073 11,073
- -----------------------------------------------------------------------------------------------------------------------------
Balances, October 1, 1995 16,919 101,072 (18,986) 682 82,768
Employee stock purchases and
exercises of employee stock options 657 5,263 5,263
Shares sold under dividend reinvestment plan 69 971 971
Shares withheld in payment of stock
options exercised (2) (45) (45)
Income tax benefit resulting from
exercises of stock options 3,400 3,400
Pooling of interest with JD Technical 138 577 577
Translation adjustment (1,700) (1,700)
Dividends declared ($0.48 per share) (8,400) (8,400)
Net income 16,637 16,637
- -----------------------------------------------------------------------------------------------------------------------------
Balances, September 29, 1996 17,781 $110,661 $(10,172) $(1,018) $99,471
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
ADAC LABORATORIES ANS SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
1996, 1995 and 1994 all included 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of ADAC Laboratories
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation and Transactions
The Company's European subsidiaries' functional currencies are considered to be
their respective local currencies. Adjustments that arise in translating their
financial statements into U.S. dollars are included as a separate component of
shareholders' equity in the consolidated balance sheets.
Gains and losses from foreign currency transactions are included as a component
of interest and other income (expense), net, in the consolidated statements of
income, and amounted to losses of $122, $150, and $68 in fiscal 1996, 1995, and
1994, respectively.
Revenue Recognition
The Company has two major business units for which specific revenue recognition
policies are followed.
Revenues related to the Company's Medical Systems business unit product sales
are recognized upon shipment to the customer or its requested location, at which
time title and risk of ownership pass. Estimated provisions for product sale
returns, installation and warranty are accrued upon revenue recognition.
Revenues related to Medical Systems service are recognized ratably over the
relevant contractual period or as the service is performed. Medical Systems
revenue billed but unearned is included on the consolidated balance sheets as
deferred revenue.
Revenues related to the Company's Healthcare Information Systems business unit
are derived from software licenses, computer hardware sales, related
implementation, training and support services and maintenance contracts.
Revenues for software licenses are recognized either at the shipment date or
upon the renewal date if, in either case, payment is due within twelve months
after such date. Revenues for license fees that have payments due beyond twelve
months are generally recognized at the time fees are paid or are billable.
Revenues for computer hardware sales are recognized at the time of shipment.
The Company's obligations subsequent to shipment primarily relate to
implementation and training. Revenues for these services are recognized as the
services are provided. Revenues from maintenance contracts are recognized
ratably over the relevant contractual period.
Research and Development
Research and development expenditures are charged to operations as incurred, net
of certain capitalized software costs.
Income Taxes
Under the liability method of accounting for income taxes, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized as income in the period that includes the
enactment date.
Deferred tax assets are also recognized for deductible temporary differences and
operating loss and tax credit carryforwards and, if appropriate, with a
valuation allowance established against the resulting assets if it is more
likely than not that the related tax benefits will not be realized.
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 using the treasury stock
method.
Cash Equivalents
All highly liquid investments purchased with an original maturity of three
months or less are considered cash equivalents.
Concentration of Credit Risk
The Company sells its products to hospitals and clinics worldwide. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral, except for sales within Latin America. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. The Company invests any excess cash on
deposits with a major investment bank. The Company has not experienced any
losses on these deposits.
Reliance on Certain Suppliers
Certain components and services used by the Company to manufacture and develop
its products are presently available from only one, or a limited number of,
suppliers or vendors. The loss of any of these suppliers or vendors would
potentially require a significant level of hardware and/or software development
to incorporate the products or services from new suppliers or
26
ADAC LABORATORIES AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
vendors into the Company's products. Although the Company has obtained business
interruption insurance to protect against such losses, there is no assurance
that such coverage would be adequate.
Inventories
Inventories are stated at the lower of standard cost (which approximates cost on
a first-in, first-out basis) or market.
Service Parts
Service parts used for servicing installed equipment are
stated at cost and are depreciated over a 10-year period using the declining-
balance method of depreciation.
Fixed Assets
Major additions and improvements are capitalized at cost, while maintenance and
repairs which do not improve or extend the life of the respective assets are
expensed as incurred. When assets are retired or otherwise disposed of, the
costs and related accumulated depreciation are removed from the financial
statements, and any gain or loss on disposal is included in the consolidated
statements of income. Fixed assets, other than leasehold improvements, are
depreciated on a straight-line basis over their estimated useful lives (3-7
years). Leasehold improvements are amortized on a straight-line basis over the
lesser of their estimated useful lives or the remaining term of the related
leases.
Capitalized Software
Costs related to the conceptual formulation and design of software products are
expensed as product development, and costs incurred subsequent to establishing
the technological feasibility of software products are capitalized.
Amortization of capitalized software costs, which begins when products are
available for general release to customers, is computed using the greater of 1)
the ratio that current gross revenues bear to the total of current and
anticipated future gross revenues; or 2) a straight-line basis over the expected
product lives, generally estimated to be three to seven years.
Software costs capitalized during fiscal years 1996, 1995, and 1994 amounted to
approximately $3,477, $1,996, and $1,402, respectively. Additionally, $5,802
of capitalized software was acquired through the acquisition of Community Health
Computing Corporation during fiscal 1995 and $364 of capitalized software was
acquired through the acquisition of SD&G Healthcare Systems, Inc during fiscal
1994 (see Note 3). Amortization of capitalized software costs amounting to
approximately $2,101, $1,164 and $697, respectively, have been charged to cost
of product revenues.
Intangible Assets
Goodwill and other purchased intangibles, including technology and sales
partnerships, are capitalized and amortized on a straight-line basis over the
estimated useful life of the related asset (3-15 years).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the financial statements have been reclassified to conform
with the current year's presentation. These classifications did not change
previously reported total assets, liabilities, shareholders' equity or net
income (loss).
NOTE 2 BALANCE SHEET DETAIL:
1996 1995
-------- --------
Inventories consist of:
Purchased parts and sub-assemblies $ 16,000 $ 14,138
Work in process 5,057 1,421
Finished goods 10,918 12,658
-------- --------
$ 31,975 $ 28,217
======== ========
1996 1995
-------- --------
Service parts consist of:
Field service parts, at cost $ 22,183 $ 19,358
Less accumulated depreciation (6,701) (5,787)
-------- --------
$ 15,482 $ 13,571
======== ========
1996 1995
-------- --------
Fixed assets, at cost, consist of:
Production and test equipment $ 7,227 $ 9,686
Field service equipment 2,374 1,138
Office and demonstration equipment 12,782 8,840
Leasehold improvements 1,112 1,042
-------- --------
23,495 20,706
-------- --------
Less accumulated depreciation and
amortization (15,102) (12,338)
-------- --------
$ 8,393 $ 8,368
======== ========
1996 1995
-------- --------
Other accrued liabilities consist of:
Accrued customer service costs $ 3,663 $ 2,031
Other accrued expenses 10,134 11,781
-------- --------
$ 13,797 $ 13,812
======== ========
1996 1995
-------- --------
Non-current liabilities and
deferred credits consist of:
Deferred contract revenue $ 2,185 $ 1,425
Deferred gain on sale of fixed assets 1,329 2,251
27
ADAC LABORATORIES AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Other non-current liabilities 856 578
-------- --------
$ 4,370 $ 4,254
======== ========
NOTE 3 ACQUISITIONS
On November 9, 1995, the Company acquired JD Technical Services, Inc., of
Washington, Missouri, a leader in nuclear medicine imaging systems
remanufacturing, as well as a nationwide provider of multivendor 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
purchase 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 were not 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.
On July 12, 1995, the Company completed its acquisition of Community Health
Computing (CHC) of Houston, Texas for approximately $18.4 million, which
included $1.9 million of expenses associated with the acquisition. Through the
acquisition, the Company acquired all the rights to CHC's product portfolios
for the laboratory information systems and radiology information systems
markets, and obtained CHC's installed customer base.
The acquisition was accounted for as a purchase, and the results of operations
of CHC have been included in the Company's consolidated financial statements
subsequent to July 12, 1995. The fair value of assets acquired, including
goodwill, was $27.6 million and liabilities assumed totaled $23.6 million.
Goodwill of $11.9 million is being amortized over 15 years on a straight-line
basis.
On November 16, 1993, the Company acquired SD&G Healthcare Systems, Inc. (SD&G),
a company engaged in the sale and development of hospital information systems.
The Company issued 273 shares of common stock in exchange for all the
outstanding stock of SD&G. The transaction was accounted for as a pooling of
interests. The Company also assumed options to purchase SD&G stock which will
remain outstanding as options to purchase approximately 26 shares of the
Company's common stock. Prior period financial statements have not been
restated because the operations of SD&G were not material to the financial
position or the results of operations of the Company at the time of acquisition.
NOTE 4 CREDIT AND BORROWING ARRANGEMENTS
The Company has a $60,000 revolving credit facility with a bank syndicate. The
credit facility offers borrowings in either U.S. dollars or in foreign
currencies and expires July 31, 1999. The Company pays interest and commitment
fees on its borrowing based on the debt level in relation to profitability.
Commitment fees range from 0.25% to 0.425% of borrowings and interest rates are
based on the bank's prime rate or Libor plus rates ranging from 0.875% to
1.375%. Borrowings are generally repaid within 90 days. At September 29,
1996, the Company had $32,774 available for borrowing under this facility.
Borrowings are collateralized by the Company's assets, and the Company is
required to comply with certain financial and other covenants, including
restrictions on its ability to acquire or merge with another company and incur
additional debt.
Additional information with respect to such revolving lines of credit is as
follows:
1996 1995
-------- --------
Maximum borrowings
during the year $49,700 $27,760
Average borrowings during
the year $33,177 $14,521
Weighted average interest
rates during the year 6.79% 7.45%
- ---------------------------- ------- -------
NOTE 5 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office and manufacturing facilities under operating
leases which expire at various dates through 2002. The Company is responsible
for maintenance, taxes and insurance on all facilities.
During fiscal 1995, the Company sold and leased back fixed assets with a net
book value of $591 for total proceeds of $832. The gain on the transaction will
be recognized over the five year term of the operating lease. Similarly, in
September 1994, the Company entered into a sale and leaseback transaction under
which it sold fixed assets with a net book value of $2,809 for total proceeds of
$6,000. As part of this agreement, the Company entered into two operating
leases with terms of three and five years, respectively. The gain on the
transaction will be recognized over the terms of the leases. In addition, the
Company guaranteed to the lessors the final residual value of approximately
$1,012.
As of September 29, 1996, future annual minimum lease payments for all non-
cancelable operating leases are as follows:
FISCAL YEAR BUILDING EQUIPMENT
- ------------------------------- -------- ---------
1997 $ 3,139 $2,098
1998 2,883 1,527
1999 1,745 2,594
2000 905 136
2001 871 1
Thereafter 861 -
------- ------
Total minimum lease payments $10,404 $6,356
======= ======
Rent expense totaled $4,911, $4,284, and $2,572 for fiscal years
28
ADAC LABORATORIES AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXEPT PER SHARE DATA)
1996, 1995 and 1994, respectively.
Capital Leases
During fiscal 1995, the Company entered into two capital leases having terms of
five years. Under these two agreements, certain leased fixed assets are
pledged as collateral.
As of September 29, 1996, future annual minimum lease payments under these
capital leases are as follows:
FISCAL YEAR CAPITAL LEASES
- ---------------------------------------------- --------------
1997 $ 229
1998 222
1999 222
2000 74
Thereafter -
-----
Total minimum lease payments 747
Amount representing interest (114)
-----
Present value of net minimum lease payments 633
Less current portion (232)
-----
$401
====
Payments under these capital lease obligations totaled $195 and $126 in fiscal
1996 and 1995, respectively.
As of September 29, 1996, the Company had $729 of equipment under capital leases
with accumulated amortization of $285.
Litigation
In September 1994, the Company settled a lawsuit with Elscint Limited which had
alleged infringement of certain patents relating to Nuclear Medicine imaging and
Digital Fluroscopy technology. Without admitting any liability or wrongdoing,
the Company agreed to pay $2,000 to settle the lawsuit. As part of the
settlement, each party agreed not to sue each other with respect to nuclear
medicine intellectual property matters for the next ten years. This amount was
included in other liabilities in the October 2, 1994 Consolidated Balance Sheet
and was paid on October 4, 1994. In addition to the $2,000 settlement charge in
fiscal 1994, approximately $4,240 in litigation defense costs were incurred and
are included in other expense in the Consolidated Statement of Income for fiscal
1994.
The Company is also a defendant in other legal proceedings incidental to its
business. While it is not possible to determine the ultimate outcome of these
other actions at this time, management is of the opinion that any unaccrued
liability resulting from the claims would not have a material adverse effect on
the Company's consolidated financial position or results of operations.
Other
Under third party lease program agreements, the Company is contingently liable
for losses in the event of default by lessees, limited to a percentage (ranging
from 2% to 100%) of the equipment lease, depending on the agreement, and up to
100% for the related service contracts. At September 29, 1996 the contingent
liability was $2,718.
In conjunction with its third party financing and lease programs, the Company
sells certain receivables with recourse. The amount of recourse ranges from 10%
to 100% of the receivable. As of September 29, 1996 the contingent liability
was $14,233.
NOTE 6 CAPITAL STOCK
Preferred Stock
The Board of Directors is authorized to determine the rights and preferences of
the preferred stock, issuable in series. The Board of Directors may increase or
decrease the number of shares of any series of preferred stock, but not below
the number of shares of such series then outstanding.
Common Stock
In 1994 the Board of Directors approved the issuance of warrants to purchase up
to 60 shares of common stock at the Company's then market price of $6.50 per
share to a consulting firm as partial compensation for services rendered and to
be rendered. The warrants were issued proportionately as services were
performed through March 1995, and expire on July 1, 1999. At September 29,
1996, all of the warrants related to this issuance had been issued and were
outstanding.
As of September 29, 1996, the Company has reserved a total of 3,479 shares of
common stock for issuance under employee stock option plans and 39 under the
employee stock purchase plan discussed in Note 7.
NOTE 7 STOCK PLANS
Stock Option Plans
The Company currently has three stock option plans for employees and
consultants, including the 1981 and 1985 stock option plans (under which no
further options may be granted), and the 1992 stock option plan.
The 1992 Option Plan (as amended) allow for non-qualified as well as incentive
options to be granted to employees, officers, consultants and others.
Incentive stock options must be granted at exercise prices of not less than
fair market value and expire within 10 years from the date of grant. Under the
plans, non-qualified stock options can have exercise prices of not less than
85% of fair market value and also expire within 10 years of grant date.
In addition, the Company has a directors' stock option plan under which options
are granted to non-employee directors. Options under this plan are granted for a
period of 5 years from the date
29
ADAC LABORATORIES AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
of grant at an option exercise price equal to 100% of fair market value.
Options available for grant under all plans as of September 29, 1996 were 653.
In addition, 631 of the options outstanding at September 29, 1996 were
exercisable. A summary of the activity under these plans is as follows:
1996 1995 1994
------ ------ ------
Exercise Price Exercise Price Exercise Price
(Shares in thousands) Shares Per Share Shares Per Share Shares Per Share
- ---------------------------------- -------- ------- ----- ---------------- ------ --------------
Outstanding at beginning of year 2,516 $ 2.25 - $ 15.75 2,557 $2.25 - $15.75 2,267 $2.25 - $ 15.75
Granted 1,160 11.625 - 17.0 1,073 7.75 - 11.875 1,169 6.38 - 14.25
Exercised (549) 3.75 - 15.75 (879) 7.375 - 13.5 (702) 6.25 - 14.25
Canceled (301) 2.625 - 15.875 (235) 2.25 - 14.25 (177) 2.25 - 14.25
- ---------------------------------- ----- --------- ------- ----- ---------------- ------ ----- -------
Outstanding at end of year 2,826 $ 2.25 - $ 17.0 2,516 $2.25 - $15.75 2,557 $2.25 - $15.75
- ---------------------------------- ----- --------- ------- ----- ---------------- ------ ----- -------
30
ADAC LABORATORIES AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Employee Stock Purchase Plan
This plan, as amended, permits eligible employees to purchase common stock
through payroll deductions (which cannot exceed 10% of the employee's
compensation and cannot exceed 100 shares per employee per interim offering
period) at the lower of 85% of fair market value at the beginning of a 27 month
offering period or at the end of each interim period. Each full-time employee
of the Company who has been employed for six months or more at the commencement
of an interim offering period is entitled to participate in the plan. During
fiscal years 1996, 1995, and 1994, 64, 58, and 57 shares were issued at an
average price of $10.94, $7.21, and $7.42 per share, respectively.
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 were not distributed in response
to any proposal to acquire the Company.
NOTE 8 RETIREMENT SAVINGS PLAN
The Company maintains a qualified retirement plan, under the provisions of
Section 401(k) of the Internal Revenue Code, in which eligible employees may
participate. Substantially all participants in this plan are able to defer
compensation up to the annual maximum amount allowable under Internal Revenue
Service regulations. Additionally, the Company may match employee contributions
with discretionary amounts as may be determined by the Board of Directors.
During fiscal 1996, the Company matched employee contributions up to a maximum
of $0.5 per employee, totaling $206. Prior to fiscal 1996, no matching
contributions had been made.
NOTE 9 RESTRUCTURING CHARGES
During the third quarter of 1994, the Company implemented a restructuring plan
to eliminate functions and positions dedicated to rework and non-critical
activities, consolidate certain job functions, redesign and streamline
manufacturing systems and processes, and undertake a major program of proactive
and preventive maintenance of the Company's installed customer base of equipment
to enhance further the equipment's reliability. As a result, the Company
recorded a restructuring charge of approximately $2.5 million for these costs.
Of the total restructuring charge, severance and related costs for 67 employees
accounted for 47%, manufacturing redesign 6%, preventive maintenance costs 28%,
asset writedowns 8%, and other costs accounted for the remainder.
NOTE 10 SUBSEQUENT EVENTS
On November 4, 1996, the Company acquired Geometrics Corporation, of Madison,
Wisconsin, a developer of specialized medical software used in the planning of
radiation therapy treatments for cancer patients. Geometrics will operate as a
product development unit of the Company's Radiation Therapy Planning division.
In connection with the acquisition, the Company issued 191 shares having an
approximate fair market value of $3.9 million. The acquisition will be
accounted for as a pooling of interests. Prior period financial statements will
not be restated because Geometrics is not material to the financial position or
results of operations of the Company.
On September 30, 1996, one of the Company's subsidiaries, ADAC Radiology
Services (ARS), acquired a one-year option to purchase Medical Transition
Strategies, Inc. (MTS) for $500 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 per
validated (as defined) network under management plus a percentage of each such
network's net revenue in calendar year 1998. The option price and the option
exercise price are, at the option 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' network revenue goals are achieved, pay MTS a break-up fee of $500.
31
ADAC LABORATORIES AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
In October 1996, the Company's Board of Directors decided to discontinue the
payment of its quarterly cash dividend in order to reinvest the funds in the
Company to further its growth strategy and enhance shareholder value.
NOTE 11 INCOME TAXES
Income tax expense (benefit) consists of:
1996 1995 1994
------ ------ --------
Current:
Federal $ 409 $ 267 $ 319
Foreign 384 - -
State 458 571 766
- ------------ ------ ------ -------
1,251 838 1,085
----- --- -------
Deferred:
Federal 7,538 4,904 (7,170)
State 486 188 (251)
- ------------ ------ ------ -------
8,024 5,092 (7,421)
------ ------ -------
Total $9,275 $5,930 $(6,336)
- ------------ ====== ====== =======
The reconciliation of the provision for income taxes, computed at the marginal
federal statutory income tax rate, to the reported amounts is as follows:
1996 1995 1994
------- ------- --------
Income taxes at marginal statutory rate of 35% $9,069 $5,951 $ 3,915
State income taxes, net of federal benefit 649 493 335
Benefit from net operating loss carryforwards - - (3,956)
Losses on foreign subsidiaries not providing
tax benefit in the current year - - 526
Change in valuation allowance (844) (980) (6,905)
Business credits (160) (196) (317)
Other 561 662 66
- ------------------------------------------------- ------ ------ -------
Provision (benefit) for income taxes $9,275 $5,930 $(6,336)
- ------------------------------------------------- ====== ====== =======
As of September 29, 1996, the Company had net operating loss carryforwards of
approximately $39.7 million available to offset future federal taxable income
and approximately $7.2 million available to offset future taxable income in
various foreign jurisdictions. Federal operating loss carryforwards of $9.0
million expire in fiscal year 2001, federal operating loss carryforwards of
$30.7 million expire 2006 to 2009, and foreign operating loss carryforwards
expire beginning in fiscal year 1997. The federal operating loss carryforwards
expiring 2006 to 2009 are subject to certain restrictions on their utilization.
The Company also has federal credit carryforwards of $5.9 million. These credit
carryforwards will expire beginning in fiscal year 1997.
Significant components of the Company's deferred tax assets and liabilities at
September 29, 1996 and October 1, 1995 are as follows:
1996 1995
--------- --------
Deferred income tax assets:
Net operating loss carryforwards $ 17,082 $ 8,388
Federal credit carryforwards 5,907 5,463
Inventory valuation 1,683 962
Employee benefits 751 376
Accrued customer service costs 842 388
Receivable valuation 789 458
Deferred income 914 672
Other 787 447
- ------------------------------------- -------- -------
28,755 17,154
Less valuation allowance (13,598) (3,054)
- ------------------------------------- -------- -------
Deferred income tax assets 15,157 14,100
- ------------------------------------- -------- -------
Deferred income tax liabilities:
Fixed assets 3,426 $ 1,963
Software development costs 4,873 1,405
Leases 1,038 -
- ------------------------------------- -------- -------
Deferred income tax liabilities 9,337 3,368
- ------------------------------------- -------- -------
Net deferred income tax assets $ 5,820 $10,732
- ------------------------------------- ======== =======
The valuation allowance identified above relates to net operating loss
carryforwards of certain foreign and domestic subsidiaries. Approximately $10.0
million of the valuation allowance when reduced will be credited to goodwill in
accordance with SFAS 109.
NOTE 12 SEGMENT INFORMATION AND FOREIGN OPERATIONS
The Company designs, manufactures, and markets medical imaging and health care
information systems to hospitals and clinics worldwide. During the fourth
quarter of fiscal 1995, the Company completed its acquisition of CHC, as
discussed in Note 3. As a result, the relative significance of the Company's
Healthcare Information Systems' segment increased in relation to the Company's
overall business. Accordingly, the Company's operations are now derived from
two major business units, Medical Systems business (MS) and Healthcare
Information Systems business (HCIS). Prior to 1995, the results of operations
from the Healthcare Information Systems' segment were not significant. The
following table summarizes the results of operations for the Company's two
major business segments.
FISCAL 1996
MS HCIS
-------- -------
Revenues $209,477 $31,308
Operating income (loss) 28,765 554
Depreciation and amortization 5,650 3,385
Capital expenditures 2,022 767
Total assets 151,447 35,181
- -------------------------------- -------- -------
32
ADAC LABORATORIES AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
FISCAL 1995
MS HCIS
-------- --------
Revenues $171,444 $13,365
Operating income (loss) 19,288 (1,063)
Depreciation and amortization 5,403 974
Capital expenditures 2,438 150
Total assets 137,677 21,420
- -------------------------------- -------- -------
Additionally, the Company has European operations which are those of its
subsidiaries in the Netherlands, France, Germany, Denmark, United Kingdom and
Italy, and substantially all of their sales are made to unaffiliated European
customers. The following table summarizes the European subsidiaries' operations:
1996 1995 1994
- ------------------------------------------------------- ------- -------- -------
Revenues $30,475 $27,282 $28,436
Net income (loss) 419 (320) 73
Total assets 29,335 23,315 20,224
- ------------------------------------------------------- ------- ------- -------
The Company also has operations in Latin America and Asia, neither of which
are material to the financial position or results of operations of the
Company.
NOTE 13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
FISCAL 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------- ------- ------- ------- -------
Revenues $54,988 $58,438 $62,434 $64,925
Gross profit 21,098 22,314 24,134 25,606
Net income 3,541 3,938 4,353 4,805
Net income per share .20 .22 .24 .26
- ------------------------------------------------------- ------- ------- ------- -------
FISCAL 1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------- ------- ------- ------- -------
Revenues $44,232 $44,727 $45,625 $50,225
Gross profit 15,858 16,141 16,563 18,927
Net income 2,430 2,754 3,054 2,835
Net income per share .15 .17 .18 .16
- ------------------------------------------------------- ------- ------- ------- -------
FISCAL 1994
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------- ------- ------- ------- -------
Revenues $46,546 $47,298 $40,081 $42,355
Gross profit 19,454 19,384 14,893 15,884
Net income 5,312 5,510 269 6,430
Net income per share .32 .33 .02 .39
- ------------------------------------------------------- ------- ------- ------- -------
The sum of a year's quarterly earnings per share may not equal the annual
earnings per share as a result of changes in the outstanding number of shares
during the year and the application of the treasury stock method, which
considers changes in the market price of common stock during each period (see
Note 1, "Income Per Share").
As discussed in Notes 3 and 12, during the fourth quarter of fiscal 1995, the
Company completed its acquisition of CHC. As a result, the relative
significance of the Company's Healthcare Information Systems' segment increased
in relation to the Company's overall business. Accordingly, beginning in the
fourth quarter of fiscal 1995, changes were made in the classification of
certain income statement items related to the Company's Healthcare Information
Systems' segment. Total revenue, operating income, net income, and earnings per
share were not affected by these changes. Operating expenses of $416, $495,
$577 and $610 were reclassified to cost of sales in the first, second, third and
fourth quarter of 1994, respectively, to conform with the revised presentation,
as were $107, $702 and $1,337 in the first, second, and third quarter of 1995,
respectively. Prior to 1994, the results of operations from the Healthcare
Information Systems' segment were not significant.
NOTE 14 RECENT PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS 121 will become
effective for the Company's year ending September 30, 1997.
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 be effective for fiscal years beginning after December 15,
1995, and will require the Company to provide additional disclosures in the
financial statements for the 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.
At present, the Company's adoption of these pronouncements are not expected to
have a material effect on the Company's financial position or results of
operations.
33
To the Board of Directors and Shareholders of ADAC Laboratories and Subsidiaries
We have audited the accompanying consolidated balance sheets of ADAC
Laboratories and Subsidiaries as of September 29, 1996 and October 1, 1995, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three fiscal years in the period ended September 29, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ADAC Laboratories
and Subsidiaries as of September 29, 1996 and October 1, 1995, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended September 29, 1996 in conformity with
generally accepted accounting principles.
San Jose, California
November 4, 1996
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The information required by Items 10, 11, 12 and 13 is included in the
Proxy Statement for the Company's 1997 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the 1996 fiscal year and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) (1) FINANCIAL STATEMENTS. Consolidated Financial Statements, Notes
---------------------
to Consolidated Financial Statements, and the Report of Independent Accountants
are included under Item 8. Financial Statements and Supplemental Data.
(2) FINANCIAL STATEMENT SCHEDULES. See "Index to Financial Statement
------------------------------
Schedules" attached hereto and made a part hereof.
(3) EXHIBITS. The following exhibits are included or, as indicated
---------
by the footnote, incorporated by reference into this filing:
3.1 Restated Articles of Incorporation, as amended.
3.2 Bylaws, as amended.
10.17(1) Leases for two buildings located at 540 Alder Drive, Milpitas,
California, between the Company and John Arrillaga and Richard T.
Peery, dated June 25, 1986.
10.45(2) 1985 Option Plan, as amended and restated through July 28, 1987.
10.52(3) Directors' Stock Option Plan (1987),as amended.
10.56(4) Amendment to leases for two buildings located at 540 Alder Drive,
Milpitas, California, between the Company and John Arrillaga and
Richard T. Peery, dated February 2, 1992.
10.60(5) 1992 Stock Option Plan, as amended.
10.68(6) Master Lease Agreement between the Registrant and Metlife Capital
Corporation, dated September 30, 1994.
10.69(6) Equipment Lease Agreement between the Registrant and Wasatch
Funding Group, Inc., dated September 30, 1994.
10.70(6) Call Agreement between the Registrant and Community Health
Computing Corporation and Exhibits, dated November 30, 1994 and
December 7, 1994, respectively.
35
10.71(6) Amendment to lease for building located at 540 Alder Drive,
Milpitas, California, between the Company and John Arrillaga and
Richard T. Peery, dated August 31, 1993.
10.72(6) Lease agreement for building located at 630 Alder Drive,
Milpitas, California, between the Company and John Arrillaga and
Richard T. Peery, dated December 6, 1993.
10.73(6) Employment/Severance agreement between ADAC Laboratories and
Stanley D. Czerwinski, dated November 2, 1994.
10.75(7) Employee Stock Purchase Plan (1994), as amended.
10.76(8) First Amended Series A Preferred Stock Purchase Agreement, dated
February 24, 1995, among the Registrant, Community Health
Computing Corp. and Community Health Computing, Inc., and related
Promissory Notes, Security Agreement and Modification of Loan
Agreements, dated July 12, 1995.
10.78(9) Vendor Program Agreement between the Registrant and DVI Financial
Services Inc., dated June 30, 1995.
10.79(9) Agreement and Plan of Reorganization Among the Registrant, ADAC
Acquisition, Inc., J.D. Technical Services, Inc. and the
Shareholders of J.D. Technical Services, Inc., dated November 9,
1995.
10.81(10) Credit Agreement dated July 31, 1996 among the Registrant, the
Lenders named therein, and ABN AMRO Bank N.V., as agent for the
Lenders
10.82(11) Rights Agreement dated as of April 22, 1996 between the
Registrant and Chemical Mellon Shareholder Services, LLC.
10.83(5) Stock Option Agreement between the Registrant and Robert L.
Miller.
10.84 Option Agreement dated as of September 30, 1996 by and among the
Registrant, ADAC Radiology Services, Inc., Medical Transition
Strategies, Inc., and Ernest Berger.
10.85 Agreement and Plan of Reorganization dated November 4, 1996 among
the Registrant, Geometrics Corporation, and the shareholders of
Geometrics Corporation.
10.86 Form of ADAC Executive Severance Agreement.
10.87 Form of ADAC HCIS Executive Severance Agreement.
10.88 Community Health Computing Corp. Stock Option Plan (1995) and
related Stock Option Agreement.
11 Computation of net income per share.
21 Subsidiaries.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
- -----------------
(1) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended September 28, 1986.
(2) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-72804) filed with
the Commission on December 13, 1993.
(3) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-02747) filed with
the Commission on April 23, 1996.
(4) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended October 1, 1989.
(5) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-02749) filed with
the Commission on April 23, 1996.
(6) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended October 2, 1994.
(7) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-02793) filed with
the Commission on April 23, 1996.
(8) Incorporated by reference to Exhibits filed with the Company's
Current Report of Form 8-K (file no. 0-9428), dated July 12, 1995
(being the date of the earliest event reported).
(9) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended October 1, 1995.
(10) Incorporated by reference to Exhibits filed with the Company's
Quarterly Report on Form 10-Q (file no. 0-9428) for the quarter
ended June 30, 1995.
(11) Incorporated by reference to Exhibits filed with the Company's
Current Report on Form 8-K (file no. 0-9428) dated April 22, 1996.
36
(b) REPORTS ON FORM 8-K. The following report on Form 8-K was filed during
--------------------
the Company's third fiscal quarter ended June 30, 1996:
(i) Report on Form 8-K, dated April 22, 1996 (date of earliest event
reported), concerning the Company's adoption of a shareholder rights plan.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: December 17, 1996 ADAC LABORATORIES
Registrant)
BY:/s/ David L. Lowe
-----------------
David L. Lowe,
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITIES DATE
- --------- ---------- ----
/s/ David L. Lowe Chairman of the Board, Chief December 17, 1996
- ----------------------------
David L. Lowe Executive Officer & Director
(Principal Executive Officer)
/s/ P. Andre Simone Chief Financial Officer December 17, 1996
- ----------------------------
P. Andre Simone (Principal Financial and
Accounting Officer)
/s/ Stanley D. Czerwinski Director December 17, 1996
- ----------------------------
Stanley D. Czerwinski
/s/ R. Andrew Eckert Director December 17, 1996
- ----------------------------
R. Andrew Eckert
/s/ Graham O. King Director December 17, 1996
- ----------------------------
Graham O. King
/s/ Robert L. Miller Director December 17, 1996
- ----------------------------
Robert L. Miller
/s/ F. David Rollo Director December 17, 1996
- ----------------------------
F. David Rollo
/s/ Edmund H. Shea, Jr. Director December 17, 1996
- ----------------------------
Edmund H. Shea, Jr.
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants
Financial Statement Schedules
Schedule VIII - Consolidated Valuation and Qualifying Accounts
Schedule X - Consolidated Supplementary Income Statement Information
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated financial statements or the notes thereto.
39
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of ADAC Laboratories is
included on page 34 of this Form 10-K. In connection with our audit of
such financial statements, we have also audited the related financial statement
schedules listed in the index on page 39 on this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respect, the information required to be included
therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 4, 1996
40
SCHEDULE VIII
ADAC LABORATORIES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
For the three years in the period ended September 29, 1996
Additions
--------------------------------
Charged to Acquisition
Balance at Costs and of Balance at End
Description Beginning of Period Expenses Business Deductions of Period
- ----------- ------------------- ----------- -------- -------------- --------------
Year Ended October 2, 1994:
Deducted from asset accounts:
Allowance for product returns
and doubtful accounts $ 932 $1,023 $ - $ 311 $1,644
=================== =========== ======== ============== =========
Year Ended October 1, 1995:
Deducted from asset accounts:
Allowance for product returns
and doubtful accounts $1,644 $1,502 $373 $1,475 $2,044
=================== =========== ======== ============== =========
Year Ended September 29, 1996:
Deducted from asset accounts:
Allowance for product returns
and doubtful accounts $2,044 $1,482 $ - $1,380 $2,146
================== =========== ======== ============== =========
41
SCHEDULE X
ADAC LABORATORIES AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(In Thousands)
For the three years in the period ended September 29, 1996
ITEM CHARGED TO COSTS & EXPENSES
---- -------------------------------
1996 1995 1994
---- ---- ----
Depreciation and amortization
of intangible assets:
Software and technology $3,268 $1,845 $1,220
Goodwill and Sales Partnership $1,203 $ 780 $ 576
Amounts charged to costs and expenses do not exceed one percent of net revenues
for all other items for all periods presented.
42
ADAC LABORATORIES AND SUBSIDIARIES
INDEX OF EXHIBITS
EXHIBIT
NUMBER TITLE OF EXHIBIT
- ------ ----------------
(SEE FOOTNOTES)
3.1 Restated Articles of Incorporation, as amended.
3.2 Bylaws, as amended.
10.17(1) Leases for two buildings located at 540 Alder Drive, Milpitas,
California, between the Company and John Arrillaga and Richard T.
Peery, dated June 25, 1986.
10.45(2) 1985 Option Plan, as amended and restated through July 28, 1987.
10.52(3) Directors' Stock Option Plan (1987),as amended.
10.56(4) Amendment to leases for two buildings located at 540 Alder Drive,
Milpitas, California, between the Company and John Arrillaga and
Richard T. Peery, dated February 2, 1992.
10.60(5) 1992 Stock Option Plan, as amended.
10.68(6) Master Lease Agreement between the Registrant and Metlife Capital
Corporation, dated September 30, 1994.
10.69(6) Equipment Lease Agreement between the Registrant and Wasatch
Funding Group, Inc., dated September 30, 1994.
10.70(6) Call Agreement between the Registrant and Community Health
Computing Corporation and Exhibits, dated November 30, 1994 and
December 7, 1994, respectively.
10.71(6) Amendment to lease for building located at 540 Alder Drive,
Milpitas, California, between the Company and John Arrillaga and
Richard T. Peery, dated August 31, 1993.
10.72(6) Lease agreement for building located at 630 Alder Drive, Milpitas,
California, between the Company and John Arrillaga and Richard T.
Peery, dated December 6, 1993.
10.73(6) Employment/Severance agreement between ADAC Laboratories and
Stanley D. Czerwinski, dated November 2, 1994.
10.75(7) Employee Stock Purchase Plan (1994), as amended.
10.76(8) First Amended Series A Preferred Stock Purchase Agreement, dated
February 24, 1995, among the Registrant, Community Health
Computing Corp. and Community Health Computing, Inc., and related
Promissory Notes, Security Agreement and Modification of Loan
Agreements, dated July 12, 1995.
10.78(9) Vendor Program Agreement between the Registrant and DVI Financial
Services Inc., dated June 30, 1995.
10.79(9) Agreement and Plan of Reorganization Among the Registrant, ADAC
Acquisition, Inc., J.D. Technical Services, Inc. and the
Shareholders of J.D. Technical Services, Inc., dated November 9,
1995.
10.81(10) Credit Agreement dated July 31, 1996 among the Registrant, the
Lenders named therein, and ABN AMRO Bank N.V., as agent for the
Lenders
10.82(11) Rights Agreement dated as of April 22, 1996 between the Registrant
and Chemical Mellon Shareholder Services, LLC.
10.83(5) Stock Option Agreement between the Registrant and Robert L.
Miller.
10.84 Option Agreement dated as of September 30, 1996 by and among the
Registrant, ADAC Radiology Services, Inc., Medical Transition
Strategies, Inc., and Ernest Berger.
10.85 Agreement and Plan of Reorganization dated November 4, 1996 among
the Registrant, Geometrics Corporation, and the shareholders of
Geometrics Corporation.
10.86 Form of ADAC Executive Severance Agreement.
10.87 Form of ADAC HCIS Executive Severance Agreement.
10.88 Community Health Computing Corp. Stock Option Plan (1995) and
related Stock Option Agreement.
11 Computation of net income per share.
21 Subsidiaries
23 Consent of Independent Accountants.
27 Financial Data Schedule.
_______________________________________
(1) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended September 28, 1986.
(2) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-72804) filed with
the Commission on December 13, 1993.
(3) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-02747) filed with
the Commission on April 23, 1996.
(4) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended October 1, 1989.
(5) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-02749) filed with
the Commission on April 23, 1996.
(6) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended October 2, 1994.
(7) Incorporated by reference to Exhibits included with the Company's
Registration Statement on Form S-8 (file no. 33-02793) filed with
the Commission on April 23, 1996.
(8) Incorporated by reference to Exhibits filed with the Company's
Current Report of Form 8-K (file no. 0-9428), dated July 12, 1995
(being the date of the earliest event reported).
(9) Incorporated by reference to Exhibits filed with the Company's
Annual Report on Form 10-K (file no. 0-9428) for the fiscal year
ended October 1, 1995.
(10) Incorporated by reference to Exhibits filed with the Company's
Quarterly Report on Form 10-Q (file no. 0-9428) for the quarter
ended June 30, 1995.
(11) Incorporated by reference to Exhibits filed with the Company's
Current Report on Form 8-K (file no. 0-9428) dated April 22, 1996.