-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Og85ybhZMH9HTHDVg8Oz84Ct1OEJBcI7Be9WUNrYmvLhthEF6mRzlN8/lSvFk2JG s901m2s8X40HIJtDzwef2w== 0000313798-97-000004.txt : 19971230 0000313798-97-000004.hdr.sgml : 19971230 ACCESSION NUMBER: 0000313798-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAC LABORATORIES CENTRAL INDEX KEY: 0000313798 STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844] IRS NUMBER: 941725806 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09428 FILM NUMBER: 97745304 BUSINESS ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083219100 MAIL ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 10-K 1 FORM 10-K 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 28, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission file number 0-9428 ADAC LABORATORIES ---- ------------ (Exact name of registrant as specified in its charter) California 94-1725806 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 540 Alder Drive Milpitas, California 95035 -------------------- ----- (Address of principal executive offices) (Zip Code) (408) 321-9100 -------------- (Registrant's telephone number including area code) --------------------------------------------------- Securities registered pursuant to Section 12(b)of the Act: Name of each exchange Title of Each Class on which registered ------------------- --------------------- None None ---- ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock ------------ (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 ----- ----- 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. ( X ) 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 1, 1997, on the NASDAQ National Market System of $21.00 per share was approximately $388,514,448. 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 1, 1997, Registrant had outstanding 19,024,666 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 1998 Annual Meeting of Shareholders, to be filed with the Commission on or before 120 days after the end of the 1997 fiscal year, are incorporated by reference into Part III hereof. 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 conducts its business through two principal business units, Medical Systems and Healthcare Information Systems ("HCIS"). The Company's Medical Systems products include nuclear medicine systems used primarily in oncology and cardiology, and radiation therapy planning systems for oncology, as well as refurbished ADAC and third-party nuclear medicine systems. The Company's HCIS products include radiology, cardiology and laboratory information systems. In October 1996, the United States Department of Commerce awarded ADAC a Malcolm Baldrige National Quality Award in the large manufacturing category in recognition of its performance management 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 The Medical Systems business unit includes the Company's nuclear medicine and radiation therapy planning ("RTP") businesses, as well as ADAC Medical Technologies ("AMT"), the Company's medical imaging equipment refurbishing business. Medical Systems also includes customer support and field service for Medical Systems products. Medical Systems revenues represented 88%, 87% and 93% of the Company's total revenues in fiscal 1997, 1996 and 1995, respectively. Nuclear Medicine. Nuclear medicine is primarily a diagnostic imaging modality that images the function (physiology) of organs and lesions. In a typical nuclear medicine procedure, the patient is administered a small amount of a radioactive compound that localizes in normal and abnormal tissues according to the functionality of the tissue and the procedure being utilized. The patient is then imaged with a gamma camera and the images are recorded on a computer. These images may be processed further as described below. The physician uses the final images and related clinical information to evaluate the functional and metabolic performance of the portion of patient's body under examination. Nuclear medicine is used primarily for oncology and cardiology procedures, which account for approximately 70% of all nuclear medicine procedures performed. The Company believes the functional imaging capability of nuclear medicine may allow earlier diagnosis of certain diseases than anatomical imaging modalities such as magnetic resonance imaging ("MRI"), computer tomography ("CT"), and ultrasound. There are three general methods for acquiring nuclear medicine images: single photon emission computed tomography ("SPECT"), planar and total body. In SPECT imaging, the camera rotates around the patient and three dimensional images are produced. Planar or static images are acquired at a single angle relative to a patient and are similar to a "snapshot" image. In total body imaging, the camera moves along the length of the patient to form a single image of the whole body. In its nuclear medicine business, the Company designs, develops, manufactures and sells a broad line of nuclear medicine cameras and related computer systems. These systems consist primarily of a gamma camera, a computer workstation and clinical software that permits the physician to process the resulting data. In fiscal 1997, 1996 and 1995, the Company's nuclear medicine product revenues represented approximately 76%, 84% and 90% of the Company's total product revenues, respectively. The Company offers two different types of gamma cameras, single head cameras with one detector head and dual head cameras with two detector heads. Dual head cameras offer better patient throughput and higher image quality than single head cameras. The detectors on the Company's dual head camera may be fixed at either 90 or 180 degrees. In fiscal 1997, ADAC generated approximately 44% of its total product revenues from the sale of dual head cameras. All of the Company's gamma cameras are equipped with the Company's EPICTM digital detector. This innovative technology, introduced in 1994, improved the reliability and stability of the nuclear image over that achieved through the use of analog technology. In addition, the Company believes that EPIC's auto-tuning and remote diagnostics capabilities facilitate improved field service efficiency and customer satisfaction. The Company's nuclear medicine product line currently includes the following single head gamma cameras: o Single Head GenesysTM -- the Company's first single detector gamma camera that was designed for general purpose nuclear medicine studies: SPECT, total body and planar imaging. The robotics and patient ergonomics provide efficient patient handling and transition from total body to SPECT studies in oncology applications. The compact design allows installation into small rooms. o ArgusTM -- the Company's second single detector gamma camera that was designed to perform general purpose nuclear medicine studies and give added flexibility for imaging patients when they are seated or in their hospital bed. The detector orientation affords a larger imaging volume for SPECT procedures especially for cancer imaging. The Company's dual head camera product line currently includes the following: o Vertex PlusTM Epic - the Company's leading variable angle, dual head camera. The detectors may be positioned in either a 180 degree orientation for whole body or positron imaging with MCD for oncology or a 90 degree orientation for cardiology. This camera is the most efficient and flexible product offered by the Company. o SolusTM Epic - the Company's fixed 180 degree dual head camera. This camera is based on the Vertex design and was engineered especially for the oncology market. Due to the fixed angle of the detectors, this camera is less expensive than the Vertex Plus Epic but offers EPIC image quality and dual head throughput advantages for oncology imaging. o CardioTM Epic - the Company's fixed 90 degree dual head camera. This camera is also based on the Vertex design and was engineered especially for the cardiology market. Like the Solus, this camera is less expensive than the Vertex Plus Epic but also offers EPIC image quality and dual head throughput advantages for cardiology imaging. The Company also manufactures and sells the TranscamTM and Thyrus gamma cameras, which are niche cameras with a small field of view and are produced by the Company's Danish subsidiary, ADAC A/S. These cameras offer planar imaging for specific clinical diagnostic procedures. The Transcam is mobile and allows imaging to be performed in the hospital ward without moving the patient. Traditionally, gamma cameras have been used only to perform SPECT, total body, or planar studies. In June 1995, however, ADAC introduced Molecular Coincidence Detection ("MCDTM"), which is a hardware and software upgrade to the Vertex Plus Epic and Solus Epic cameras that enables these SPECT cameras to perform positron imaging. Prior to the introduction of MCD, positron imaging had been available only on expensive, dedicated positron emission tomography ("PET") imaging systems ranging in price between $1 million and $2 million. Positron imaging is a valuable diagnostic tool because of its high resolution and high accuracy in oncology, cardiology and neurology. MCD offers physicians the ability to perform positron imaging with a gamma camera 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 offers a number of other clinical hardware and software enhancements to its cameras that enable physicians to extract clinical information from nuclear medicine procedures to aid in the diagnosis of disease. The principal clinical enhancements offered by the Company, other than MCD, include the following: o Vantage ExSPECT TM -- Co-developed with Emory University, this product is offered as an upgrade to the Company's earlier VantageTM product, and corrects for image distortions created by variations in tissue density, scatter and resolution. Vantage ExSPECT is particularly useful in cardiac studies, and the Company believes it offers important advantages over cardiac ultrasound, the alternate competitive procedure. The Company received FDA 510(k) clearance for Vantage ExSPECT in August 1997. o MCD with Attenuation Correction ("MCD/AC TM") -- This product is designed to correct for attenuation when imaging with MCD and provides substantial improvements in image quality. Similar to Vantage, MCD/AC corrects for image distortions created by variations in tissue density. It is important to note that attenuation is a greater problem in positron imaging because the photons travel twice as far through the body than in traditional nuclear medicine procedures. The Company received FDA 510(k) clearance for MCD/AC in October 1997. To date, the Company is the only vendor to offer attenuation correction for coincidence imaging with a gamma camera. o AutoSPECT PlusTM -- This product allows physicians to process automatically through the use of a single button one or more cardiac SPECT, gated SPECT and Vantage SPECT data sets, and also provides manual processing capability. Automated processing offers the following advantages over manual processing: reproducible results, accurate results, reduced artifacts and processing time and increased efficiency. o Quantitave Gated SPECT ("QGS TM") -- Jointly developed with Cedars Sinai Medical Center, this software provides essential information for the detection and analysis of cardiac disease and enables physicians to study a number of different snapshots of the heart simultaneously. o Image Fusion and Review -- This product is used to align and display different images such as MCD, SPECT, PET, CT and MRI in three dimensions as composite images. Image Fusion also permits the operator to manipulate and align the images. This functionality facilitates image interpretation by a physician by combining functional and anatomical data in the same image. The Company received FDA 510(k) clearance for this product in October 1997. Radiation Therapy Planning. In its RTP business, the Company designs, develops, markets and supports turnkey radiation therapy planning systems that assist hospital radiation oncology departments and cancer treatment centers in planning patient treatments. The systems combine third-party workstations and printers with the Company's proprietary application software, Pinnacle3TM. In fiscal 1997, 1996 and 1995, revenues from the sale of RTP products represented 6%, 4% and 2%, respectively, of the Company's total product revenues. RTP's principal product, Pinnacle3TM, is a treatment planning system that includes two dimensional and three dimensional planning capabilities for external beam, brachytherapy and stereotactic radiosurgery patient treatments. Pinnacle3 `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 Pinnacle3 provides improved image processing and dose calculation methods compared to currently available products. The Company received 510(k) clearance from the FDA to market Pinnacle3 in the United States in April 1996. Pinnacle3 has also been introduced into international markets with positive results. In November 1996, the Company acquired Geometrics Corporation, the architect of the core technology included in the Company's Pinnacle3 product. Geometrics operates as the product development unit of RTP. RTP experienced significant revenue growth in fiscal 1997 due to the launch of Pinnacle3 in the United States and internationally during that period. Although the Company believes that RTP will continue to experience significant revenue growth in fiscal 1998, management does not expect that the growth rates experienced in fiscal 1997 will be sustained in fiscal 1998. ADAC Medical Technologies. In November 1995, ADAC acquired JD Technical Services, Inc., and in February 1997, acquired Photon Diagnostic Technologies, Inc., which were engaged in the multi-vendor nuclear medicine equipment refurbishing and service business. In October 1997, the Company acquired the business of Southern Cats, Inc., one of the largest independent providers of CT and X-ray equipment refurbishment and service. See Note 3 of Notes to Consolidated Financial Statements. The Company operates the multi- vendor service portion of these businesses as part of its Medical Systems service business described below, and operates the multi- vendor refurbishing and product sales business out of its subsidiary, AMT. AMT currently refurbishes and sells nuclear medicine and other imaging equipment manufactured by a number of vendors, including General Electric Company, Siemens Medical Systems, and Elscint Limited. In fiscal 1997 and 1996, the years in which AMT engaged in this business, revenues from the sale of these products represented 7% and 3% of the Company's total product revenues, respectively. Customer Support and Field Service. The Company maintains a customer support center in California, and field service forces in North America and Europe for its Medical Systems business. The Company's network of service engineers and customer support specialists provide installation, warranty, repair, training and support services. Together with its distributors, the Company services over 7,200 installed systems at over 2,800 sites worldwide, including approximately 600 systems manufactured by vendors other than ADAC. The Company generates service revenue under service contracts with ADAC and non-ADAC customers, by providing service on a time and materials basis to such customers and by offering multi- vendor service under asset management contracts with third parties. Medical Systems service revenues represented 78%, 74% and 87% of the Company's total service revenues in fiscal 1997, 1996 and 1995, respectively. Healthcare Information Systems The Company's Healthcare Information Systems business unit ("HCIS") designs, develops, markets, sells and supports integrated solutions consisting of computer equipment and software applications that offer healthcare providers the necessary tools to process and archive patient and clinical information. HCIS' revenues represented approximately 12%, 13% and 7% of the Company's total revenues in fiscal 1997, 1996 and 1995, respectively. The Company's principal HCIS products are QuadRIST, a radiology information systems products, LabStatT, a laboratory information systems product, and CorCAATT, a cardiology information system product. The QuadRIS and LabStat products are based on advanced client/server architectures, operating on an OracleTM database server and the Microsoft Windows 95TM 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. The Company acquired the rights to CorCAAT in May 1997 through the acquisition of Cortet, Inc. ("Cortet"), a developer of client- server computer systems for use in cardiac catheterization laboratories. CorCAAT is a cardiac catheterization laboratory information system that delivers comprehensive cath lab information management from a single integrated system. CorCAAT reduces costs by performing functions that previously required equipment and systems from multiple vendors and by eliminating the need for expensive and inflexible interfaces. CorCAAT simplifies the patient monitoring, inventory management, case reporting, image management and outcomes management processes by providing a single point of access to all cath lab data. The product is based on networked computing technology and standard components including Microsoft Windows NTTM, Microsoft SQL ServerTM and IntelTM-based computers. CorCAAT is currently installed at 11 sites in the United States. See "-- Government Regulation." The Company also supports a line of other more mature products, including MARS IITM, IMAGES/3000TM, RadCare rtm, MRM, RadStat rtm, and LabCareTM, which are installed in 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. The HCIS business unit generated a cumulative operating loss over the past three fiscal years of approximately $2.5 million, including a substantial operating loss in fiscal 1997, and may generate operating losses in fiscal 1998. The Company is continuing to invest in HCIS to complete the development of the current updates to its products, which the Company believes are required to maintain its competitiveness, satisfy customer needs and generate positive customer reference sites to support future sales. There can be no assurance that HCIS will not require even further investment to complete this development, or that the development can be completed in a timely manner or that these efforts will generate profits in HCIS, which could have a material adverse effect on the results of operations and financial condition of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Considerations." Other From time to time, the Company explores other opportunities for expanding its business. For example, in fiscal 1996 ADAC formed a new business unit, ADAC Radiology Services ("ARS"). ARS' business strategy 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 October 30, 1997, ARS exercised an option to acquire the business of Medical Transition Strategies, Inc. ("MTS"), which was in the business of forming and managing radiology networks. See Note 9 of Notes to Consolidated Financial Statements. To date, the results of ARS have not been material to the Company's overall results of operations. Because ARS' business strategy is still in the development stage, there can be no assurance that this strategy will be successful. 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 11 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. 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. In addition, 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 the development or commercialization of successful products or product enhancements. Research and development expenditures, net of software capitalization, totaled $15.7 million, $12.5 million and $10.1 million in fiscal 1997, 1996, and 1995, 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. From fiscal 1996 to fiscal 1997, the U.S. nuclear medicine market grew by approximately 20%. According to data provided by the National Electronics Manufacturers Association, ADAC's share of the U.S. market, based on bookings volume, was approximately 48% for fiscal 1997, which represents approximately a two percentage point decrease in market share from the prior year. During this period, however, the Company maintained its price premium of approximately 15% in the dual head market over its competitors. Given the competitiveness of the nuclear medicine business, there can be no assurance that the Company will be able to maintain its market share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Considerations." The Company believes that the key to success in its markets is to provide technologically superior products that deliver cost- effective, high quality clinical diagnosis and that 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 also must focus on solutions for the managed care environment in order to provide validated and improved clinical outcomes at lower clinical process costs. 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. Although the Company entered the laboratory information systems market in 1995, to date the Company has not generated significant sales in this market. There can be no assurance that the Company will be able to successfully penetrate the laboratory information systems market. Manufacturing and Suppliers The Company's manufacturing process includes mechanical assembly, final system integration and testing. In addition, the Company purchases certain sub-systems, including SunTM workstations, disk drives and sodium iodide crystals, 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 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 HCIS 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. In September 1996, the Medical Systems manufacturing operations in Milpitas, California were certified to the requirements of the international quality system requirements of ISO 9001. Government Regulation ADAC's Medical Systems business, as well as certain portions of its HCIS business, are regulated by the United States Food and Drug Administration. The FDA regulates the development, testing, manufacturing, packaging, labeling, distribution and marketing of medical devices under the Federal, Food, Drug and Cosmetic Act (the "FDC Act") and regulations promulgated by the FDA. The State of California (through its Department of Health Services), where the Company maintains its factory, as well as other states, also regulates the manufacture of medical devices. In general, these laws require that manufacturers adhere to certain standards designed to ensure the safety and effectiveness of medical devices. Under the FDC Act, 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 FDC Act 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 performance requirements before production, insure that device components are compatible, select adequate packaging materials, and, if appropriate, do risk analyses. The regulations took effect on June 1, 1997, but include a twelve-month transition period during which enforcement action with respect to design control requirements 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 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. In fiscal 1997, the FDA conducted an inspection at Cortet, ADAC's Winter Park, Florida, subsidiary. As a result of that inspection, the FDA issued a Warning Letter to Cortet in August 1997 concerning the adequacy of Cortet's quality assurance system. Cortet responded to the FDA's observations and Warning Letter and, in October 1997, received correspondence from the FDA's Orlando District Office indicating that Cortet's responses appeared to adequately address the FDA's concerns. Failure of the Company to resolve the issues raised by the FDA in the Cortet Warning Letter could have a material adverse effect on Cortet's business and cause fluctuations in the market price for the Company's common stock. To date, the results of operations of Cortet have not been material to the Company's overall results of operation. 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 may cause 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 generally conduct at least one clinical investigation and submit extensive supporting data and clinical information in the PMAA, which typically takes from one to two years, but sometimes longer for the FDA to review. Generally, the Company has not been required to resort to the PMAA process for approval of its products. 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 with the Company's PegasysTM computer system. Recently, the Company submitted an application for approval of the newest generation computer system, the Pegasys UltraTM. 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. Failure of the Company to comply with these requirements could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and 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 fiscal 1998. The Company is anticipating that additional costs, which may be substantial, will be incurred for compliance with the European Medical Device Directive. 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. 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 1, 1997, the Company held 32 United States patents, including several patents that have been issued covering technology incorporated into MCD, and 59 foreign patents. The Company has a total of 31 patent applications pending at various stages of completion. 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. 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 1, 1997, the Company had approximately 880 full- time employees worldwide, including 720 employed in Medical Systems and 160 in HCIS. None of the Company's employees are represented by a labor union. The Company 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 1998 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 2,844 holders of record of the Company's Common Stock on December 1, 1997. 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 by fiscal quarter.
Fiscal 1997 Fiscal 1996 Per Share Per Share ---------------------------- ---------------------------- High Low Dividend High Low Dividend -------- -------- -------- -------- -------- -------- First Quarter $ 24 1/8 $ 19 1/8 $ -- $ 12 5/8 $ 11 $0.12 Second Quarter 27 1/2 18 1/4 -- 17 5/8 11 5/8 0.12 Third Quarter 27 16 -- 22 3/4 15 3/8 0.12 Fourth Quarter 23 5/8 17 3/8 -- 25 16 0.12
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. Item 6. SELECTED CONSOLIDATED FINANCIAL DATA ADAC LABORATORIES AND SUBSIDIARIES
(Amounts in thousands, except per share data) Fiscal Year - ------------------------------------- ---------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------- ---------- ---------- ---------- ---------- ---------- Revenues $282,331 $240,785 $184,809 $176,280 $156,946 Cost of revenues 166,022 147,633 117,320 106,665 89,516 Operating expenses (1) 81,724 63,833 49,264 51,978 47,668 Other expense 4,940 3,407 1,222 6,452 242 - ------------------------------------- ---------- ---------- ---------- ---------- ---------- Income before income taxes 29,645 25,912 17,003 11,185 19,520 Provision (credit) for income taxes 12,867 9,275 5,930 (6,336) 1,461 - ------------------------------------- ---------- ---------- ---------- ---------- ---------- Net income (1) $16,778 $16,637 $11,073 $17,521 $18,059 - ------------------------------------- ========== ========== ========== ========== ========== Net income per share (1) $0.86 $0.90 $0.65 $1.06 $1.10 Number of shares used in income per share calculations 19,528 18,507 17,079 16,508 16,458 Dividends declared per share $ -- $0.48 $0.48 $0.48 $0.48 - ------------------------------------- ---------- ---------- ---------- ---------- ---------- Total assets $206,995 $186,628 $159,097 $121,603 $95,081 ===================================== ========== ========== ========== ========== ==========
(1) Operating expenses, net income and net income per share in fiscal 1997 include the effects of a one-time non-recurring, pre-tax charge of approximately $5.9 million for the write-off of in-process research and development related to the acquisition of Cortet, Inc., and certain uncompleted acquisition costs and related expenses. Excluding this charge, operating expenses, net income and net income per share for fiscal 1997 would have been $75,862, $22,515 and $1.16, respectively. 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 1997 Compared to Fiscal 1996 and Fiscal 1995 Revenues for fiscal 1997 increased 17%, or $41.5 million, over fiscal 1996 revenues of $240.8 million, which were 30% above the $184.8 million of revenues generated in fiscal 1995. Revenues are primarily generated from the sale and servicing of medical imaging products. Medical Systems revenues represented 88%, 87% and 93% of the Company's total revenues in fiscal 1997, 1996 and 1995, respectively. The Company's Healthcare Information Systems revenues represented approximately 12%, 13% and 7% of the Company's total revenues in fiscal 1997, 1996 and 1995, respectively. Gross profit for fiscal 1997 of $116.3 million increased 25%, or $23.2 million, over fiscal 1996, which increased 38%, or $25.7 million, over fiscal 1995. Medical Systems Medical Systems includes revenues from the sale of the Company's nuclear medicine, RTP and AMT products, as well as customer service related to those products. Summary information related to Medical Systems' product and service revenues and gross profit margins for fiscal 1997 compared to fiscal 1996 and 1995 is as follows:
Fiscal Year ------------------------------------------ (Dollar amounts in thousands) 1997 1996 1995 - -------------------------------- ------------ ------------ ------------ Revenues: Product $194,434 $163,032 $129,445 Service $54,953 $46,445 $41,999 Geographical mix: North America 75% 76% 73% Europe 13% 14% 16% Latin America, Japan and Asia 12% 10% 11% Gross profit margin: Product 43% 39% 37% Service 34% 33% 33%
Medical Systems' product revenues increased 26% from fiscal 1995 to fiscal 1996 and 19% from fiscal 1996 to fiscal 1997 due to continued customer acceptance of the Company's nuclear medicine, RTP and AMT products, including new product introductions and enhancement options. Product revenue growth is principally driven by the sale of higher priced dual head products and MCD. In addition, RTP experienced significant revenue growth in fiscal 1997 due to the launch of Pinnacle3 in the United States and internationally during that period. In fiscal 1997 and 1996, Medical Systems' revenues increased in dollar volume in all of the Company's geographical markets. In fiscal 1997, the growth rate was highest in the Latin America market, and in fiscal 1996, the growth rate was highest in North America. Gross profit margins for Medical Systems products increased from fiscal 1996 to fiscal 1997 primarily due to the sale of higher margin products and the elimination of certain license fees payable on the sale of RTP products in connection with the acquisition of Geometrics in November 1996, and increased from fiscal 1995 to fiscal 1996 largely due to reductions in product cost. The increase in Medical Systems' service revenues and the improvement in service gross profit margins from fiscal 1995 to fiscal 1997 resulted from an increase in the number of customers under service contracts, economies of scale related to more effective coverage of field service support costs and improved product reliability. Service revenues increased 18% in fiscal 1997 over fiscal 1996 and 11% in fiscal 1996 over fiscal 1995. The higher growth rate in fiscal 1997 primarily resulted from the acceleration of the Company's multi-vendor service business through acquisition. Healthcare Information Systems (HCIS) HCIS generates revenues from the sale of laboratory, radiology and cardiology information systems, which include hardware and software, as well as from the provision of service for these products. All of the Company's HCIS revenues are generated in North America. Summary information related to HCIS' product and service revenues and gross profit margins for fiscal 1997 compared to fiscal 1996 and fiscal 1995 is as follows:
Fiscal Year ------------------------------------------ (Dollar amounts in thousands) 1997 1996 1995 - -------------------------------- ------------ ------------ ------------ Revenues: Product $17,113 $14,582 $7,270 Service $15,547 $16,726 $6,095 Gross profit margin: Product 32% 41% 34% Service 47% 51% 50%
HCIS' product revenues increased 101% from fiscal 1995 to fiscal 1996 and 17% from fiscal 1996 to fiscal 1997. The increase from fiscal 1995 to fiscal 1996 resulted primarily from the acquisition of CHC and the release by the Company of QuadRis, a new product in its radiology information systems product line. Revenues increased in fiscal 1997 largely as a result of the introduction by the Company of CorCAAT, which the Company acquired in a merger with Cortet in May 1997. Laboratory product mix as a percentage of revenues decreased from fiscal 1996 to fiscal 1997, and laboratory product revenues declined over the course of fiscal 1997, due to continued product development delays, which slowed new sales bookings and delayed the implementation of existing contract backlog. Product gross profit margins decreased from fiscal 1996 to fiscal 1997 due to higher levels of hardware in the revenue/cost mix for laboratory and radiology sales, combined with increased laboratory implementation personnel and travel costs and increased amortization expense of capitalized software costs for all product lines. Product gross margins increased from fiscal 1995 to fiscal 1996 primarily as a result of increased product sales and efficiency gains related to the installation of these products. HCIS service revenues declined in fiscal 1997 from fiscal 1996 due principally to a deterioration in the Company's laboratory support customer base. Service revenues increased from fiscal 1995 to fiscal 1996 due to the acquisition of CHC and the expansion of the Company's installed base of laboratory and radiology customers. Service margins decreased from fiscal 1996 to fiscal 1997 due to increased third-party hardware maintenance costs associated with the Company's laboratory product, together with an increase in radiology and laboratory client support costs. Service margins increased slightly from fiscal 1995 to fiscal 1996 due to efficiency gains. Operating and Other Expenses As a percentage of Company's revenue, operating and other expense, net, for fiscal 1997, 1996 and 1995 were as follows:
Fiscal Year ------------------------------------------ 1997 1996 1995 - -------------------------------- ------------ ------------ ------------ Operating expenses: Marketing and sales 15.0% 15.1% 16.2% Research and development, net of software capitalization 5.6% 5.2% 5.5% General and administrative 6.0% 5.9% 4.9% Goodwill amortization 0.3% 0.3% 0.1% In-process research and development and acquisition expenses 2.1% 0.0% 0.0% ------------ ------------ ------------ 29.0% 26.5% 26.7% ============ ============ ============ Other expense, net 1.8% 1.4% 0.7%
Marketing and sales expenses decreased as a percentage of revenue from fiscal 1995 to fiscal 1996 and remained essentially constant as a percentage of revenue from fiscal 1996 to fiscal 1997. The decline from fiscal 1995 to fiscal 1996 period resulted from certain cost reduction efforts implemented by the Company in fiscal 1996. Research and development expenditures, net of software capitalization, totaled $15.7 million, $12.5 million and $10.1 million in fiscal 1997, 1996, and 1995, respectively. Research and development expenses, on both a gross and net basis, increased as a percentage of revenue from fiscal 1996 to fiscal 1997. The increase resulted primarily from additional investments made by the Company to accelerate the development of the Company's laboratory product and to maintain and enhance the Company's radiology product. Research and development expenditures, net of software capitalization, increased by $2.4 million from fiscal 1995 to fiscal 1996 as a result of increased expenditures for new product introductions and product enhancements, while research and development expenditures, net, decreased slightly as a percentage of revenue over the same period. Capitalized software costs were $5.5 million $3.5 million and $2.0 million in fiscal 1997, 1996, and 1995, respectively. General and administrative expenses remained essentially constant as a percentage of revenue from fiscal 1996 to fiscal 1997. General and administrative expenses increased from fiscal 1995 to fiscal 1996 as a percentage of revenue primarily due to increased labor costs resulting from the acquisitions of J.D. Technical, a refurbisher of nuclear medicine imaging equipment, and CHC. Goodwill amortization remained flat as a percentage of revenue from fiscal 1996 to fiscal 1997. Goodwill amortization increased from fiscal 1995 to fiscal 1996 as a result of the amortization of expenses associated with the CHC acquisition in late fiscal 1995. In fiscal 1997, the Company recognized a $5.9 million one-time, pre-tax charge for in-process research and development related to the purchase of Cortet and certain uncompleted acquisition costs and related expenses. This charge represents 2% of the Company's total revenue for fiscal 1997. Other expense, net, which primarily consists of interest expense and foreign currency transaction gains and losses, increased slightly as a percentage of revenue from fiscal 1996 to fiscal 1997. Other expense, net, increased from fiscal 1995 to fiscal 1996 due to the Company's increased level of bank borrowings during fiscal 1996. Income Taxes The effective tax rate as a percentage of pretax income was 43% compared to 36% in fiscal 1996. This increase for fiscal 1997 resulted primarily from certain non-tax deductible items relating to the acquisition of Cortet. Fiscal 1996's effective tax rate as a percentage of pretax income was 36% compared to 35% in fiscal 1995. This increase resulted from 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 11 of Notes to Consolidated Financial Statements. Inflation The Company does not believe that inflation has had a material effect on its results of operations. Liquidity and Capital Resources The Company believes its available cash resources, generated primarily from operations, lease discounting and credit lines will provide adequate funds to finance the Company's operations in fiscal 1998. The Company's financial condition strengthened from fiscal 1996 to fiscal 1997. The Company's ratio of current assets to current liabilities improved to 2.3 to one at September 28, 1997 from 1.7 to one at September 29, 1996. Working capital increased $22.2 million to $76.5 million in fiscal 1997 from $54.3 million in fiscal 1996. Cash and cash equivalents for fiscal 1997 increased by $2.0 million compared to a decrease of $4.5 million for fiscal 1996. This increase resulted from higher revenues, lower inventory and prepaid inventory, increased stock option exercises and the elimination of the Company's dividend. The primary uses of cash during fiscal 1997 were for (i) an increase in accounts receivable; (ii) a decrease in accounts payable; (iii) capital expenditures; (iv) an increase in capitalized software costs; and (v) a reduction in long-term debt. The increase in accounts receivable resulted from higher revenues, the lengthening of customer payment terms to meet competitive conditions, and an increase in international business, as well as delays in product installations and implementations due to customer site preparation and other factors. Accounts payable decreased due to a reduction of raw material purchases as a result of factory efficiency programs and a change in the timing of payments, which were partially offset by an increase in expenses related to the volume of business. Cash used for investing activities in fiscal 1997 of $11.8 million consisted of capital expenditures for office, manufacturing and research and development equipment and capitalized software research and development costs in both the Medical Systems and HCIS business units. Financing activities provided $1.6 million in cash in fiscal 1997. This was primarily attributable to common stock issued to employees under the Company's employee stock option and stock purchase plans and the discontinuance of the dividend payment. These items were partially offset by a reduction in bank loans during fiscal 1997, which reduced the outstanding borrowings under the Company's lines of credit to $22.2 million at September 28, 1997 from $27.2 million September 29, 1996, See Note 4 of Notes to Consolidated Financial Statements. The Company's liquidity is affected by many factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash 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 changing business conditions or to pursue new business opportunities. There can be no assurance that such additional sources of capital will be available on terms favorable to the Company, if at all. 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 13 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. Healthcare Information Systems The HCIS business unit has generated a cumulative operating loss over the past three years, including a substantial operating loss in fiscal 1997, and may generate operating losses in fiscal 1998. The Company is continuing to invest in HCIS to complete the development of the current updates to its products, which the Company believes are required to maintain its competitiveness, satisfy customer needs and generate positive customer reference sites to support future sales. There can be no assurance that HCIS will not require even further investment to complete this development or that the development can be completed in a timely manner or that these efforts will generate profits in HCIS, which could have a material adverse effect on the results of operations and financial condition of the Company. Competition The markets served by the Company are characterized by rapidly evolving technology, intense competition and pricing pressure. There are a number of companies that currently offer, or are in the process of developing, products that compete with products offered by the Company. Some of the Company's competitors have substantially greater capital, engineering, manufacturing and other resources than the Company. These competitors could develop technologies and products that are more effective than those currently used or marketed by the Company or that could render the Company's products obsolete or noncompetitive. In fiscal 1997 the introduction by certain of the Company's competitors of new products resulted in a decrease in the Company's market share for that year. In the future, these products may continue to have an adverse effect on the Company's market share. Dependence on Development and Commercialization of New Products and Product Enhancements ADAC's success is dependent upon the successful development, introduction and commercialization of new products and the development of enhancements to existing products. Because the nuclear medicine market is relatively mature, and from time to time in recent years has experienced a decline, the Company must continue to develop and successfully commercialize innovative new products and product enhancements such as MCD, and the current updates to the Company's products in order to pursue its growth strategy. Failure of the Company to market and sell its products effectively in future periods could have a material adverse effect on the Company's results of operations. The development of new products and product enhancements entails considerable time and expense, including research and development costs, and the time, expense and uncertainty involved in obtaining any necessary regulatory clearances. The success of MCD depends on a number of factors, including the commercial availability of, fleuro-deoxy-glucose ("FDG"). At this time, the infrastructure for the commercial supply of FDG is not well developed. In addition, although reimbursement has been approved locally by certain private payors and local Medicare offices, widespread reimbursement by Medicare and private payors for the use of FDG in connection with MCD remains uncertain. Continued uncertainty over reimbursement for the use of MCD could have an adverse effect on sales of MCD, which could have a material adverse effect on the Company's results of operations. 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. In addition, a failure to comply with FDA requirements relating to medical device testing, manufacture, packaging, labeling, distribution, promotion, record keeping, and reporting of adverse events could result in enforcement actions including Warning Letters, such as the one issued to Cortet in August 1997, as well as 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. Failure of the Company to address adequately the concerns raised by the FDA in the Cortet Warning Letter could have a material adverse effect on Cortet's business and cause fluctuations in the market price for the Company's common stock. The Company is also subject to FTC restrictions on advertising and 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. 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 in recent periods, the Company's bookings and backlog cannot necessarily be relied upon as an accurate predictor of future revenues as the timing of such revenues is dependent upon completion of customer site preparation and construction, installation scheduling, receipt of applicable regulatory approvals, and other factors. Accordingly, there can be no assurance that the orders will mature into revenue. Risks Related to Acquisitions In the past fiscal year, the Company has acquired a number of small businesses, and anticipates that it may continue to acquire businesses whose products and services complement the Company's business. Acquisitions involve numerous risks, including, among other things, difficulties in successfully integrating the businesses (including products and services, as well as sales and marketing efforts), failure to retain existing customers of or attract new customers to the acquired business operations, failure to retain key technical and management personnel, coordinating geographically separated organizations, and diversion of ADAC management attention. These risks, as well as liabilities of any acquired business (whether known or unknown at the time of acquisition), could have a material adverse effect on the results of operations and financial condition of the Company, including adverse short-term effects on its reported operating results. The Company seeks to mitigate these risks by taking reserves when appropriate in connection with these acquisitions. In addition, the Company has in the past and may in the future issue stock as consideration for acquisitions. Future sales of shares of the Company's stock issued in such acquisitions could adversely affect or cause fluctuations in the market price of the Company's Common Stock. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from 20th century dates. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. As a result, in two years, computer systems and/or software used by many companies may need to be upgraded to comply with such Year 2000 requirements. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test its internal systems, for Year 2000 compliance. Management has not yet assessed the year 2000 compliance expense and related potential effect on the Company's earnings. In addition, the Company is currently seeking to ensure that the software included in its nuclear medicine, healthcare information and other systems is Year 2000 compliant. Failure (or perceived failure) of such products to be Year 2000 compliant could significantly adversely affect sales of such products, which could have a material adverse effect on the Company's results of operations and financial condition. In addition, the Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many potential customers may choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industries in which the Company competes. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for the Company's products. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers, to reevaluate their current system needs, and as a result consider switching to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. 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. Intellectual Property Rights The Company's success depends in part on its continued ability to obtain patents, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. There can be no assurance that pending patent applications will mature into issued patents or that third parties will not make claims of infringement against the Company's products or technologies or will not be issued patents that may require payment of license fees by the Company or prevent the sale of certain products by the Company. Reliance on Suppliers Certain components used by the Company to manufacture its products such as 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 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA ADAC LABORATORIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands, except per share data)
Fiscal Year Ended - -------------------------------- ------------------------------------------ September 28, September 29, October 1, 1997 1996 1995 - -------------------------------- ------------ ------------ ------------ REVENUES, NET: Product $211,831 $177,613 $136,715 Service 70,500 63,172 48,094 - -------------------------------- ------------ ------------ ------------ 282,331 240,785 184,809 ------------ ------------ ------------ COST OF REVENUES: Product 121,766 108,091 85,914 Service 44,256 39,542 31,406 ------------ ------------ ------------ 166,022 147,633 117,320 ------------ ------------ ------------ Gross profit 116,309 93,152 67,489 - -------------------------------- ------------ ------------ ------------ OPERATING EXPENSES: Marketing and sales 42,445 36,275 29,928 Research and development 15,693 12,516 10,081 General and administrative 16,932 14,250 9,081 Goodwill amortization 792 792 174 In-process research and development and acquisition expenses 5,862 -- -- ------------ ------------ ------------ 81,724 63,833 49,264 - -------------------------------- ------------ ------------ ------------ Operating income 34,585 29,319 18,225 OTHER EXPENSE: Interest and other, net 4,940 3,407 1,222 - -------------------------------- ------------ ------------ ------------ 4,940 3,407 1,222 ------------ ------------ ------------ Income before provision for income taxes 29,645 25,912 17,003 Provision (credit) for income taxes 12,867 9,275 5,930 - -------------------------------- ------------ ------------ ------------ Net income $16,778 $16,637 $11,073 - -------------------------------- ============ ============ ============ Net income per share $0.86 $0.90 $0.65 ============ ============ ============ Number of shares used in per share calculations 19,528 18,507 17,079 - -------------------------------- ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. ADAC LABORATORIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (amounts in thousands)
September 28, September 29, 1997 1996 - -------------------------------------------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $5,088 $3,081 Accounts receivable, net of allowance for returns and doubtful accounts of $2,386 in 1997 and $2,146 in 1996 99,495 80,654 Inventories 27,534 31,975 Prepaid expenses and other current assets 10,155 11,027 - -------------------------------------------------- ------------ ------------ Total current assets 142,272 126,737 - -------------------------------------------------- ------------ ------------ Service parts, net 17,278 15,482 Fixed assets, net 11,555 8,393 Capitalized software, net 14,007 11,656 Goodwill, net 10,110 10,901 Deferred income taxes 8,249 8,095 Other assets, net 3,524 5,364 - -------------------------------------------------- ------------ ------------ Total Assets $206,995 $186,628 - -------------------------------------------------- ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable to banks $22,217 $27,226 Accounts payable 10,543 13,923 Dividends payable -- 2,137 Deferred revenues 11,561 13,302 Customer deposits and advance billings 2,841 2,302 Accrued compensation 7,522 7,825 Other accrued liabilities 11,115 13,797 - -------------------------------------------------- ------------ ------------ Total current liabilities 65,799 80,512 - -------------------------------------------------- ------------ ------------ Non-current deferred income taxes 11,103 2,275 Non-current liabilities and deferred credits 3,596 4,370 - -------------------------------------------------- ------------ ------------ Total Liabilities 80,498 87,157 - -------------------------------------------------- ------------ ------------ Commitments and contingencies (Note 5) - -------------------------------------------------- SHAREHOLDERS' EQUITY - -------------------------------------------------- Preferred stock, no par value: Authorized: 5,000 shares; Issued and outstanding: none in 1997 and 1996 Common stock, no par value: Authorized: 50,000 shares; Issued and outstanding: 18,812 shares as of September 28, 1997 and 17,781 shares as of September 29, 1996, respectively 123,269 110,661 Retained earnings (accumulated deficit) 5,593 (10,172) Translation adjustment (2,365) (1,018) - -------------------------------------------------- ------------ ------------ Shareholders' Equity 126,497 99,471 - -------------------------------------------------- ------------ ------------ Total Liabilities and Shareholders' Equity $206,995 $186,628 - -------------------------------------------------- ============ ============
The accompanying notes are an integral part of these consolidated financial statements. ADAC LABORATORIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)
Fiscal Year Ended - --------------------------------------- ----------------------------------------- September 28, September 29, October 1, 1997 1996 1995 - --------------------------------------- ------------- ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $16,778 $16,637 $11,073 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,191 9,035 6,377 Provision for product returns and doubtful accounts 3,558 1,482 1,502 Deferred income taxes 8,413 4,912 4,145 Inventory allowance 1,008 1,099 (1,805) In-process research and development and acquisition expenses 5,862 -- -- Changes in operating assets and liabilities: Accounts receivable (22,589) (27,089) (8,966) Inventories 3,452 (4,857) (3,471) Prepaid expenses and other current assets 882 (5,512) (2,763) Service parts (3,816) (3,712) (1,971) Accounts and dividends payable (3,419) 886 (3,109) Deferred revenues (1,895) (204) 7,059 Customer deposits and advance billings 539 (1,899) (3,135) Accrued compensation (383) 1,490 508 Other accrued liabilities (2,928) (15) (1,114) Non-current liabilities and deferred credits (2,068) 116 875 - --------------------------------------- ------------- ------------- ----------- Net cash provided by (used in) operating activities 13,585 (7,631) 5,205 - --------------------------------------- ------------- ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (6,166) (2,789) (2,588) Proceeds from sale and leaseback of fixed assets -- -- 1,553 Increase in other assets (5,860) (2,467) (2,997) Acquisition of CHC, net of cash acquired -- -- (16,152) Cash received upon acquisition of Cortet 229 - --------------------------------------- ------------- ------------- ----------- Net cash used in investing activities (11,797) (5,256) (20,184) - --------------------------------------- ------------- ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under short-term debt arrangements, net (5,009) 8,928 18,298 Proceeds from issuance and repurchase of common stock, net 8,712 9,589 3,986 Dividends paid (2,137) (8,400) (7,885) - --------------------------------------- ------------- ------------- ----------- Net cash provided by financing activities 1,566 10,117 14,399 - --------------------------------------- ------------- ------------- ----------- Effect of exchange rates on cash (1,347) (1,700) 928 - --------------------------------------- ------------- ------------- ----------- Net change in cash and cash equivalents 2,007 (4,470) 348 Cash and cash equivalents, at beginning of the year 3,081 7,551 7,203 - --------------------------------------- ------------- ------------- ----------- Cash and cash equivalents, at end of the year $5,088 $3,081 $7,551 - --------------------------------------- ============= ============= =========== SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid $3,835 $3,325 $1,609 Income taxes paid 4,185 442 289 Noncash investing activities: Issuance of common stock pursuant to the acquisitions of Geometrics, Photon and Cortet (see Note 3).
The accompanying notes are an integral part of these consolidated financial statements. ADAC LABORATORIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (amounts in thousands, except per share data)
Retained Common Stock Earnings Total - --------------------------------------- -------------------- (Accumulated Translation Shareholders' Shares Amount Deficit) Adjustment Equity - --------------------------------------- --------- --------- ------------ ------------- ------------ 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 Employee stock purchases and exercises of employee stock options 623 6,063 -- -- 6,063 Shares sold under dividend reinvestment plan 38 776 -- -- 776 Shares withheld in payment of stock options exercised (37) (794) -- -- (794) Income tax benefit resulting from exercises of stock options -- 2,666 -- -- 2,666 Pooling of interest with Geometrics and Photon 248 -- (1,013) -- (1,013) Acquisition of Cortet 159 3,897 -- -- 3,897 Translation adjustment -- -- -- (1,347) (1,347) Net income -- -- 16,778 -- 16,778 - --------------------------------------- --------- --------- ------------ ------------- ------------ Balances, September 28, 1997 18,812 $123,269 $5,593 ($2,365) $126,497 - --------------------------------------- ========= ========= ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements. ADAC LABORATORIES AND SUBSIDIARIES 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 1997, 1996 and 1995 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 other expense, net, in the consolidated statements of income, and amounted to losses of $0.6 million, $0.1 million, and $0.2 million in fiscal 1997, 1996, and 1995, respectively. Revenue Recognition Revenues related to the Company's Medical Systems business unit product sales are recognized upon shipment to the customer or to the location requested by the customer, 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 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 1997, 1996, and 1995 amounted to approximately $5.5 million, $3.4 million, and $2.0 million, respectively. Additionally, $5.8 million of capitalized software was acquired through the acquisition of Community Health Computing Corporation during fiscal 1995. Amortization of capitalized software costs during the fiscal years 1997, 1996 and 1995 amounting to approximately $3.2 million, $2.1 million and $1.2 million, 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. Note 2 Balance Sheet Detail: ($000) 1997 1996 - ------------------------------------------------ ---------- ---------- Inventories consist of: Purchased parts and sub-assemblies $14,327 $16,000 Work in process 3,175 5,057 Finished goods 10,032 10,918 ---------- ---------- $27,534 $31,975 ========== ========== ($000) 1997 1996 - ------------------------------------------------ ---------- ---------- Service parts consist of: Field service parts, at cost $24,653 $22,183 Less accumulated depreciation (7,375) (6,701) ---------- ---------- $17,278 $15,482 ========== ========== ($000) 1997 1996 - ------------------------------------------------ ---------- ---------- Fixed assets, at cost, consist of: Production and test equipment $9,144 $7,227 Field service equipment 2,443 2,374 Office and demonstration equipment 16,932 12,782 Leasehold improvements 1,181 1,112 ---------- ---------- 29,700 23,495 Less accumulated depreciation and amortization (18,145) (15,102) ---------- ---------- $11,555 $8,393 ========== ========== ($000) 1997 1996 - ------------------------------------------------ ---------- ---------- Other accrued liabilities consist of: Accrued customer service costs $4,495 $3,663 Other accrued expenses 6,620 10,134 ---------- ---------- $11,115 $13,797 ========== ========== ($000) 1997 1996 - ------------------------------------------------ ---------- ---------- Non-current liabilities and deferred credits consist of: Deferred contract revenue $1,185 $2,185 Deferred gain on sale of fixed assets 688 1,329 Other non-current liabilities 1,723 856 ---------- ---------- $3,596 $4,370 ========== ========== Note 3 Acquisitions On May 22, 1997, the Company acquired Cortet, Inc. (Cortet), of Winter Park, Florida, in exchange for 159,087 shares of the Company's common stock valued at approximately $3.9 million and the assumption of certain closing costs and related expenses. Cortet is a developer of client- server information systems for use in cardiac catheterization laboratories. The acquisition was accounted for using the purchase method of accounting and the results of Cortet have been included in the Company's consolidated financial statements subsequent to May 22, 1997. In connection with the acquisition, the Company recognized a one-time, pre-tax charge to operations of $5.9 million for charges related to the purchase of in-process research and development and certain uncompleted acquisition costs and related expenses. On February 19, 1997, the Company acquired Photon Diagnostic Technologies, Inc. (Photon), of Miami, Florida, in exchange for 57,143 shares of the Company's common stock valued at approximately $1.5 million. Photon refurbishes, services and supports Elscint nuclear medicine imaging systems. The acquisition has been accounted for as a pooling of interests. Prior period financial statements have not been restated because Photon is not material to the financial position or results of operations of the Company. On November 4, 1996, the Company acquired Geometrics Corporation (Geometrics), of Madison, Wisconsin, a developer of specialized medical software used in the planning of radiation therapy treatments for cancer patients, in exchange for 190,561 shares of the Company's common stock valued at approximately $3.9 million. The acquisition has been accounted for as a pooling of interests. Prior period financial statements have not been restated because Geometrics is not material to the financial position or results of operations of the Company. On November 9, 1995, the Company acquired JD Technical Services, Inc., of Washington, Missouri, a leader in nuclear medicine imaging systems refurbishing, as well as a nationwide provider of multivendor service and support, in exchange for 138,301 shares of the Company's common stock valued at $1.7 million. 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 Corp. (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. Note 4 Credit and Borrowing Arrangements The Company has a $100 million revolving credit facility with a bank syndicate. The credit facility offers borrowings in either U.S. dollars or in foreign currencies and expires July 30, 1999. The Company pays interest and commitment fees on its borrowings based on its debt level in relation to its cash flow. Commitment fees range from 0.25% to 0.475% of unused commitment and interest rates are based on the bank's prime rate or Libor plus rates ranging from 0.875% to 1.5%. Borrowings are generally repaid within 90 days. At September 28, 1997, the Company had $77.8 million 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 other companies and to incur additional debt. Additional information with respect to such revolving lines of credit is as follows: ($000) 1997 1996 - ------------------------------------------------ ---------- ---------- Maximum borrowings during the year $55,650 $49,700 Average borrowings during the year $39,645 33,177 Weighted average interest rates during the year 6.62% 6.79% - ------------------------------------------------ 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 $0.6 million for total proceeds of $0.8 million. The gain on the transaction will be recognized over the five year term of the operating lease. As of September 28, 1997, future annual minimum lease payments for all non cancelable operating leases are as follows: Fiscal Year ($000) Building Equipment - ------------------------------------------------ ---------- ---------- 1998 $3,001 $2,035 1999 1,611 3,053 2000 1,006 240 2001 955 6 2002 795 5 Thereafter 66 -- ---------- ---------- Total minimum lease payments $7,434 $5,339 ========== ========== Rent expense totaled $5.9 million, $4.9 million, and $4.3 million for fiscal years 1997, 1996 and 1995, respectively. Capital Leases During fiscal 1997, the Company entered into three capital leases all with terms of three years. In 1995, the Company entered into three capital leases both with terms of five years. Under these agreements, certain leased fixed assets are pledged as collateral. As of September 28, 1997, future annual minimum lease payments under these capital leases are as follows: Capital Fiscal Year ($000) Leases - ------------------------------------------------ ---------- 1998 $248 1999 248 2000 82 2001 -- Thereafter -- ---------- Total minimum lease payments 578 Amount representing interest (65) ---------- Present value of net minimum lease payments 513 Less current portion (205) ---------- $308 ========== Payments under these capital lease obligations totaled $0.2 million, $0.2 million and $0.1 million in fiscal 1997, 1996 and 1995, respectively. As of September 28, 1997, the Company had $0.9 million of equipment under capital leases with accumulated amortization of $0.4 million. Litigation The Company is a defendant in various legal proceedings incidental to its business. While it is not possible to determine the ultimate outcome of these actions at this time, management is of the opinion that any unaccrued liability resulting from these claims would not have a material adverse effect on the Company's consolidated financial position or results of operations. Other Under third party lease program agreements, the Company is contingently liable for losses in the event of default by lessees, up to a specified 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 28, 1997 the contingent liability was $2.9 million. In conjunction with its third party financing and lease programs, the Company sells certain receivables with recourse. The amount of recourse on outstanding receivables ranges from 10% to 100% of the receivable. Receivables are currently being sold by the Company with recourse ranging from 0 to 10%. Proceeds from receivables sold totaled 29.8 million and 21.5 million in fiscal 1997 and 1996, respectively. As of September 28, 1997 the contingent liability was $12.3 million. 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 fiscal 1997 and 1995 the Board of Directors approved the issuance of warrants to purchase up to 24,000 and 60,000 shares of common stock, respectively, to a consulting firm as partial compensation for services rendered and to be rendered. The exercise price for these warrants are $22.00 and $11.88, respectively. The warrants were issued proportionately as services were performed. At September 28, 1997, all of these warrants were outstanding. As of September 28, 1997, the Company has reserved a total of 3,706,000 shares of common stock for issuance under employee stock option plans and 89,855 under the employee stock purchase plan discussed in Note 7. Note 7 Stock Plans Stock Option Plans The Company currently has one stock option plan for employees and consultants under which options may be granted, the 1992 Stock Option Plan, as amended. The 1992 Option Plan allows 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 plan, 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 of grant at an option exercise price equal to 100% of fair market value. A summary of the activity under these plans is as follows:
1997 1996 1995 ------------------- ------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Shares in thousands) Options Price Options Price Options Price - --------------------------------- --------- --------- --------- --------- --------- ---------- Outstanding, beginning of year 2,826 $11.09 2,516 $8.30 2,557 $7.05 Granted 966 17.12 1,160 15.24 1,073 8.47 Exercised (564) 9.23 (549) 7.91 (879) 5.03 Cancelled (160) 14.59 (301) 9.15 (235) 7.85 --------- --------- --------- Outstanding, end of year 3,068 13.09 2,826 11.09 2,516 8.30 ========= ========= ========= Options exercisable at end of year 1,064 10.62 631 9.01 685 8.64 ========= ========= ========= Options available for grant at end of year 638 653 469 ========= ========= =========
The following table summarizes information about stock options outstanding as of September 28, 1997:
Options Outstanding Options Exercisable ------------------------------------ ------------------------ Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Outstanding Price - ----------------- ------------ ----------- ----------- ------------ ----------- $ 6.38 to $ 6.38 384,500 1.87 $6.38 384,500 $6.38 7.75 to 7.86 47,165 5.67 7.83 21,915 7.78 8.00 to 8.00 538,000 7.26 8.00 176,250 8.00 8.38 to 12.13 325,379 5.22 11.57 170,379 11.65 14.25 to 15.75 45,334 0.69 14.91 45,334 14.91 15.88 to 15.88 730,250 8.60 15.88 158,725 15.88 16.00 to 16.00 654,600 9.57 16.00 -- -- 16.50 to 19.50 300,200 7.52 18.61 82,975 18.56 21.88 to 21.88 19,000 9.05 21.88 -- -- 22.63 to 22.63 24,000 4.60 22.63 24,000 22.63 ------------ ------------ $ 6.38 to $22.63 3,068,428 7.07 $13.09 1,064,078 $10.62 ============ ============
In fiscal 1997, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 - Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 15, 1995 and provides, among other things, that companies may elect to account for employee stock options using a fair value-based method or continue to apply the intrinsic value-based method prescribed by Accounting Principal Board Opinion No. 25 ("APB 25"). Under the fair value-based method prescribed by SFAS 123, all employee stock options grants are considered compensatory. Compensation cost is measured at the date of grant based on the estimated fair value of the options determined using an option pricing model. The model takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the stock, expected dividends on the stock and the risk-free interest rate over the expected life of the option. Under APB 25, generally only stock options that have intrinsic value at the date of grant are considered compensatory. Intrinsic value represents the excess, if any, of the market price of the stock at the grant date over the exercise price of the options. Under both methods, compensation cost is charged to earnings over the period the options become exercisable. As permitted by SFAS 123, the Company has elected to continue to apply the intrinsic value-based method for employee stock options. Accordingly, no material compensation cost has been recognized. The following table discloses the Company's pro forma net income and net income per share assuming compensation costs for employee stock options had been determined using the Black-Scholes option-pricing model with the following assumptions: (i) no dividends, (ii) expected volatility of 55% for both years, (iii) risk free interest rate of 6.16% and 6.23% for fiscal 1997 and 1996, respectively, (iv) and expected lives of 2 years. 1997 1996 ----------- ----------- Net income: ($000) As reported $16,778 $16,637 Pro forma 14,382 15,831 Net income per share: As reported $0.86 $0.90 Pro forma 0.74 0.86 Because the accounting method prescribed by SFAS 123 is not applicable to options granted prior to October 3, 1995, the compensation cost reflected in the pro forma amounts shown above may not be representative of the amounts to be expected in future years. 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 1997, 1996, and 1995, 56,000, 64,000 and 58,000 shares were issued at an average price of $15.05, $10.94, and $7.21 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 1997 and 1996, the Company matched employee contributions up to a maximum of $500 per employee, totaling $0.3 million and $0.2 million respectively. Prior to fiscal 1996, no matching contributions had been made. Note 9 Subsequent Events On October 30, 1997, one of the Company's subsidiaries, ADAC Radiology Services, Inc. (ARS), exercised an option to purchase Medical Transition Strategies, Inc. (MTS). MTS is in the business of forming and managing radiology networks. ARS acquired the option in September 1996 in exchange for the payment of $0.5 million in cash and $1.0 million payable over five years. The exercise price equals $50,000 per validated network under management plus a percentage of each validated network's net revenue in calendar year 1998. The Company does not believe the amount of the exercise price will be material. The operations of MTS were not material to the financial position or the results of operations of the Company at the time of acquisition. Note 10 Income Taxes Income tax expense consists of: ($000) 1997 1996 1995 - ---------------------------------------- --------- --------- --------- Current: Federal $2,420 $409 $267 Foreign 477 384 -- State 1,296 458 571 - ---------------------------------------- --------- --------- --------- 4,193 1,251 838 --------- --------- --------- Deferred: Federal 8,272 7,538 4,904 State 402 486 188 - ---------------------------------------- --------- --------- --------- 8,674 8,024 5,092 --------- --------- --------- Total $12,867 $9,275 $5,930 - ---------------------------------------- ========= ========= ========= The reconciliation of the provision for income taxes, computed at the marginal federal statutory income tax rate, to the reported amounts is as follows: ($000) 1997 1996 1995 - ---------------------------------------- --------- --------- --------- Income taxes computed at marginal statutory rate of 35% $10,375 $9,069 $5,951 State income taxes, net of federal benefit 1,201 649 493 Non-deductible acquisition costs 1,824 -- -- Change in valuation allowance (704) (844) (980) Business credits (462) (160) (196) Other 633 561 662 - ---------------------------------------- --------- --------- --------- Provision for income taxes $12,867 $9,275 $5,930 - ---------------------------------------- ========= ========= ========= As of September 28, 1997, the Company had net operating loss carryforwards of approximately $30.8 million available to offset future federal taxable income and approximately $5.9 million available to offset future taxable income in various foreign jurisdictions. Federal operating loss carryforwards of $9.2 million expire in fiscal year 2001, federal operating loss carryforwards of $21.6 million expire 2006 to 2010, and foreign operating loss carryforwards expire beginning in fiscal year 1998. The federal operating loss carryforwards expiring 2006 to 2010 are subject to certain restrictions on their utilization. The Company also has federal credit carryforwards of $1.5 million which are not subject to expiration. Significant components of the Company's deferred tax assets and liabilities at September 28, 1997 and September 29, 1996 are as follows: ($000) 1997 1996 - ---------------------------------------- --------- --------- Deferred income tax assets: Net operating loss carryforwards $13,366 $17,082 Federal credit carryforwards 1,518 5,907 Inventory valuation 1,740 1,683 Employee benefits 901 751 Accrued customer service costs 1,036 842 Receivable valuation 704 789 Deferred income 454 914 Other 1,424 787 - --------------------------------------------------- --------- --------- 21,143 28,755 Less valuation allowance (12,894) (13,598) - --------------------------------------------------- --------- --------- Deferred income tax assets 8,249 15,157 - --------------------------------------------------- --------- --------- Deferred income tax liabilities: Fixed assets 5,780 3,426 Software development costs 5,195 4,873 Leases -- 1,038 Other 128 -- - --------------------------------------------------- --------- --------- Deferred income tax liabilities 11,103 9,337 - --------------------------------------------------- --------- --------- Net deferred income tax assets (liability) ($2,854) $5,820 - --------------------------------------------------- ========= ========= The valuation allowance identified above relates to net operating loss carryforwards of certain foreign and domestic subsidiaries. Approximately $10.3 million of the valuation allowance when reduced will be credited to goodwill in accordance with SFAS 109. Note 11 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 fiscal 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 1997 ($000) MS HCIS Other Total - ---------------------------------- --------- --------- --------- --------- Revenues $249,387 $32,660 $284 $282,331 Operating income (loss) (1) 42,879 (7,798) (496) 34,585 Depreciation and amortization 5,804 4,387 -- 10,191 Capital expenditures 4,301 1,865 -- 6,166 Total assets 169,478 35,999 1,518 206,995 - ---------------------------------- --------- --------- --------- --------- (1) Operating loss for HCIS include the effects of a one-time, non-recurring pre-tax charge of approximately $5.9 million for the write-off of in-process research and development related to the acquisition of Cortet, Inc., and certain uncompleted acquisition costs and related expenses. Excluding this charge, operating loss for HCIS was $1.9 million. Fiscal 1996 ($000) MS HCIS Other Total - ---------------------------------- --------- --------- --------- --------- Revenues $209,477 $31,308 $ -- $240,785 Operating income 28,765 554 -- 29,319 Depreciation and amortization 5,650 3,385 -- 9,035 Capital expenditures 2,022 767 -- 2,789 Total assets 151,417 35,181 -- 186,598 - ---------------------------------- --------- --------- --------- --------- Fiscal 1995 ($000) MS HCIS Other Total - ---------------------------------- --------- --------- --------- --------- Revenues $171,444 $13,365 $ -- $184,809 Operating income 19,288 (1,063) -- 18,225 Depreciation and amortization 5,403 974 -- 6,377 Capital expenditures 2,438 150 -- 2,588 Total assets 137,677 21,420 -- 159,097 - ---------------------------------- --------- --------- --------- --------- 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: Fiscal Year ------------------------------- ($000) 1997 1996 1995 - ---------------------------------- --------- --------- --------- Revenues $32,308 $30,475 $27,282 Net income (loss) 397 419 (320) Total assets 28,347 29,335 23,315 - ---------------------------------- --------- --------- --------- The Company also has a subsidiary in Brazil and certain operations in Latin America and Asia, none of which are material to the financial position or results of operations of the Company. Note 12 Quarterly Results of Operations (unaudited): ($000) First Second Third Fourth except per share data Quarter Quarter Quarter Quarter - ---------------------- --------- --------- --------- --------- FISCAL 1997 - ---------------------- Revenues $68,365 $69,976 $71,510 $72,480 Gross profit 27,527 28,989 29,669 30,124 Net income 5,093 5,552 106 (1) 6,027 Net income per share $0.27 $0.29 $0.01 (1) $0.31 FISCAL 1996 - ---------------------- 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 $0.20 $0.22 $0.24 $0.26 FISCAL 1995 - ---------------------- 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 $0.15 $0.17 $0.18 $0.16 (1) Net income and net income per share include the effects of a one-time, non-recurring pre-tax charge of approximately $5.9 million for the write-off of in-process research and development related to the acquisition of Cortet, Inc., and certain uncompleted acquisition costs and related expenses. 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"). Note 13 Recent Pronouncements In February 1997, the FASB issued SFAS 128, "Earnings per Share." This Statement establishes and simplifies standards for computing and presenting earnings per share. SFAS 128 will be effective for the Company's first quarter of fiscal 1998, and requires restatement of all previously reported earnings per share data that are presented. Early adoption of this Statement is not permitted. SFAS 128 replaces primary and fully diluted earnings per share with basic and diluted earnings per share. The Company expects that basic earnings per share amounts will be accretive compared to the Company's primary earnings per share amounts, and diluted earnings per share amounts will not be materially different from the Company's fully diluted earnings per share amounts. In June 1997, Financial Accounting Standard 130, "Reporting Comprehensive Income" ("FAS 130"), was issued and is effective for fiscal years commencing after December 15, 1997. The Company will comply with the requirements of FAS 130 in fiscal year 1999. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In June 1997, Financial Accounting Standard 131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS 131"), was issued and is effective for fiscal years commencing after December 15, 1997. The Company will comply with the requirements of FAS 131 in fiscal year 1999. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP 97-2), Software Revenue Recognition. This SOP supersedes SOP 91-1, Software Revenue Recognition. The Company will comply with the requirements of SOP 97-2 in fiscal year 1999. The Company is currently assessing the implications of this new statement and the impact of its implementation on the financial statements. 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 28, 1997 and September 29, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended September 28, 1997. 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 assur ance 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 28, 1997 and September 29, 1996, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended September 28, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California November 4, 1997 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 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the 1997 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 (1) Restated Articles of Incorporation, as amended. 3.2 (1) Bylaws, as amended. 10.01(2) 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. 10.02(3) 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. 10.03(4) 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. 10.04(4) 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. 10.05(1) Directors' Stock Option Plan (1987),as amended. 10.06(1) 1992 Stock Option Plan, as amended. 10.07(1) Employee Stock Purchase Plan (1994), as amended. 10.08(4) Employment/Severance agreement between the Company and Stanley D. Czerwinski, dated November 2, 1994. 10.09(5) Stock Option Agreement between the Company and Robert L. Miller. 10.10(6) Form of ADAC Executive Severance Agreement. 10.11(5) Form of ADAC Healthcare Information Systems, Inc. Executive Severance Agreement. 10.12(7) Credit Agreement dated July 31, 1996 among the Company, the Lenders named therein, and ABN AMRO Bank N.V., as agent for the Lenders. 10.13(8) Rights Agreement dated as of April 22, 1996 between the Company and Chemical Mellon Shareholder Services, LLC. 10.14(6) Option Agreement dated as of September 30, 1996 by and among the Company, ADAC Radiology Services, Inc., Medical Transition Strategies, Inc., and Ernest Berger. 10.15(6) Agreement and Plan of Reorganization dated November 4, 1996 among the Company, Geometrics Corporation, and the shareholders of Geometrics Corporation. 10.16 ADAC Healthcare Information Systems, Inc. 1997 Stock Option Plan and related Stock Option Agreement. 10.17 ADAC Radiology Services, Inc. 1996 Amended and Restated Stock Option Plan and related Stock Option Agreement. 10.18(1) Second Amendment to Credit Agreement dated as of May 1, 1997, and First Amendment to Credit Agreement dated as of December 27, 1996, each by and among the Company, the Lenders named therein, and ABN AMRO Bank N.V., as agent for the Lenders. 10.19(1) Agreement and Plan of Reorganization dated as of March 31, 1997 by and among the Company, ADAC Acquisition Corp., Cortet, Inc. and the Designated Shareholders of Cortet, Inc. 10.20 Form of Community Health Computing Corp. Option Repurchase 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 Quarterly Report on Form 10-Q (file no. 0-9428) for the quarter ended June 29, 1997. (2) 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. (3) 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. (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 2, 1994. (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 September 29, 1996. (7) 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. (8) Incorporated by reference to Exhibits filed with the Company's Current Report on Form 8-K (file no. 0-9428) dated April 22, 1996. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during -------------------- the 1997 fiscal year. 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 29, 1997 ADAC LABORATORIES (Registrant) BY:/s/ R. Andrew Eckert ---------------- R. Andrew Eckert, 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 Title Date - --------------------------- ------------------------------- ---------------- /s/ David L. Lowe Chairman of the Board December 29, 1997 - ------------------------- of Directors David L. Lowe /s/ R. Andrew Eckert Chief Executive Officer December 29, 1997 - ------------------------- and Director R. Andrew Eckert (Principal Executive Officer) /s/ P. Andre Simone Chief Financial Officer December 29, 1997 - ------------------------- (Principal Financial and P. Andre Simone Accounting Officer) /s/ Stanley D. Czerwinski Director December 29, 1997 - ------------------------- Stanley D. Czerwinski /s/ Graham O. King Director December 29, 1997 - ------------------------- Graham O. King /s/ F. David Rollo Director December 29, 1997 - ------------------------- F. David Rollo /s/ Edmund H. Shea, Jr. Director December 29, 1997 - ------------------------- Edmund H. Shea, Jr.
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. REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of ADAC Laboratories is included on page 36 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 41 of 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, 1997 SCHEDULE VIII ADAC LABORATORIES AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In Thousands) For the three years in the period ended September 28, 1997
Additions ----------------------- Balance at Charged to Acquisition Deductions Balance Beginning Costs and of from at end Description of Year Expenses Business Reserves of Year - ---------------------------------- ---------- ----------- ----------- --------- ---------- 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 ========== =========== =========== ========= ========== Year Ended September 28, 1997: Deducted from asset accounts: Allowance for product returns and doubtful accounts $2,146 $3,558 $ -- $3,318 $2,386 ========== =========== =========== ========= ==========
SCHEDULE X ADAC LABORATORIES AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION (In Thousands) For the three years in the period ended September 28, 1997
ITEM CHARGED TO COSTS & EXPENSES - ---------------------------------- ---------------------------------- 1997 1996 1995 ---------- ----------- ----------- Depreciation and amortization of intangible assets: Software and technology $4,003 $3,268 $1,845 Goodwill and Sales Partnership $1,126 $1,203 $780
Amounts charged to costs and expenses do not exceed one percent of net revenues for all other items for all periods presented. ADAC LABORATORIES AND SUBSIDIARIES INDEX OF EXHIBITS EXHIBIT NUMBER Description - ------- --------------- 10.16 ADAC Healthcare Information Systems, Inc. 1997 Stock Option Plan and related Stock Option Agreement. 10.17 ADAC Radiology Services, Inc. 1996 Amended and Restated Stock Option Plan and related Stock Option Agreement. 10.20 Form of Community Health Computing Corp. Option Repurchase Agreement. 11 Computation of net income per share. 21 Subsidiaries. 23 Consent of Independent Accountants. 27 Financial Data Schedule. EX-10.16 2 ADAC HISI 1997 STOCK OPTION PLAN Exhibit 10.16 1997 STOCK OPTION PLAN ADAC HEALTHCARE INFORMATION SYSTEMS, INC. (Effective November 10, 1997) ARTICLE 1. INTRODUCTION The Plan was originally adopted by the Board and approved by the Company's sole stockholder, ADAC Laboratories, a California corporation, on November 10, 1997. The purpose of the Plan is to promote the long-term success of the Company and the creation of incremental stockholder value by (a) encouraging directors, officers, employees, partners, consultants and advisors to focus on critical long-range objectives, (b) attracting and retaining such persons with exceptional qualifications and (c) linking such persons directly to stockholder interests through increased stock ownership. Options granted under the Plan shall be designated at the time of grant as either non-qualified stock options or incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan shall be governed by, and construed in accordance with the laws of the State of California. ARTICLE 2. ADMINISTRATION 2.1 The Committee. The Plan shall be administered by a Committee (the "Committee") that shall consist of two or more persons who are "non-employee directors," as defined in Rule 16b-3 promulgated under the Exchange Act, and "outside directors," as defined in Section 162(m) of the Code. 2.2 Powers of the Committee. Subject to the other provisions of the Plan and the approval of any relevant authorities, the Committee shall have the authority, in its discretion: (a) to determine the Fair Market Value; (b) to select the Participants to whom Options may from time to time be granted hereunder; (c) to determine the number of Common Shares to be covered by each Option granted hereunder; (d) to approve forms of agreement for use under the Plan; (e) to determine the terms and conditions of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the Common Shares relating thereto, based in each case on such factors as the Committee, in its sole discretion, shall determine; (f) to determine whether and under what circumstances an Option may be settled in cash instead of Common Shares; (g) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Shares covered by such Option has declined since the date the Option was granted, or to initiate an option exchange program; (h) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub- plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (i) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Common Shares to be issued upon exercise of an Option that number of Common Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Common Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Common Shares withheld for this purpose shall be made in such form and under such conditions as the Committee may deem necessary or advisable; and (j) to construe and interpret the terms of the Plan and Options granted pursuant to the Plan. 2.3 Effect of Committee's Decision. All decisions, determinations and interpretations of the Committee shall be final and binding on all Optionees. ARTICLE 3. SHARES RESERVED UNDER THE PLAN Subject to the provisions of Article 7 of the Plan, the maximum aggregate number of Common Shares which may be subject to option and sold under the Plan is 1,484,968 Common Shares. The Common Shares may be authorized but unissued, or reacquired Common Shares. The maximum number of Common Shares that may be available for grant to any Participant in any financial year of the Company shall not exceed 300,000 Common Shares. If an Option expires or becomes unexercisable without have been exercised in full, or is surrendered pursuant to an option exchange program, the unpurchased Common Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Common Shares that have actually been issued under the Plan upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Common Shares subject to vesting restrictions are repurchased by the Company at their original purchase price, such Common Shares shall become available for future grant under the Plan. ARTICLE 4. ELIGIBILITY The following persons shall be eligible for designation as Participants by the Committee: (i) directors, officers, employees, consultants and advisors of the Company, (ii) directors, officers, employees, consultants and advisors of a parent of the Company, (iii) directors, officer, employees, consultants and advisors of any Subsidiary corporation, partnership or limited liability company (A) which is controlled by the Company or (B) 50% or more or the voting power of which is held by the Company (a "Controlled Entity") or (iv) any individual, corporation, partnership or limited liability company which is an equity owner of a Controlled Entity. ARTICLE 5. OPTIONS 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. 5.2. Options Nontransferable. Unless the Stock Option Agreement provides otherwise, no Option or interest therein may be transferred, assigned or pledged by Optionee other than by will, the laws of descent and distribution or operation of law. Unless the Stock Option Agreement provides otherwise, an Option held by an individual may be exercised during the lifetime of Optionee only by him or her. 5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option which number may be adjusted in accordance with Article 7. 5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price of Incentive Stock Options shall not be less than the Fair Market Value of a Common Share on the date of grant. Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee. 5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option provided that the term of an Option that is an Incentive Stock Option shall in no event exceed ten (10) years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of Optionee's death, disability or retirement and may provide for expiration prior to the end of its term in the event of the termination of Optionee's employment or service. 5.6 Modification, Extension and Renewal of Options. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding Options or may accept the cancellation of outstanding Options (to the extent not previously exercised) in return for the grant of new Options at the same or a different price. The foregoing notwithstanding, no modification of an Option shall, without the consent of Optionee, impair his or her rights or obligations under such Option. 5.7 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as are set forth in the Stockholders Agreement or as otherwise determined by the Committee. Any additional restrictions shall be set forth in the applicable Stock Option Agreement. 5.8 Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are employees of the Company or one of its subsidiaries (within the meaning of Section 424(f) of the Code) at the date of grant. The aggregate Fair Market Value (determined as of the time the option is granted) of the Common Shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all option plans of the Company) shall not exceed $100,000. Incentive Stock Options may not be granted to any Participant who, at time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company, unless the option price is fixed at not less than 110% of the Fair Market Value of the Common Shares on the date of grant and the exercise of such option is prohibited by its term after the expiration of five years from the date of grant of such option. ARTICLE 6. PAYMENT FOR OPTION SHARES AND WITHHOLDING TAXES Upon exercise of an Option, the Exercise Price of such Option, together with the full amount of all federal and state withholding or other employment taxes resulting from such exercise, shall be required to be delivered to the Company. Subject to the sole discretion of the Committee, all or any part of the aggregate Exercise Price and withholding tax obligation may be satisfied by Optionee delivering Common Shares, by having the Company withhold a portion of the Common Shares that otherwise would be issued to Optionee under such Options or by Optionee delivering a full recourse promissory note. Common Shares so delivered or withheld shall be valued at their Fair Market Value on the exercise date of the Option. The payment of the exercise price and withholding taxes by delivering or withholding Common Shares to the Company shall be subject to the discretion of the Committee and to such restrictions as the Committee may impose, including any restrictions required by rules of the Securities and Exchange Commission and restrictions necessary to avoid a charge to earnings for financial accounting purposes. The terms of the promissory note delivered in payment of all or any portion of the aggregate Exercise Price and withholding taxes and any required collateral to secure the obligations under such promissory note and the applicable rate of interest thereon shall be determined in the sole discretion of the Committee. ARTICLE 7. PROTECTION AGAINST DILUTION 7.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make appropriate adjustments in (a) the number of Options available for future grant under Article 3 and (b) the number of Common Shares covered by each outstanding Option, including a commensurate adjustment in the Exercise Price, if necessary, under each outstanding Option. 7.2 Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Committee shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Committee in its discretion may provide for an Optionee to have the right to exercise his or Option until fifteen (15) days prior to such transaction as to all of the Common Shares covered thereby, including Common Shares as to which the Option would not otherwise be exercisable. In addition, the Committee may provide that any Company repurchase option applicable to any Common Shares purchased upon exercise of an Option shall lapse as to all such Common Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. 7.3 Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refused to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Common Shares covered thereby, including Common Shares as to which it would not otherwise be exercisable. If an Option is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Common Share subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of common stock of the Company for each Common Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding common stock of the Company); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Committee may, with the consent of the successor corporation, provide the consideration to be received upon the exercise of the Option, for each Common Share subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the par share consideration received by holders of common stock of the Company in the merger or sale of assets. 7.4 Reservation of Rights. Except as provided in this Article 7, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of an Option under the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or dissolve, liquidate, sell or transfer all or any part of its business or assets. ARTICLE 8. LIMITATION OF RIGHTS 8.1 Employment Rights. Neither the Plan nor any Option granted under the Plan shall be deemed to give any individual a right to remain employed by the Company or a Subsidiary. The Company and its Subsidiaries reserve the right to terminate the employment of any employee at any time, and for any reason, subject only to a written employment agreement (if any). 8.2 Stockholders' Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Option prior to the issuance of such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Article 7. 8.3 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Option until such time as any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration, qualification or exemption from registration or qualification under the Securities Act or any applicable state securities laws. With respect to any issuance of Common Shares, the Company shall have no obligation to either (a) register the issuance of the Common Shares under the Securities Act or (b) issue Common Shares to persons who are not "Accredited Investors" in reliance upon the exemption provided under Regulation D as promulgated under the Securities Act. 8.4 Stockholders Agreement. Any other provision of the Plan notwithstanding, unless and until the Common Shares are registered under the Exchange Act, the obligations of the Company to issue Common Shares upon the exercise of Options is subject to the condition that Optionee become a party to and subject to all transfer restrictions and other provisions of the Stockholders Agreement. ARTICLE 9. FUTURE OF THE PLAN 9.1 Term of the Plan. This Plan is effective on November 10, 1997 and shall remain in effect until November 9, 2002 unless terminated earlier under Section 9.2. 9.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. However, any amendment of the Plan shall be subject to the approval of the Company's stockholders, if the effect of the amendment is to increase the Common Shares reserved for issuance under the Plan or to change the maximum number of Common Shares that are available for grant to a Participant in any fiscal year, or if otherwise required by applicable laws, regulations or rules. 9.3 Effect of Amendment or Termination. No Options shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option previously granted under the Plan. ARTICLE 10. DEFINTIONS 10.1 "Board" means the Company's Board of Directors, as constituted from time to time. 10.2 "Change in Control" means: (a) the sale, lease, exchange or other transfer or disposition by the Company of all or substantially all of the assets of the Company and its subsidiaries; or (b) when any person or group of persons other than ADAC Laboratories or an affiliate of ADAC Laboratories is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of voting securities of the Company having greater combined voting power than the combined voting power of the voting securities of the Company beneficially owned, directly or indirectly, by ADAC Laboratories and any affiliate of ADAC Laboratories. 10.3 "Committee" has the meaning set forth in Section 2.1. 10.4 "Common Share" means one share of the Company's Common Stock, $.00l par value. 10.5 "Company" means ADAC Healthcare Information Systems, Inc. a Texas corporation. 10.6 "Exchange Act" means the Securities and Exchange Act of 1934, as amended. 10.7 "Exercise Price" means the amount for which one Common Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. 10.8 "Fair Market Value" means the market price of a Common Share, determined by the Committee as follows: (a) if the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (b) if the Common Share was traded over-the-counter on the date in question but was classified as a national market issue, then the Fair Market Value shall be equal to the last-transaction price quoted by the Nasdaq National Market system for such date; and (c) if the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the Nasdaq National Market system for such date; and (d) if none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. 10.9 "Option" means an Option granted under the Plan and entitling the holder to purchase one Common Share. 10.10 "Optionee" means an individual or his or her representative or transferee that holds an Option. 10.11 "Participant" means a person who has received an Option. 10.12 "Plan" means this 1997 Stock Option Plan, as it may be amended from time to time. 10.13 "Securities Act" means the Securities Act of 1933, as amended. 10.14 "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. 10.15 "Stockholders Agreement" means that certain Stockholders Agreement, dated as of November 10, 1997, between the Company and its shareholders. 10.16 "Subsidiary" means any corporation, if the Company and/or one or more other Subsidiaries own fifty percent (50%) or more of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. ARTICLE 11. EXECUTION To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to execute the Plan in its name and on its behalf as of November 10, 1997. ADAC Healthcare Information Systems, Inc. By:___________________________________ Exhibit 10.16 INCENTIVE STOCK OPTION AGREEMENT THIS OPTION AGREEMENT (the "Agreement") is made as of , 1997, between ADAC HEALTHCARE INFORMATION SYSTEMS, INC., a Texas corporation (the "Company"), and _____________ ("Optionee"). WHEREAS, pursuant to that certain 1997 Stock Option Plan, a copy of which is attached hereto as Exhibit A (the "Plan"), the Committee of the Board of Directors of the Company (the "Committee") has determined that Optionee is to be granted, on the terms and conditions set forth herein, an incentive stock option to purchase shares of the Company's common stock, $.001 par value (the "Common Shares"). NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreement herein contained, the parties agree as follows: 1. Option. The Company hereby grants to Optionee an option (the "Option") to purchase _____________________ (______) shares of Common Shares (the "Option Shares") at an exercise price of __________ ($0.___) per share. This Option is intended to be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, or a successor thereto. Notwithstanding the foregoing, in the event this Option fails to qualify as an "incentive stock option" under the Code for any reason, in whole or in part, this Option shall not be invalid but shall instead be treated as a "non-qualified stock option" under the Code to the extent it does not qualify for incentive stock option treatment. 2. Term of Option. The term of this Option shall commence on the date hereof and terminate on _________________, unless earlier terminated under the terms of the Plan or this Agreement. Upon the termination of this Option, the right to purchase Option Shares hereunder shall cease. 3. Time of Exercise. This Option may be exercised (in the manner provided in Section 4 hereof) in whole or in part, and from time to time after the date hereof, subject to the terms and conditions of the Plan and the following additional limitations: (a) Optionee shall have the right to exercise this Option as to [_______ percent (____%) of the Option Shares on the _____________, ________ percent (___%) on the __________________ and __________ percent (___%) on the _________________of the Option grant date]. (b) This Option may not be exercised after and shall terminate upon the earliest to occur of any of the following: (i) thirty (30) days after the termination of Optionee's employment with the Company or any other affiliate of the Company for any reason other than retirement, permanent disability or death (and then only to the extent Optionee could have exercised this Option on the date of termination); or (ii) one hundred eighty (180) days after the termination of Optionee's employment with the Company or one of its subsidiaries as a result of retirement or permanent disability (and then only to the extent Optionee could have exercised this Option on the date of termination); or (iii) one hundred eighty (180) days after Optionee's death, if death occurs while Optionee is employed by the Company or one of its subsidiaries (and then only to the extent Optionee could have exercised this Option on the date of his or her death); or (iv) Optionee's termination for cause. Cause shall include gross and willful failure, after written warning, to discharge the normal duties required of Optionee, theft or misappropriation of Company property, commission of a crime such that the Company's reputation with its customers is materially damaged, and breach of the ADAC Nondisclosure and Inventions Agreement or other similar agreement executed by Optionee. (c) This Option may be exercised as to any or all of the Option Shares that may be acquired by Optionee on the date of such exercise subject to the following limitations: (i) this Option must be exercised for no less than the greater of 2,500 Shares of Common Stock or twenty percent (20%) of the Option Shares; provided, that if the number of the Option Shares that may be acquired by Optionee is less than the foregoing amount then this Option must be exercised as to all the Option Shares that may be acquired by Optionee and (ii) this Option must be exercised as to all of the Option Shares that may be acquired by Optionee unless after such exercise Optionee would have the right to acquire no less than 2,500 Shares of Common Stock or twenty percent (20%) of the Option Shares. 4. Method of Exercise. This Option may be exercised only by the giving of written notice thereof to the Company which notice shall be accompanied by: (a) a certified or cashier's check in an aggregate amount of the exercise price and the withholding taxes required to be delivered to the Company upon exercise of this Option, or following any initial public offering by the Company, the consideration required under any cashless exercise program established by the Company; (b) an executed counterpart signature page to the Stockholders Agreement (the "Stockholders Agreement") in the form attached hereto as Exhibit B; and (c) such other documents or representations as the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of this Option. 5. Nontransferability of Option. This Option may not be transferred, sold, assigned, pledged or hypothecated other than by will, the laws of descent and distribution or by operation of law, and is exercisable during the life of the Optionee only by the Optionee. 6. Stock Option Plan. This Option is granted under and is subject to the terms and conditions of the Plan. 7. Mandatory Exercise. Upon ADAC Laboratories, a California corporation ("Parent"), giving written notice to Optionee under Section 2.4 of the Stockholders Agreement, Optionee hereby agrees to exercise this Option (on a net payment basis in the manner hereinafter described) as to that number of the Option Shares equal to (i) the number of the Option Shares that Optionee may exercise on the date such notice is given to Optionee, multiplied by (ii) the percentage of shares of Common Stock held by Parent that are intended to be sold by Parent in the proposed transaction. Optionee shall promptly execute and deliver a counterpart signature page to the Stockholders Agreement in the form attached hereto as Exhibit B and such other documents or representations the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of this Option and shall be bound by the provisions of the Stockholders Agreement. In connection with a transaction contemplated under Section 2.4 of the Stockholders Agreement, Optionee shall not deliver the exercise price and withholding taxes and the Company shall cause Optionee to be paid the consideration per Option Share less the aggregate exercise price and withholding taxes. If the transaction price under Section 2.4 of the Stockholders Agreement is less than the exercise price under this Option, the Optionee may elect not to exercise this Option and this Option shall terminate effective upon the closing of the transaction covered by Section 2.4 of the Stockholders Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed and to be dated as of the date set forth on the first page hereof. OPTIONEE: ____________________________________ ADAC HEALTHCARE INFORMATION SYSTEMS, INC.: ADAC HEALTHCARE INFORMATION SYSTEMS, INC. a Texas corporation By:_________________________________ Its:________________________________ EXHIBIT A 1997 STOCK OPTION PLAN EXHIBIT B STOCKHOLDERS AGREEMENT Counterpart Signature Page The undersigned hereby agrees to become a party to that certain Stockholders Agreement, dated as of _______________, 1997 (the "Agreement"), by and among ADAC Healthcare Information Systems, Inc., a Texas corporation, and its stockholders and agrees to be bound by the terms and conditions of the Agreement. The undersigned shall be an "Employee Holder" for all purposes under the Agreement. Dated as of ____________________, 1997. EMPLOYEE HOLDER: EX-10.17 3 ADAC RADIOLOGY SERVICES, INC. STOCK OPTION PLAN Exhibit 10.17 1996 AMENDED AND RESTATED STOCK OPTION PLAN ADAC RADIOLOGY SERVICES, INC. (Effective November 10, 1997) ARTICLE 1. INTRODUCTION The Plan was originally adopted by the Board and approved by the Company's sole stockholder, ADAC HealthCare Partners, Inc., a Delaware corporation, on September 25, 1996 and was amended and restated on November 10, 1997. The purpose of the Plan is to promote the long-term success of the Company and the creation of incremental stockholder value by (a) encouraging directors, officers, employees, partners, consultants and advisors to focus on critical long-range objectives, (b) attracting and retaining such persons with exceptional qualifications and (c) linking such persons directly to stockholder interests through increased stock ownership. Options granted under the Plan shall be designated at the time of grant as either non-qualified stock options or incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan shall be governed by, and construed in accordance with the laws of the State of California. ARTICLE 2. ADMINISTRATION 2.1 The Committee. The Plan shall be administered by a Committee (the "Committee") that shall consist of two or more persons who are "non-employee directors," as defined in Rule 16b-3 promulgated under the Exchange Act, and "outside directors," as defined in Section 162(m) of the Code. 2.2 Powers of the Committee. Subject to the other provisions of the Plan and the approval of any relevant authorities, the Committee shall have the authority, in its discretion: (a) to determine the Fair Market Value; (b) to select the Participants to whom Options may from time to time be granted hereunder; (c) to determine the number of Common Shares to be covered by each Option granted hereunder; (d) to approve forms of agreement for use under the Plan; (e) to determine the terms and conditions of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the Common Shares relating thereto, based in each case on such factors as the Committee, in its sole discretion, shall determine; (f) to determine whether and under what circumstances an Option may be settled in cash instead of Common Shares; (g) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Shares covered by such Option has declined since the date the Option was granted, or to initiate an option exchange program; (h) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub- plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (i) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Common Shares to be issued upon exercise of an Option that number of Common Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Common Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Common Shares withheld for this purpose shall be made in such form and under such conditions as the Committee may deem necessary or advisable; and (j) to construe and interpret the terms of the Plan and Options granted pursuant to the Plan. 2.3 Effect of Committee's Decision. All decisions, determinations and interpretations of the Committee shall be final and binding on all Optionees. ARTICLE 3. SHARES RESERVED UNDER THE PLAN Subject to the provisions of Article 7 of the Plan, the maximum aggregate number of Common Shares which may be subject to option and sold under the Plan is 300,000 Common Shares. The Common Shares may be authorized but unissued, or reacquired Common Shares. The maximum number of Common Shares that may be available for grant to any Participant in any financial year of the Company shall not exceed 150,000 Common Shares. If an Option expires or becomes unexercisable without have been exercised in full, or is surrendered pursuant to an option exchange program, the unpurchased Common Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Common Shares that have actually been issued under the Plan upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Common Shares subject to vesting restrictions are repurchased by the Company at their original purchase price, such Common Shares shall become available for future grant under the Plan. ARTICLE 4. ELIGIBILITY The following persons shall be eligible for designation as Participants by the Committee: (i) directors, officers, employees, consultants and advisors of the Company, (ii) directors, officers, employees, consultants and advisors of a parent of the Company, (iii) directors, officer, employees, consultants and advisors of any Subsidiary corporation, partnership or limited liability company (A) which is controlled by the Company or (B) 50% or more or the voting power of which is held by the Company (a "Controlled Entity") or (iv) any individual, corporation, partnership or limited liability company which is an equity owner of a Controlled Entity. ARTICLE 5. OPTIONS 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. 5.2. Options Nontransferable. Unless the Stock Option Agreement provides otherwise, no Option or interest therein may be transferred, assigned or pledged by Optionee other than by will, the laws of descent and distribution or operation of law. Unless the Stock Option Agreement provides otherwise, an Option held by an individual may be exercised during the lifetime of Optionee only by him or her. 5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option which number may be adjusted in accordance with Article 7. 5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price of Incentive Stock Options shall not be less than the Fair Market Value of a Common Share on the date of grant. Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee. 5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option provided that the term of an Option that is an Incentive Stock Option shall in no event exceed ten (10) years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of Optionee's death, disability or retirement and may provide for expiration prior to the end of its term in the event of the termination of Optionee's employment or service. 5.6 Modification, Extension and Renewal of Options. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding Options or may accept the cancellation of outstanding Options (to the extent not previously exercised) in return for the grant of new Options at the same or a different price. The foregoing notwithstanding, no modification of an Option shall, without the consent of Optionee, impair his or her rights or obligations under such Option. 5.7 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as are set forth in the Stockholders Agreement or as otherwise determined by the Committee. Any additional restrictions shall be set forth in the applicable Stock Option Agreement. 5.8 Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are employees of the Company or one of its subsidiaries (within the meaning of Section 424(f) of the Code) at the date of grant. The aggregate Fair Market Value (determined as of the time the option is granted) of the Common Shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all option plans of the Company) shall not exceed $100,000. Incentive Stock Options may not be granted to any Participant who, at time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company, unless the option price is fixed at not less than 110% of the Fair Market Value of the Common Shares on the date of grant and the exercise of such option is prohibited by its term after the expiration of five years from the date of grant of such option. ARTICLE 6. PAYMENT FOR OPTION SHARES AND WITHHOLDING TAXES Upon exercise of an Option, the Exercise Price of such Option, together with the full amount of all federal and state withholding or other employment taxes resulting from such exercise, shall be required to be delivered to the Company. Subject to the sole discretion of the Committee, all or any part of the aggregate Exercise Price and withholding tax obligation may be satisfied by Optionee delivering Common Shares, by having the Company withhold a portion of the Common Shares that otherwise would be issued to Optionee under such Options or by Optionee delivering a full recourse promissory note. Common Shares so delivered or withheld shall be valued at their Fair Market Value on the exercise date of the Option. The payment of the exercise price and withholding taxes by delivering or withholding Common Shares to the Company shall be subject to the discretion of the Committee and to such restrictions as the Committee may impose, including any restrictions required by rules of the Securities and Exchange Commission and restrictions necessary to avoid a charge to earnings for financial accounting purposes. The terms of the promissory note delivered in payment of all or any portion of the aggregate Exercise Price and withholding taxes and any required collateral to secure the obligations under such promissory note and the applicable rate of interest thereon shall be determined in the sole discretion of the Committee. ARTICLE 7. PROTECTION AGAINST DILUTION 7.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make appropriate adjustments in (a) the number of Options available for future grant under Article 3 and (b) the number of Common Shares covered by each outstanding Option, including a commensurate adjustment in the Exercise Price, if necessary, under each outstanding Option. 7.2 Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Committee shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Committee in its discretion may provide for an Optionee to have the right to exercise his or Option until fifteen (15) days prior to such transaction as to all of the Common Shares covered thereby, including Common Shares as to which the Option would not otherwise be exercisable. In addition, the Committee may provide that any Company repurchase option applicable to any Common Shares purchased upon exercise of an Option shall lapse as to all such Common Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. 7.3 Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refused to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Common Shares covered thereby, including Common Shares as to which it would not otherwise be exercisable. If an Option is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Common Share subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of common stock of the Company for each Common Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding common stock of the Company); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Committee may, with the consent of the successor corporation, provide the consideration to be received upon the exercise of the Option, for each Common Share subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the par share consideration received by holders of common stock of the Company in the merger or sale of assets. 7.4 Reservation of Rights. Except as provided in this Article 7, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of an Option under the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or dissolve, liquidate, sell or transfer all or any part of its business or assets. ARTICLE 8. LIMITATION OF RIGHTS 8.1 Employment Rights. Neither the Plan nor any Option granted under the Plan shall be deemed to give any individual a right to remain employed by the Company or a Subsidiary. The Company and its Subsidiaries reserve the right to terminate the employment of any employee at any time, and for any reason, subject only to a written employment agreement (if any). 8.2 Stockholders' Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Option prior to the issuance of such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Article 7. 8.3 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Option until such time as any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration, qualification or exemption from registration or qualification under the Securities Act or any applicable state securities laws. With respect to any issuance of Common Shares, the Company shall have no obligation to either (a) register the issuance of the Common Shares under the Securities Act or (b) issue Common Shares to persons who are not "Accredited Investors" in reliance upon the exemption provided under Regulation D as promulgated under the Securities Act. 8.4 Stockholders Agreement. Any other provision of the Plan notwithstanding, unless and until the Common Shares are registered under the Exchange Act, the obligations of the Company to issue Common Shares upon the exercise of Options is subject to the condition that Optionee become a party to and subject to all transfer restrictions and other provisions of the Stockholders Agreement. ARTICLE 9. FUTURE OF THE PLAN 9.1 Term of the Plan. This Plan is effective on November 10, 1997 and shall remain in effect until November 9, 2002 unless terminated earlier under Section 9.2. 9.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. However, any amendment of the Plan shall be subject to the approval of the Company's stockholders, if the effect of the amendment is to increase the Common Shares reserved for issuance under the Plan or to change the maximum number of Common Shares that are available for grant to a Participant in any fiscal year, or if otherwise required by applicable laws, regulations or rules. 9.3 Effect of Amendment or Termination. No Options shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option previously granted under the Plan. ARTICLE 10. DEFINTIONS 10.1 "Board" means the Company's Board of Directors, as constituted from time to time. 10.2 "Change in Control" means: (a) the sale, lease, exchange or other transfer or disposition by the Company of all or substantially all of the assets of the Company and its subsidiaries; or (b) when any person or group of persons other than ADAC Laboratories or an affiliate of ADAC Laboratories is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of voting securities of the Company having greater combined voting power than the combined voting power of the voting securities of the Company beneficially owned, directly or indirectly, by ADAC Laboratories and any affiliate of ADAC Laboratories. 10.3 "Committee" has the meaning set forth in Section 2.1. 10.4 "Common Share" means one share of the Company's Common Stock, $.00l par value. 10.5 "Company" means ADAC Radiology Services, Inc. a Delaware corporation. 10.6 "Exchange Act" means the Securities and Exchange Act of 1934, as amended. 10.7 "Exercise Price" means the amount for which one Common Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. 10.8 "Fair Market Value" means the market price of a Common Share, determined by the Committee as follows: (a) if the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (b) if the Common Share was traded over-the-counter on the date in question but was classified as a national market issue, then the Fair Market Value shall be equal to the last-transaction price quoted by the Nasdaq National Market system for such date; and (c) if the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the Nasdaq National Market system for such date; and (d) if none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. 10.9 "Option" means an Option granted under the Plan and entitling the holder to purchase one Common Share. 10.10 "Optionee" means an individual or his or her representative or transferee that holds an Option. 10.11 "Participant" means a person who has received an Option. 10.12 "Plan" means this 1997 Stock Option Plan, as it may be amended from time to time. 10.13 "Securities Act" means the Securities Act of 1933, as amended. 10.14 "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. 10.15 "Stockholders Agreement" means that certain Stockholders Agreement, dated as of November 10, 1997, between the Company and its shareholders. 10.16 "Subsidiary" means any corporation, if the Company and/or one or more other Subsidiaries own fifty percent (50%) or more of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. ARTICLE 11. EXECUTION To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to execute the Plan in its name and on its behalf as of November 10, 1997. ADAC Radiology Services, Inc. By:___________________________________ Exhibit 10.17 INCENTIVE STOCK OPTION AGREEMENT THIS OPTION AGREEMENT (the "Agreement") is made as of , 1997, between ADAC RADIOLOGY SERVICES, INC., a Delaware corporation (the "Company"), and _____________ ("Optionee"). WHEREAS, pursuant to that certain 1997 Stock Option Plan, a copy of which is attached hereto as Exhibit A (the "Plan"), the Committee of the Board of Directors of the Company (the "Committee") has determined that Optionee is to be granted, on the terms and conditions set forth herein, an incentive stock option to purchase shares of the Company's common stock, $.001 par value (the "Common Shares"). NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreement herein contained, the parties agree as follows: 1. Option. The Company hereby grants to Optionee an option (the "Option") to purchase _____________________ (______) shares of Common Shares (the "Option Shares") at an exercise price of __________ ($0.___) per share. This Option is intended to be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, or a successor thereto. Notwithstanding the foregoing, in the event this Option fails to qualify as an "incentive stock option" under the Code for any reason, in whole or in part, this Option shall not be invalid but shall instead be treated as a "non-qualified stock option" under the Code to the extent it does not qualify for incentive stock option treatment. 2. Term of Option. The term of this Option shall commence on the date hereof and terminate on _________________, unless earlier terminated under the terms of the Plan or this Agreement. Upon the termination of this Option, the right to purchase Option Shares hereunder shall cease. 3. Time of Exercise. This Option may be exercised (in the manner provided in Section 4 hereof) in whole or in part, and from time to time after the date hereof, subject to the terms and conditions of the Plan and the following additional limitations: (a) Optionee shall have the right to exercise this Option as to [___________ percent (___%) of the Option Shares on the _________________, __________ percent (___%) on the __________________ and ____________ percent (___%) on the _______________ of the Option grant date]. (b) This Option may not be exercised after and shall terminate upon the earliest to occur of any of the following: (i) thirty (30) days after the termination of Optionee's employment with the Company or any other affiliate of the Company for any reason other than retirement, permanent disability or death (and then only to the extent Optionee could have exercised this Option on the date of termination); or (ii) one hundred eighty (180) days after the termination of Optionee's employment with the Company or one of its subsidiaries as a result of retirement or permanent disability (and then only to the extent Optionee could have exercised this Option on the date of termination); or (iii) one hundred eighty (180) days after Optionee's death, if death occurs while Optionee is employed by the Company or one of its subsidiaries (and then only to the extent Optionee could have exercised this Option on the date of his or her death); or (iv) Optionee's termination for cause. Cause shall include gross and willful failure, after written warning, to discharge the normal duties required of Optionee, theft or misappropriation of Company property, commission of a crime such that the Company's reputation with its customers is materially damaged, and breach of the ADAC Nondisclosure and Inventions Agreement or other similar agreement executed by Optionee. (c) This Option may be exercised as to any or all of the Option Shares that may be acquired by Optionee on the date of such exercise subject to the following limitations: (i) this Option must be exercised for no less than the greater of 2,500 Shares of Common Stock or twenty percent (20%) of the Option Shares; provided, that if the number of the Option Shares that may be acquired by Optionee is less than the foregoing amount then this Option must be exercised as to all the Option Shares that may be acquired by Optionee and (ii) this Option must be exercised as to all of the Option Shares that may be acquired by Optionee unless after such exercise Optionee would have the right to acquire no less than 2,500 Shares of Common Stock or twenty percent (20%) of the Option Shares. 4. Method of Exercise. This Option may be exercised only by the giving of written notice thereof to the Company which notice shall be accompanied by: (a) a certified or cashier's check in an aggregate amount of the exercise price and the withholding taxes required to be delivered to the Company upon exercise of this Option, or following any initial public offering by the Company, the consideration required under any cashless exercise program established by the Company; (b) an executed counterpart signature page to the Stockholders Agreement (the "Stockholders Agreement") in the form attached hereto as Exhibit B; and (c) such other documents or representations as the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of this Option. 5. Nontransferability of Option. This Option may not be transferred, sold, assigned, pledged or hypothecated other than by will, the laws of descent and distribution or by operation of law, and is exercisable during the life of the Optionee only by the Optionee. 6. Stock Option Plan. This Option is granted under and is subject to the terms and conditions of the Plan. 7. Mandatory Exercise. Upon ADAC Laboratories, a California corporation ("Parent"), giving written notice to Optionee under Section 2.4 of the Stockholders Agreement, Optionee hereby agrees to exercise this Option (on a net payment basis in the manner hereinafter described) as to that number of the Option Shares equal to (i) the number of the Option Shares that Optionee may exercise on the date such notice is given to Optionee, multiplied by (ii) the percentage of shares of Common Stock held by Parent that are intended to be sold by Parent in the proposed transaction. Optionee shall promptly execute and deliver a counterpart signature page to the Stockholders Agreement in the form attached hereto as Exhibit B and such other documents or representations the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of this Option and shall be bound by the provisions of the Stockholders Agreement. In connection with a transaction contemplated under Section 2.4 of the Stockholders Agreement, Optionee shall not deliver the exercise price and withholding taxes and the Company shall cause Optionee to be paid the consideration per Option Share less the aggregate exercise price and withholding taxes. If the transaction price under Section 2.4 of the Stockholders Agreement is less than the exercise price under this Option, the Optionee may elect not to exercise this Option and this Option shall terminate effective upon the closing of the transaction covered by Section 2.4 of the Stockholders Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed and to be dated as of the date set forth on the first page hereof. OPTIONEE: ADAC RADIOLOGY SERVICES, INC.: ADAC RADIOLOGY SERVICES, INC. a Delaware corporation By: Its: EXHIBIT A 1997 STOCK OPTION PLAN EXHIBIT B STOCKHOLDERS AGREEMENT Counterpart Signature Page The undersigned hereby agrees to become a party to that certain Stockholders Agreement, dated as of _______________, 1997 (the "Agreement"), by and among ADAC Radiology Services, Inc., a Delaware corporation, and its stockholders and agrees to be bound by the terms and conditions of the Agreement. The undersigned shall be an "Employee Holder" for all purposes under the Agreement. Dated as of ____________________, 1997. EMPLOYEE HOLDER: EX-10.20 4 OPTION REPURCHASE AGREEMENT. Exhibit 10.20 OPTION PURCHASE AGREEMENT THIS OPTION PURCHASE AGREEMENT (the "Agreement") is made and entered into as of May 12, 1997, by and among COMMUNITY HEALTH COMPUTING CORP., a Delaware corporation ("CHC"), and ____________________ ("Optionee"). A. CHC previously granted Optionee certain stock options (the "Options") under the CHC Stock Option Plan (1985); B. The Options give Optionee the right to purchase the number of shares of common stock of CHC set forth in Exhibit 1 at a purchase price of $0.66 per share; C. The Options expire in July 1997; D. It was the intent of CHC that, through the grant of the Options, Optionee would be given the opportunity to realize the increased value of the CHC common stock which Optionee's efforts helped produce, and, as of the date hereof, no general plan or program to achieve this goal has been developed; E. Accordingly, CHC has determined that it is in the best interests of CHC and its shareholders to acquire from Optionee, and Optionee desires to sell to CHC, the Options all on the terms and conditions set forth herein. NOW, THEREFORE, the parties agree as follows: 1. Closing The closing (the "Closing") of the transactions contemplated hereby shall be held at the offices of CHC on May 12, 1997, subject to satisfaction or waiver of the conditions to Closing set forth in Section 2 below. At the Closing, Optionee will deliver to CHC Option Agreements representing the Options, and CHC will deliver to Optionee the Purchase Price, net of required payroll withholding taxes. The "Purchase Price" is set forth in Exhibit 1 hereto, is payable in cash at the closing and is based on the fair market value of the CHC common stock underlying the Options of $1.43, as determined by an independent appraiser, less the aggregate exercise payable upon exercise of such Options. 2. Conditions to Closing. The obligations of the parties under this Agreement are subject to the fulfillment or waiver of the following conditions: (a) Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the parties on or prior to the Closing shall have been performed or complied with in all material aspects. (b) Board and Stockholder Approval. CHC shall have obtained all necessary consents and approvals of its Board of Directors and stockholders, if applicable, necessary to perform the transactions contemplated by this Agreement. 3. Miscellaneous. (a) Governing Law. This Agreement shall be governed in all respects by the internal laws of the State of California. (b) Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any of the parties hereto and the closing of the transactions contemplated hereby. (c) Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. (d) Entire Agreement: Amendment. This Agreement and the other documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge, or termination is sought. (e) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. (f) Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective it if materially changes the economic benefit of this Agreement to any party. (g) Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. (h) Benefits of Agreement. Nothing in this Agreement, express or implied, shall give to any person, other than the parties hereto and their successors hereunder any benefit or any legal or equitable right, remedy or claim under this Agreement. IN WITNESS WHEREOF, the parties have executed this Option Purchase Agreement as of the date first written above. COMMUNITY HEALTH COMPUTING CORP., a Delaware corporation By:____________________________________ David L. Lowe Chairman and Chief Executive Officer _______________________________________ Optionee EXHIBIT 1 OPTIONEE: OPTIONS: TO PURCHASE _________ SHARES OF CHC COMMON STOCK PURCHASE PRICE: $__________* __________ * Amount is subject to normal payroll withholding taxes. EX-11 5 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 ADAC LABORATORIES AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED NET INCOME PER SHARE (in thousands except per share data) For the three years in the period ended September 28, 1997
Fiscal Years ------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Average shares outstanding 18,413 17,360 16,426 Net effect of dilutive stock options and warrants 1,115 1,147 653 ------------ ------------ ------------ Average common and common equivalent shares outstanding 19,528 18,507 17,079 ============ ============ ============ Net Income $16,778 $16,637 $11,073 ============ ============ ============ Net income per share $0.86 $0.90 $0.65 ============ ============ ============
Primary and fully diluted income per share differs by less than one cent in all periods. EX-21 6 SUBSIDIARIES EXHIBIT 21 ADAC LABORATORIES AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT JURISDICTION OF NAME INCORPORATION - ----- ------------- ADAC do Brasil Brazil ADAC Laboratories Europe, B.V. The Netherlands ADAC Laboratories, SARL (1) France ADAC Laboratories, GmbH (1) Germany ADAC Laboratories, A/S (1) Denmark ADAC Laboratories, Canada Limited Canada ADAC Laboratories, S.R.L. (1) Italy ADAC Laboratories, Ltd. (1) The United Kingdom ADAC Laboratories Pacific, Inc. California, U.S. ADAC Foreign Sales Corporation, Inc. Virgin Islands, U.S. ADAC Research and Manufacturing, Inc. California, U.S. ADAC Medical Technologies, Inc. Delaware, U.S. ADAC HealthCare Information Systems, Inc. (2) Texas, U.S. ADAC Radiology Services, Inc. Delaware, U.S. ADAC Healthcare Partners, Inc. Delaware, U.S. Cortet, Inc. Florida, U.S. The Company owns 100% of each of the above subsidiaries except as set forth in the note below. (1) ADAC Laboratories, B.V., owns 100% of this subsidiary. (2) Community Health Computing Corporation owns 100% of this subsidiary. EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of ADAC Laboratories on Form S-8 (File Nos.333-34619, 333- 34625 and 333-34629) of our report dated November 4, 1997, on our audits of the consolidated financial statements and financial statement schedules of ADAC Laboratories as of September 28, 1997 and September 29, 1996, and for each of the three fiscal years ended September 28, 1997, which is included under Item 8. Financial Statements and Supplemental Data of this Form 10-K. COOPERS & LYBRAND L.L.P. San Jose, California December 22, 1997 EX-27.1 8 ARTICLE 5 FIN. DATA SCHEDULE FOR 10-K
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations included in the Company's Form 10-K for the year ended September 28, 1997 and is qualified in its entirety by reference to such Financial Statements. 1,000 Sep-28-1997 Sep-30-1996 Sep-28-1997 12-MOS 5,088 0 101,881 2,386 27,534 142,272 29,700 18,145 206,995 65,799 0 0 0 123,269 3,228 206,995 211,831 282,331 121,766 166,022 75,070 0 0 29,645 12,867 16,778 0 0 0 16,778 $0.86 $0.86
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