Accounting change gives ADAC paper gain

Nuclear medicine vendorADAC Laboratories recorded a one-time gain of $8 million lastmonth due to the elimination of a tax credit associated with difficultyears the company experienced in the 1980s. The credit was offsetin part by a $5.5 million charge the company has set aside topay for its litigation with Elscint.

ADAC, of Milpitas, CA, experienced two years of tough sleddingsome years ago and adopted a net operating loss valuation allowanceas a tax credit for the losses the company sustained. Since then,ADAC has come back strong and is now the market leader in salesof gamma cameras. According to Federal Accounting Standards Boardrules, ADAC's business prospects for next year are bright andthe company should eliminate the valuation allowance under theterms of FASB Statement 109.

Dispensing with the valuation allowance will give ADAC a pre-taxpaper windfall of about $8 million, to be recorded in the currentquarter. The downside, however, is that ADAC's tax rate will behigher next year, in the 35% to 38% range. The company's tax rateis currently in the low 20% range.

ADAC also announced that it expects to take an after-tax chargeof $5.5 million to pay for the Elscint litigation. Elscint filedthe suit last year, charging ADAC with infringing on nuclear medicinepatents (SCAN 7/27/94). The case is scheduled to go to trial inOctober.

When taken together, the accounting change and the legal chargewill result in a one-time increase to earnings of $3 million or18¢ a share, to be recorded in the current quarter endingin October.