<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
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 Identification
incorporation or organization) No.)
540 ALDER DRIVE 95035
MILPITAS, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(408) 321-9100
(Registrant's telephone number including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
As of May 31, 1999, Registrant had outstanding 20,497,324 shares of Common
Stock, no par value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(This document contains a total of 28 pages)
<PAGE>
ADAC LABORATORIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three-Month and
Six-Month Periods Ended April 4, 1999 and March 29, 1998.................................... 3
Condensed Consolidated Balance Sheets at April 4, 1999 and September 27, 1998................. 4
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods
Ended April 4, 1999 and March 29, 1998...................................................... 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 13
Part II. Other Information
Item 5. Other Information............................................................................. 26
Item 6. Exhibits and Reports on Form 8-K.............................................................. 26
Signatures.................................................................................... 27
Exhibit Index................................................................................. 28
27 Financial Data Schedule
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ----------------------
<S> <C> <C> <C> <C>
APRIL 4, MARCH 29, APRIL 4, MARCH 29,
1999 1998 1999 1998
---------- ----------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES, NET:
Product......................................................... $ 63,520 $ 53,801 $ 134,426 $ 101,820
Service......................................................... 23,873 20,721 47,246 40,140
---------- ----------- ---------- ----------
87,393 74,522 181,672 141,960
---------- ----------- ---------- ----------
COST OF REVENUES:
Product......................................................... 55,697 28,990 94,782 56,150
Service......................................................... 18,250 13,853 34,829 25,696
Discontinued product............................................ -- -- -- 14,494
---------- ----------- ---------- ----------
73,947 42,843 129,611 96,340
---------- ----------- ---------- ----------
GROSS PROFIT...................................................... 13,446 31,679 52,061 45,620
---------- ----------- ---------- ----------
OPERATING EXPENSES:
Marketing and sales............................................. 19,138 11,915 34,601 23,473
Research and development........................................ 4,478 3,963 8,844 9,281
General and administrative...................................... 15,888 5,473 24,227 10,060
Goodwill amortization........................................... 502 545 990 1,037
Restructuring charges........................................... 800 -- 3,300 --
---------- ----------- ---------- ----------
40,806 21,896 71,962 43,851
---------- ----------- ---------- ----------
OPERATING INCOME (LOSS)........................................... (27,360) 9,783 (19,901) 1,769
---------- ----------- ---------- ----------
Interest and other expense, net................................... 1,741 965 2,981 1,928
---------- ----------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES................... (29,101) 8,818 (22,882) (159)
Provision (benefit) for income tax................................ (8,310) 3,439 (5,947) (62)
---------- ----------- ---------- ----------
NET INCOME (LOSS)................................................. $ (20,791) $ 5,379 $ (16,935) $ (97)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
NET INCOME (LOSS) PER SHARE
Basic........................................................... $ (1.02) $ .28 $ (.83) $ (.01)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Diluted......................................................... $ (1.02) $ .27 $ (.83) $ (.01)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
NUMBER OF SHARES USED IN PER SHARE CALCULATIONS
Basic........................................................... 20,456 19,226 20,414 19,097
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Diluted......................................................... 20,456 20,223 20,414 19,097
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 4, SEPTEMBER 27,
1999 1998
----------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 1,449 $ 4,869
Accounts receivable, net of allowance for returns and doubtful accounts of $11,478 in
1999 and $2,319 in 1998.............................................................. 84,868 55,316
Tax and other receivables.......................................................... 6,861 7,294
Inventories, net................................................................... 54,050 78,311
Prepaid expenses and other current assets.......................................... 6,793 4,928
----------- -------------
TOTAL CURRENT ASSETS............................................................. 154,021 150,718
Service parts, net................................................................. 19,562 18,063
Fixed assets, net.................................................................. 15,882 11,007
Capitalized software, net.......................................................... 15,489 11,770
Intangibles, net................................................................... 24,115 25,336
Deferred income taxes.............................................................. 30,114 24,167
Other assets, net.................................................................. 1,246 2,748
----------- -------------
TOTAL ASSETS..................................................................... $ 260,429 $ 243,809
----------- -------------
----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks............................................................. $ 39,095 $ 23,396
Accounts payable................................................................... 20,211 22,887
Deferred revenues.................................................................. 18,605 11,591
Customer deposits and advanced billings............................................ 7,919 2,004
Accrued compensation............................................................... 11,836 8,903
Warranty and installation.......................................................... 6,080 6,595
Other accrued liabilities.......................................................... 17,604 14,423
----------- -------------
TOTAL CURRENT LIABILITIES........................................................ 121,350 89,799
Non-current deferred income taxes.................................................... 13,988 14,026
Non-current liabilities and deferred credits......................................... 2,755 3,082
----------- -------------
TOTAL LIABILITIES................................................................ 138,093 106,907
----------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 20,476 shares at April 4, 1999 and 20,253 shares at
September 27, 1998............................................................... 153,203 149,599
Accumulated deficit................................................................ (27,201) (10,266)
Translation adjustment............................................................. (3,666) (2,431)
----------- -------------
TOTAL SHAREHOLDERS' EQUITY....................................................... 122,336 136,902
----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................... $ 260,429 $ 243,809
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
APRIL 4, MARCH 29,
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................. $ (16,935) $ (97)
Adjustments to reconcile net loss to net cash Provided by (used in) operating activities:
Depreciation and amortization........................................................ 7,742 6,216
Provision for product returns and doubtful accounts.................................. 9,758 2,530
Deferred income taxes................................................................ (5,985) (3,729)
Inventory allowance.................................................................. 7,741 433
Discontinued products................................................................ -- 14,494
Restructuring charges................................................................ 3,300 --
Changes in assets and liabilities:
Accounts receivable................................................................ (39,310) (9,908)
Tax and other receivables.......................................................... 433 --
Inventories........................................................................ 16,520 (15,548)
Prepaid expenses and other current assets.......................................... (1,865) (1)
Service parts...................................................................... (2,959) (1,746)
Accounts payable................................................................... (2,676) 6,155
Deferred revenues.................................................................. 7,014 (1,354)
Customer deposits and advance billings............................................. 5,915 (874)
Accrued compensation............................................................... 2,933 (490)
Warranty and other accrued liabilities............................................. (634) 4,919
Non-current liabilities and deferred credits....................................... (327) (21)
---------- ----------
Cash provided by (used in) operating activities.......................................... (9,335) 979
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................... (8,009) (2,362)
Increase in other assets............................................................... (3,909) (2,666)
Intangibles............................................................................ (235) (7,134)
Acquisition assets, net................................................................ -- 807
---------- ----------
Cash used in investing activities........................................................ (12,153) (11,355)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short term Debt arrangements, net........................ 15,699 6,496
Proceeds from issuance of common stock, net............................................ 3,604 4,885
---------- ----------
Cash provided by financing activities.................................................... 19,303 11,381
---------- ----------
Effect of exchange rates on cash......................................................... (1,235) (987)
---------- ----------
Net increase (decrease) in cash and cash equivalents..................................... (3,420) 18
Cash and cash equivalents, at beginning of the period.................................... 4,869 5,088
---------- ----------
Cash and cash equivalents, at end of the period.......................................... $ 1,449 $ 5,106
---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid.......................................................................... $ 1,164 $ 1,928
Income taxes paid...................................................................... $ 445 $ 2,668
</TABLE>
5
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for annual financial statements. In the opinion of management, the
condensed interim consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the information required to be
included, however, see Note 16, "South American Operations." Operating results
for the three and six-month periods ended April 4, 1999 are not necessarily
indicative of the results that may be expected for any future periods, including
the full fiscal year. Reference should also be made to the Annual Consolidated
Financial Statements, Notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the fiscal year ended September 27, 1998.
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share has been computed using the weighted
average number of common shares outstanding. Diluted net income per share
includes the dilutive effect of common stock options and warrants using the
treasury stock method. The calculation of basic and diluted earnings per share
(EPS) for the three and six-month periods ended April 4, 1999 and March 29, 1998
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
<S> <C> <C> <C> <C>
APRIL 4, MARCH 29, APRIL 4, MARCH 29,
1999 1998 1999 1998
---------- ----------- ---------- -----------
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
Basic EPS: Net Income (loss)...................................... $ (20,791) $ 5,379 $ (16,935) $ (97)
Denominator: Weighted Average Common Shares Outstanding........... 20,456 19,226 20,414 19,097
---------- ----------- ---------- -----------
Basic EPS......................................................... $ (1.02) $ .28 $ (.83) $ (.01)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Diluted EPS: Net Income (loss).................................... $ (20,791) $ 5,379 $ (16,935) $ (97)
Denominator: Weighted Average Common Shares Outstanding........... 20,456 19,226 20,414 19,097
Options........................................................... -- 997 -- --
---------- ----------- ---------- -----------
Total shares...................................................... 20,456 20,223 20,414 19,097
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Diluted EPS....................................................... $ (1.02) $ .27 $ (.83) $ (.01)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
If the Company had net income in the three-month period ended April 4, 1999,
and the six-month periods ended April 4, 1999 and March 29, 1998, the total
diluted shares would have included options of 290,000, 575,000 and 933,000,
respectively.
3. DEPRECIATION AND AMORTIZATION
Depreciation and amortization was approximately $3.7 million and $2.8
million for the three-month periods ended April 4, 1999 and March 29, 1998,
respectively.
6
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. INVENTORIES
<TABLE>
<CAPTION>
APRIL 4,
1999 SEPTEMBER 27, 1998
------------ ------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Inventories consist of:
Purchased parts and sub-assemblies.............................................. $ 19,061 $ 17,452
Work in process................................................................. 5,496 5,713
Finished goods.................................................................. 39,188 59,217
------------ -------
63,745 82,382
Less reserves................................................................... (9,695) (4,071)
------------ -------
$ 54,050 $ 78,311
------------ -------
------------ -------
</TABLE>
5. SERVICE PARTS
<TABLE>
<CAPTION>
APRIL 4,
1999 SEPTEMBER 27, 1998
------------ ------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Service parts consist of:
Field service parts, at cost.................................................... $ 29,286 $ 26,327
Less accumulated depreciation................................................... (9,724) (8,264)
------------ -------
$ 19,562 $ 18,063
------------ -------
------------ -------
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
APRIL 4,
1999 SEPTEMBER 27, 1998
------------ ------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Fixed assets, at cost, consist of:
Production and test equipment................................................... $ 6,086 $ 4,351
Field service equipment......................................................... 1,127 1,168
Office and demonstration equipment.............................................. 20,610 14,401
Leasehold improvements.......................................................... 1,367 1,261
------------ --------
29,190 21,181
Less accumulated depreciation and Amortization.................................. (13,308) (10,174)
------------ --------
$ 15,882 $ 11,007
------------ --------
------------ --------
</TABLE>
7
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. INTANGIBLES
<TABLE>
<CAPTION>
APRIL 4,
1999 SEPTEMBER 27, 1998
------------ ------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Intangibles consist of:
Goodwill........................................................................ $ 21,803 $ 21,849
Acquired technology............................................................. 9,136 8,984
Other........................................................................... 606 510
------------ -------
31,545 31,343
Less accumulated amortization................................................... (7,430) (6,007)
------------ -------
$ 24,115 $ 25,336
------------ -------
------------ -------
</TABLE>
8. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
APRIL 4,
1999 SEPTEMBER 27, 1998
------------ ------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Other accrued liabilities consist of:
Accrued cost of revenue......................................................... $ 2,966 $ 3,354
Accrued restructuring........................................................... 2,514 --
Customer advances............................................................... 2,022 2,775
Accrued legal and accounting.................................................... 1,589 194
Accrued royalties............................................................... 1,540 956
Other accrued expenses.......................................................... 6,973 7,144
------------ -------
$ 17,604 $ 14,423
------------ -------
------------ -------
</TABLE>
On September 27, 1998, the Company concluded a comprehensive review of its
international operations and decided to restructure its European and Latin
American businesses. As a result, the Company took charges in the fiscal first
and second quarters of 1999 of $2.5 million and $0.8 million, respectively. The
restructuring costs were comprised of $2.9 million for severance expenses, $.2
million for legal and consulting costs, and $0.2 million for other costs
associated with the restructuring. As of April 4, 1999 $2.5 million remained in
the accrual for restructuring costs comprised of $2.1 million for severance
expenses, $0.2 million for legal and consulting costs, and $0.2 million for
other costs associated with the restructuring. The Company currently anticipates
that these restructuring costs will be paid over the next six months.
9. CREDIT AND BORROWING ARRANGEMENTS
The Company has a $75 million revolving credit facility with a bank
syndicate. The credit facility offers borrowings in either U.S. dollars or in
foreign currencies and expires March 29, 2002. 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%. At April 4, 1999, the Company had $36 million available for
borrowing under this facility. In February 1999, the Company delayed delivering
8
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. CREDIT AND BORROWING ARRANGEMENTS (CONTINUED)
financial statements and related information to its banks in connection with the
restatement occurring at that time. This constituted a default under the
facility. In May 1999, the Company again delayed delivering financial statements
and related information to its banks in connection with the delayed public
release of second quarter financials for fiscal 1999. This also constituted a
default under the facility. As anticipated in both cases, the banks waived the
defaults and consented to an extension of time required to provide the
information. The Company has since delivered all required information within the
time required by the banks. In addition, the results of the Company's operations
in the first and second quarters caused the Company to be out of compliance with
all financial covenants in the facility, which defaults have been waived through
the end of the second fiscal quarter. It is likely that the results of the
Company's third fiscal quarter also will not comply with these covenants. The
Company will seek a further waiver of the covenants for this period, although
there can be no assurance that such a waiver will be available.
10. LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits were
filed in federal court by or on behalf of stockholders who purchased Company
stock between January 10, 1996 and December 28, 1998. These actions name as
defendants the Company and certain of its present and former officers and
directors. The complaints allege various violations of the federal securities
laws in connection with restatement of the Company's financial statements and
seek unspecified but potentially significant damages. The Company intends to
contest these actions vigorously. A stockholder derivative action, purportedly
on behalf of the Company and naming as defendants Company officers and directors
was also filed in state court seeking recovery for the Company based on stock
sales by these defendants during the above time period. The Company is also 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 liability resulting from
these claims would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flow.
11. INCOME TAXES
The Company uses the deferral method to account for income taxes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
The provision (benefit) for income taxes for each of the three- and
six-month periods ended April 4, 1999 and March 29, 1998 are based on the
estimated effective income tax rates for the fiscal years ending October 3, 1999
and September 27, 1998 of 26% and 39.0%, respectively. The effective tax rate
for fiscal 1999 was adjusted in the second quarter from 38% to 26%, resulting in
an effective tax benefit for the second quarter of 29%. The principal reason for
the difference between the statutory tax rate of 35% and the effective tax rate
of 26% is the expiration of tax credits and permanent differences.
12. FISCAL 1998 NON-ORDINARY ITEMS
On February 10, 1998, the Company decided to discontinue the HCIS business
unit's LabStat product while retaining the laboratory support and maintenance
business. The decision was made after the Company's Board of Directors
determined that continuing development and marketing of LabStat was not
9
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. FISCAL 1998 NON-ORDINARY ITEMS (CONTINUED)
in the best interest of the Company and its shareholders and that all meaningful
discussions with possible strategic partners had ceased.
The Company's decision to discontinue LabStat resulted in a non-ordinary
discontinued product charge of $11.6 million. The charge was a consequence of
the Company determining that certain assets utilized in the development and
marketing of LabStat became impaired as a result of the Company's decision. The
discontinued business charge consisted principally of non-cash charges,
including the write off of $4.9 million of capitalized software, $4.7 million of
deferred product costs, $0.9 million of fixed assets that were specifically
utilized in the LabStat product, $1.0 million in legal and other expenses that
were accrued as part of the write-off and $0.1 million in receivables.
In connection with the Company's evaluation of its laboratory information
systems business, the Company also conducted an analysis of it's Digital
Subtraction Angiography ("DSA") product line and determined it was appropriate
to write off the remaining inventory. Accordingly, the Company included an
impairment charge of $2.9 million in its results of operations for the first
quarter of fiscal 1998. The decision to write off the DSA inventories, was a
result of the Company's decision to no longer market the product. The combined
non-ordinary write off for LabStat and DSA was $14.5 million.
13. FISCAL 1999 NON-ORDINARY CHARGES AND EXPENSES
During 1998, the Company began an examination of the performance,
profitability and prospects of its various business units as part of an overall
evaluation of its business and financial controls. In connection with this
examination, the Company identified issues relating to its application of
accounting principles and conducted a review of its asset carrying values,
accruals and expenses in historical financial periods, leading to a restatement
of reported financial results for fiscal 1996, fiscal 1997 and the first three
quarters of fiscal 1998. Following the restatement, the Company continued to
focus on its accounting systems and weaknesses in its internal controls and the
assessment of its business units. As part of this focus and assessment, and
against the background of increasing competition in certain of the Company's
markets, and its customers deferring purchasing decisions due to their perceived
Year 2000 compliance risks, the Company revised its estimates of the
recoverability of the Company's inventory to reflect its lower production
requirements and consequently increased levels of potentially excess and
obsolete inventory, the collectibility of receivables, and the value of certain
other assets carried on the Company's books. The Company's financial statements
for the second quarter of 1999 include the following adjustments and
10
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. FISCAL 1999 NON-ORDINARY CHARGES AND EXPENSES (CONTINUED)
charges based on changes in estimates and revaluations resulting from this
process. The more significant charges are listed on the following pages.
<TABLE>
<S> <C>
Inventories
Nuclear inventory obsolescence................................................... $ 5,653
AMT inventory reduced to market value............................................ 415
ARS inventory obsolescence....................................................... 877
HCIS inventory obsolescence...................................................... 200
Offsite inventory obsolescence................................................... 746
Engineering obsolescence......................................................... 1,468
European inventory write-off..................................................... 1,073
Excess consumable spares write-off............................................... 788
---------
11,220
---------
Increase in receivable reserves.................................................... 5,960
---------
$ 17,180
---------
---------
</TABLE>
These adjustments and charges are reflected in the Statement of Operations
as additional cost of revenues and as operating expenses.
The Company has concentrated resources on continuing to improve its
accounting systems and internal controls, and has retained a nationally
recognized accounting firm as a consultant. That firm has developed a number of
recommendations and has been retained to assist the Company in implementing
them. Among other things, the Company is attempting to integrate more closely
its inventory procurement procedures with the process of developing and
introducing new products in order to reduce the risks of substantial inventories
being obsoleted by product introductions. Furthermore, with respect to
receivables, the Company is improving its sales order and collection procedures
related to field service sales and the sale of ancillary products which sales
resulted in the majority of the additional receivables reserves added during the
period.
14. RECENT PRONOUNCEMENTS
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.
In June 1998, Financial Accounting Standard 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), was issued and is effective for
fiscal years commencing after June 15,2000. The Company will comply with the
requirements of FAS 133 in fiscal year 2000. Currently the Company does not hold
any derivative instruments or engage in any hedging activities.
11
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
15. COMPREHENSIVE INCOME (LOSS)
Effective September 28, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting and displaying income and its
components (revenue, expenses, gains and losses) in full set of general-purpose
financial statements. This Statement requires the classification of items of
comprehensive income by their nature in a financial statement and the
accumulated balance of other comprehensive income separately accumulated other
comprehensive income in the equity section of the balance sheet. The Company's
accumulated other comprehensive income consists solely of translation
adjustments. Comprehensive income (loss) and net income (loss) including
comprehensive income (loss) for the three and six-month periods ended April 4,
1999 and March 29, 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
<S> <C> <C> <C> <C>
APRIL 4, MARCH 29, APRIL 4, MARCH 29,
1999 1998 1999 1998
---------- ----------- ---------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Net Income (loss)................................................. $ (20,791) $ 5,379 $ (16,935) $ (97)
Comprehensive (loss).............................................. (937) (150) (914) (602)
---------- ----------- ---------- -----
Net Income (loss) including comprehensive income (loss)........... $ (21,728) $ 5,229 $ (17,849) $ (699)
---------- ----------- ---------- -----
---------- ----------- ---------- -----
</TABLE>
16. SOUTH AMERICAN OPERATIONS
A significant number of the Company's customers in the Company's principal
South American markets of Brazil, Argentina and Columbia are delinquent in
making their periodic payments due under the terms of sales previously made to
them, many of which were supported by financing arrangements that involve full
or partial recourse to the Company. Deteriorating economic conditions, currency
devaluations and currency controls in those markets and ineffective monitoring
of delinquencies and collection efforts by the Company each may have contributed
to the delay in collections. The Company is currently undertaking renewed
collection efforts and a complete evaluation of each receivable balance and
recourse obligation to determine what reserves should be provided; it cannot,
however, make a reasonable estimate until this process is complete. The Company
is dedicating significant resources and working towards completing its
investigation and reporting the results as soon as possible. The Company's
receivables and recourse obligations for South America at April 4, 1999 totals
approximately $15 million against which the Company has reserves of $1.1
million. Any additional reserve requirement that may result from this review
could potentially be charged to the current or previously reported periods
depending on determination of the circumstances that existed in those periods
with respect to the collectibility of the receivables and the Company's
obligations under the recourse provisions.
12
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related Notes thereto
contained elsewhere within this document. Operating results for the three-month
and six-month periods ended April 4, 1999 are not necessarily indicative of the
results that may be expected for any future periods, including the full fiscal
year. Reference should also be made to the Annual Consolidated Financial
Statements, Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended September 27, 1998.
RESULTS OF OPERATIONS
THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 4, 1999 COMPARED TO THE
THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 29, 1998
Revenues for the second quarter of fiscal 1999 are $87.4 million, a 17%
increase, or $12.9 million, over the second quarter fiscal 1998 revenues of
$74.5 million. Revenues are primarily generated from the sale and servicing of
medical imaging products. Medical Systems revenues represented 81% and 77% of
the Company's total revenues for the second quarter of fiscal 1999 and 1998,
respectively. The Company's Software Business revenues represented approximately
19% and 23% of the Company's total revenues for the second quarter of fiscal
1999 and 1998, respectively.
Revenues for the six-month period ended April 4, 1999 increased 28%, or
$39.7 million, over the $142.0 million for the same period in fiscal 1998. Gross
profit for the first six months of fiscal 1999 was $52.1 million, a 14% increase
over the $45.6 million generated in the same period in fiscal 1998 which
included the discontinued product charge associated with the write-off of the
LabStat and DSA assets in the first quarter of fiscal 1998
NON-ORDINARY CHARGES AND EXPENSES
During 1998, the Company began an examination of the performance,
profitability and prospects of its various business units as part of an overall
evaluation of its business and financial controls. In connection with this
examination, the Company identified issues relating to its application of
accounting principles and conducted a review of its asset carrying values,
accruals and expenses in historical financial periods, leading to a restatement
of reported financial results for fiscal 1996, fiscal 1997 and the first three
quarters of fiscal 1998. Following the restatement, the Company continued to
focus on its accounting systems and weaknesses in its internal controls and the
assessment of its business units. As part of this focus and assessment, and
against the background of increasing competition in certain of the Company's
markets, and its customers deferring purchasing decisions due to their perceived
Year 2000 compliance risks, the Company decided to restructure its ADAC Medical
Technologies ("AMT") equipment refurbishing business, and revised its estimates
of the recoverability of the Company's inventory to reflect its lower build
plans and consequently increased levels of potentially excess an obsolete
inventory, the collectibility of receivables, and the value of certain other
assets carried on the Company's books. The Company's financial statements
13
<PAGE>
for the second quarter of 1999 include the following adjustments and charges
based on changes in estimates and revaluations resulting from this process. The
more significant charges are listed below.
<TABLE>
<S> <C>
Inventories
Nuclear inventory obsolescence................................................... $ 5,653
AMT inventory reduced to market value............................................ 415
ARS inventory obsolescence....................................................... 877
HCIS inventory obsolescence...................................................... 200
Offsite inventory obsolescence................................................... 746
Engineering obsolescence......................................................... 1,468
European inventory write-off..................................................... 1,073
Excess consumable spares write-off............................................... 788
---------
11,220
---------
Increase in receivable reserves.................................................... 5,960
---------
$ 17,180
---------
---------
</TABLE>
These adjustments and charges are reflected in the Statement of Operations
as additional cost of revenues and as operating expenses and also impact the
Company's balance sheet.
The Company has concentrated resources on continuing to improve its
accounting systems and internal controls, and has retained a nationally
recognized accounting firm as a consultant. That firm has developed a number of
recommendations and has been retained to assist the Company in implementing
them. Among other things, the Company is attempting to integrate more closely
its inventory procurement procedures with the process of developing and
introducing new products in order to reduce the risks of substantial inventories
being obsoleted by product introductions. Furthermore, with respect to
receivables, the Company is improving its sales order and collection procedures
related to field service sales and the sale of ancillary products which sales
resulted in the majority of the additional receivables reserves added during the
period.
MEDICAL SYSTEMS
Medical Systems includes revenues from the sale of the Company's nuclear
medicine and ADAC Medical Technologies (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 the
14
<PAGE>
three and six-month periods ended April 4, 1999 compared to the corresponding
periods in fiscal 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
<S> <C> <C> <C> <C>
APRIL 4, MARCH 29, APRIL 4, MARCH 29,
1999 1998 1999 1998
--------- ----------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Revenues:
Product.......................................................... $ 50,791 $ 40,634 $ 105,844 $ 79,423
Service.......................................................... 20,155 16,514 39,427 31,847
--------- ----------- ---------- ----------
Total.......................................................... $ 70,946 $ 57,148 $ 145,271 $ 111,270
Geographical mix:
North America.................................................... 89.2% 79.2% 88.9% 80.9%
Europe........................................................... 5.2% 12.0% 5.5% 12.1%
Latin America, Japan and Asia.................................... 5.6% 8.8% 5.6% 7.0%
Gross margin after discontinued product charges in
fiscal 1998
Product.......................................................... 2.9% 43.4% 22.3% 38.7%
Service.......................................................... 17.8% 28.9% 20.6% 32.9%
--------- ----------- ---------- ----------
Total.......................................................... 7.1% 39.3% 21.8% 37.0%
</TABLE>
Medical Systems' product revenues for the three and six-month periods ended
April 4, 1999 increased 25% and 33%, respectively, over the same period in
fiscal 1998. Product revenue growth was driven by increased installations due to
readiness of customers sites matched with the availability of cameras from the
Company's work-down of finished goods inventory. The proportion of the Company's
revenues derived from North America increased because of the relative
deterioration of economic and business conditions in Europe and Latin America,
and because the Company was able to more quickly complete installations of
ordered products in North America than in those other regions. The Company
anticipates it will continue throughout the balance of fiscal 1999 to experience
rates of revenue growth in the Medical Systems business that are lower than
rates experienced in recent years, due to increasing competition in certain of
the Company's markets, and its customers deferring purchasing decisions due to
their perceived Year 2000 risks.
Gross margins for Medical Systems products decreased 41% and 16% in the
three and six-month periods ending April 4, 1999, respectively, compared to the
corresponding periods of the prior fiscal year. The decreases in gross margins
can be attributed to several factors, the single largest of which were
substantial revised carrying values and book to physical adjustments of the
Company's inventories in this segment. Delays in customer orders coupled with
new product introductions by the Company and competitors caused the Company to
experience substantial obsolescence of inventories, which the Company wrote down
by $5.7 million, in the second quarter of fiscal 1999. In the Company's AMT
equipment refurbishment business, the Company took a further charge of $3.3
million in the second quarter of fiscal 1999, because of a book to physical
inventory adjustment as a result of a physical inventory. The adjustment
resulted from poor inventory control systems. The Company intends to continue
taking a physical inventory at its AMT site at the end of each quarter until
adequate controls are put in place or that facility is closed. The Company had
determined that certain of the materials that were being held for resale have
become obsolete due to rapid changes in the demand for used and refurbished
nuclear medicine cameras, resulting in a charge of $0.4 million in the second
quarter of fiscal 1999, to reduce the carrying value of materials held for
resale. The Company increased its reserve for engineering inventory from $0.8
million to $2.3 million in the second quarter of fiscal 1999, as a result of
book to physical
15
<PAGE>
adjustments and obsolescence. See Note 13 "Fiscal 1999--Non-ordinary Charges and
Expenses" of the Notes to Condensed Consolidated Financial Statements.
In addition to inventory-related issues, gross margins were also adversely
affected in the these periods by a smaller build plan for the second quarter of
fiscal 1999, due to the Company's effort to reduce finished goods inventory.
With fewer units manufactured the cost per unit increased. Gross margins were
also adversely affected by competitive pricing pressures and investments in
infrastructure.
Following the conclusion of its second fiscal quarter in 1999, the Company
decided to restructure its AMT business by discontinuing refurbishment of a
number of lines of older nuclear medicine equipment the demand for which is
declining. In connection with this decision the Company will close its
refurbishing facility in Washington, Missouri and relocate the business to
Milpitas, California. The Company anticipates that substantial inventories of
equipment and parts will be rendered obsolete by this decision and market
conditions. The Company presently believes that charges associated with these
AMT inventories in the third quarter of fiscal 1999 will total at least $2.4
million.
Medical Systems service revenues for the three and six-month periods ended
April 4, 1999 increased 22% and 24%, respectively, over the same periods in
fiscal 1998. The increases resulted from a higher number of customers under
service contract. The second quarter of fiscal 1999 also had additional revenues
from work to make customers equipment Year 2000 compliant. Gross margins for
Medical Systems services decreased by 11% and 12% respectively for the three and
six-month periods ended April 4, 1999 when compared to same periods of fiscal
1998. The principal reason for the decline was a write-off of approximately $0.8
million of consumable spare parts held in the field for use in providing
services following the Company's determination in the second quarter that
inventories of these spares were excessive. Margins also declined by
approximately 3% for the three and 4% for the six-month period due to increased
staffing and higher retrofit costs.
The Company is in the process of reviewing the composition of the
capitalized field service inventory and the estimated collective useful life of
this asset. The Company will take a physical inventory of its spares early in
the fourth quarter of fiscal 1999 which may result in a change to its safety
stock levels and removal of obsolete and excess parts. The Company will continue
to monitor recoverability of the collective asset under SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
SOFTWARE BUSINESS
ADAC's Software Business includes RTP and HCIS. RTP revenues are generated
primarily from the sale and support of the Company's Pinnacle(3)-TM- radiation
therapy planning system. HCIS historically generated revenues from the sale of
radiology, laboratory and cardiology information systems as well as from
providing support for these products. In the first quarter of fiscal 1998, the
Company took a one-time charge of $11.6 million to discontinue development and
marketing of its LabStat product. See Note 12 "Fiscal 1998 Non-ordinary Items"
of the Notes to Condensed Consolidated Financial Statements. Summary information
related to the Software Business product and service revenues and gross profit
margins
16
<PAGE>
for the three and six-month periods ended April 4, 1999 compared to the
corresponding periods in fiscal 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
<S> <C> <C> <C> <C>
APRIL 4, MARCH 29, APRIL 4, MARCH 29,
1999 1998 1999 1998
--------- ----------- --------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Revenues:
Product........................................................... $ 12,729 $ 13,167 $ 28,581 $ 22,397
Service........................................................... 3,718 4,208 7,820 8,294
--------- ----------- --------- -----------
Total........................................................... $ 16,447 $ 17,375 $ 36,401 $ 30,691
Gross margin after discontinued product charges
Product........................................................... 49.8% 54.4% 56.1% 1.9%
Service........................................................... 54.9% 49.6% 54.8% 47.9%
--------- ----------- --------- -----------
Total........................................................... 51.0% 53.2% 55.8% 14.3%
</TABLE>
Software Business product revenues decreased 3% and increased 28% for the
three and six-month periods ended April 4, 1999, respectively, over the same
period in fiscal 1998. The decrease in the three-month period resulted primarily
from the HCIS product lines due to a change in revenue recognition to
percentage-of-completion in compliance with Statement of Position ("SOP") 97-2
"Software Revenue Recognition". The HCIS decrease was partially offset by higher
RTP sales of the Pinnacle product. The increase for the six-month period is
primarily driven by the RTP Pinnacle product.
Gross margin percentage before discontinued product charges for the six
months ended April 4, 1999 increased 5% over the prior year period. The increase
is attributed to increased sales of the higher margin Pinnacle and QuadRIS
products, and cost reductions associated with the LabStat write-off in fiscal
1998. See Note 12 "Fiscal 1998 Non-ordinary Items" of the Notes to Condensed
Consolidated Financial Statements.
Software Business service revenues decreased for the three and six-month
periods ended April 4, 1999 from the corresponding periods in fiscal 1998 due
principally to lower legacy HCIS laboratory service revenues. However, service
gross margins increased for the three and six-month periods ended April 4, 1999,
from the corresponding periods in fiscal 1998 due to improved third party
maintenance fees.
OPERATING AND OTHER EXPENSES:
Summary information showing the Company's operating and other expenses as a
percentage of revenue for the three and six-month periods are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
<S> <C> <C> <C> <C>
APRIL 4, MARCH 29, APRIL 4, MARCH 29,
1999 1998 1999 1998
----------- ------------- ----------- -------------
Operating costs and expenses:
Marketing and sales................................................ 21.9% 16.0% 19.0% 16.5%
Research and development, net of software capitalization........... 5.1% 5.3% 4.9% 6.5%
General and administrative......................................... 18.2% 7.3% 13.3% 7.1%
Goodwill amortization.............................................. 0.6% 0.7% 0.5% 0.7%
Restructuring charge............................................... 0.9% -- 1.8% --
--- --- --- ---
46.7% 29.4% 39.6% 30.9%
--- --- --- ---
--- --- --- ---
Interest and other expense, net...................................... 2.0% 1.3% 1.6% 1.4%
</TABLE>
17
<PAGE>
Marketing and sales expenses for the three and six-month periods ended April
4, 1999 increased $7.2 and $11.1 million, respectively, over the corresponding
periods in the prior fiscal year as a result of higher compensation costs
associated with increasing revenues and orders and additional bad debt reserves
in the Company's European operations incurred in the second quarter of fiscal
1999.
Research and development expenditures, net of software capitalization,
totaled $4.5 and $4.0 million in the second quarter of fiscal 1999 and 1998,
respectively. The increase in the second quarter of fiscal 1999 compared to
fiscal 1998 is due to increased spending in RTP to support product growth.
Capitalized software costs were $2.1 million in both the second quarters of
fiscal 1999 and 1998. For the first six months of fiscal 1999 and 1998, research
and development expenditures, net of software capitalization, were $8.8 million
and $9.3 million in fiscal 1999 and 1998, respectively. Expenses for research
and development before capitalized software costs increased $1.0 million for the
first six months of fiscal 1999 when compared to 1998 due to increased product
development activities for RTP. Capitalized software costs were $5.1 and $3.6
million for the first six months of fiscal 1999 and 1998, respectively.
General and administrative expenses for the three and six-month periods
ended April 4, 1999 increased $10.4 and $14.2 million over the corresponding
periods in the prior fiscal year primarily as a result of an increase in bad
debt reserves of $4.4 million in the second quarter following a review of all
receivables on the Company's books (other than Latin American receiveables, a
review of which is continuing, see Note 16 "South American Operations"), but
also due to an increase in expenses payable to outside legal, accounting and
other service providers, an overall increase in infrastructure costs and an
increase in expense accruals.
Goodwill amortization decreased slightly in the three and six-month periods
of fiscal 1999 compared to the corresponding periods of fiscal 1998 due to
termination of the ADAC Radiology Services amortization partially offset by
goodwill amortization generated from the acquisition of ONES in January, 1998.
The Company took restructuring charges in the first and second quarters of
fiscal 1999 of $2.5 and $0.8 million, respectively. See Note 12 "Fiscal 1998
Non-ordinary Items" of the Notes to Condensed Consolidated Financial Statements.
Interest and other expense, net, which primarily consists of interest
expense and foreign currency transaction gains and losses, increased as a
percentage of revenue for the three and six-month periods ended April 4, 1999
when compared to corresponding periods in the prior fiscal year, primarily from
foreign currency losses during the second quarter of fiscal 1999 related to the
Company's European operations.
INCOME TAXES:
The provision (benefit) for income taxes for each of the three- and
six-month periods ended April 4, 1999 and March 29, 1998 are based on the
estimated effective income tax rates for the fiscal years ending October 3, 1999
and September 27, 1998 of 26% and 39.0%, respectively. The effective tax rate
for fiscal 1999 was adjusted in the second quarter from 38% to 26%, resulting in
an effective tax benefit for the second quarter of 29%. The principal reason for
the difference between the statutory tax rate of 35% and the effective tax rate
of 26% is the expiration of tax credits and permanent differences.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its available cash resources, generated primarily from
its credit lines, will provide adequate funds to finance the Company's
operations in fiscal 1999. If necessary, the Company will seek to increase its
credit line to support the Company's future growth. There can be no assurance
that credit lines sufficient to satisfy the Company's cash requirements will be
available if needed.
18
<PAGE>
The Company's ratio of current assets to current liabilities at April 4,
1999 was 1.3 to one, while working capital at April 4, 1999 decreased $28.2
million to $32.7 million from $60.9 million at September 27, 1998. This decrease
was primarily due to the increases in notes payable to banks, deferred revenues,
and customer deposits and advanced billings of $15.7, $7.0 and $5.9 million,
respectively, and decreases in inventories and cash of $24.3 and $3.4 million,
respectively, partially offset by a $29.6 million increase in accounts
receivable, net. Notes payable to banks increased to meet the Company's
operating needs for cash. Deferred revenues, and customer deposits and advanced
billings increased due to the Company's more stringent revenue recognition
policy requiring up-front customer deposits with orders. Inventories decreased
primarily from the charges in the second quarter of fiscal 1999 of $11.2 million
and a work-down of finished goods inventory. Accounts receivable, net, increased
due to a decrease in accounts receivable sold, increased sales for the first
six-months of fiscal 1999 and a lengthening of customer payment terms to meet
competitive conditions. This was partially offset by the increase in accounts
receivable reserve. The Company's ratio of current assets to current liabilities
at March 29, 1998 was 1.4 to one, while working capital at March 29, 1998
decreased $3.6 million to $37.2 million from $40.8 million at September 28,
1997.
The primary uses of cash in operations for the first six months of fiscal
1999 were increases of $39.3 and $6.0 million in accounts receivable and
deferred income taxes, partially offset by a decrease of $16.5 million in
inventories and increases of $7.0 and $5.9 million in deferred revenues and
customer deposits and advanced billings. The deferred income tax asset increased
due to the net loss for the six-month period ended April 4, 1999. The primary
uses of cash in operations for the first six months of fiscal 1998 was a $9.9
million increase in accounts receivable and a $15.5 million increase in
inventory.
Cash of $12.2 million was used for investing activities in the first six
months of fiscal 1999. This activity consisted primarily of $8.0 and $3.9
million for capital equipment expenditures and an increase in other assets,
respectively. Capital expenditures were primarily for computer equipment to
support new enterprise software being installed for the sales and service
groups, and the addition of internal use engineering and sales demo equipment.
The increase in other assets is primarily from the capitalization of development
costs related to software products. Cash of $11.4 million was used for investing
activities in the first six months of fiscal 1998. This activity consisted
principally of the acquisitions of CT Solutions and ONES.
Financing activities provided $19.3 million of cash in the first six months
of fiscal 1999. This was attributable to $15.7 million of increased borrowings
to meet operational needs and $3.6 million of proceeds from common stock issued
to employees under the Company's employee stock purchase and option plans.
Financing activities provided $11.4 million of cash in the first six months of
fiscal 1998. This was primarily attributable to $6.5 million of increased
borrowings for the purchase of CT Solutions and ONES and $4.9 million of
proceeds from common stock issued to employees under the Company's employee
stock purchase and option plans.
The Company presently has a $75 million revolving credit facility with a
bank syndicate. In February 1999, the Company delayed delivering financial
statements and related information to its banks in connection with the
restatement occurring at that time. This constituted a default under the
facility. In May 1999, the Company again delayed delivering financial statements
and related information to its banks in connection with the delayed public
release of second quarter financials for fiscal 1999. This also constituted a
default under the facility. As anticipated in both cases, the banks waived the
defaults and consented to an extension of time required to provide the
information. The Company has since delivered all required information within the
time required by the banks. In addition, the results of the Company's operations
in the first and second quarters caused the Company to be out of compliance with
all financial covenants in the facility, which defaults have been waived through
the end of the second fiscal quarter. It is likely that the results of the
Company's third fiscal quarter also will not comply with these covenants. The
Company will seek a further waiver of the covenants for this period, although
there can be no assurance that such a waiver will be available.
19
<PAGE>
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.
SOUTH AMERICAN OPERATIONS
A significant number of the Company's customers in the Company's principal
South American markets of Brazil, Argentina and Columbia are significantly
delinquent in making their periodic payments due under the terms of sales
previously made to them, many of which were supported by financing arrangements
that involve full or partial recourse to the Company. Deteriorating economic
conditions, currency devaluations and currency controls in those markets and
ineffective monitoring of delinquencies and collection efforts by the Company
each may have contributed to the delay in collections. The Company is currently
undertaking renewed collection efforts and a complete evaluation of each
receivable balance and recourse obligation to determine what reserves should be
provided; it cannot, however, make a reasonable estimate until this process is
complete. The Company is dedicating significant resources and working towards
completing its investigation and reporting the results as soon as possible. The
Company's receivables and recourse obligations for South America at March 31,
1999 totals approximately $15 million against which the Company has reserves of
$1.1 million. Any additional reserve requirement that may result from this
review could potentially be charged to the current or previously reported
periods depending on determination of the circumstances that existed in those
periods with respect to the collectibility of the receivables and the Company's
obligations under the recourse provisions.
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. These statements,
including the forward looking statements contained in this Form 10-Q, 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. These forward looking statements include statements concerning
the Company's future bookings, revenue, expenses and earnings, the establishment
of additional reserves and the taking of Non-ordinary charges. Factors that
could cause actual results to differ materially from those contained in such
forward-looking statements include, but are not limited to, the existence of
significant competition in each of the business segments in which the Company
conducts business; the impact of Year 2000 on the Company's results; the
Company's dependence on successfully developing, introducing and commercializing
new products and developing enhancements to existing products; the
collectibility of the Company's receivables, changes to the Company's operating
structure and charges and dislocations that may result therefrom; the impact of
international economic conditions on the Company's business; and a number of
factors that can introduce variability in the Company's operating results,
including the timing of product orders, shipments, and installations. Further
information on these and other factors is found below. All forward-looking
statements are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update such statements.
20
<PAGE>
LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits were
filed in federal court by or on behalf of stockholders who purchased Company
stock between January 10, 1996 and December 28, 1998. These actions name as
defendants the Company and certain of its present officers and directors. The
complaints allege various violations of the federal securities laws in
connection with restatement of the Company's financial statements and seek
unspecified but potentially significant damages. The Company intends to contest
these actions vigorously. A stockholder derivative action, purportedly on behalf
of the Company and naming as defendants Company officers and directors was also
filed in state court seeking recovery for the Company based on stock sales by
these defendants during the above time period. The Company is also 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 liability resulting from
these claims would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flow.
GOVERNMENT REGULATION
The design, clinical activities, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of the company's products are subject
to extensive and rigorous governmental regulation in the United States and
foreign countries. In the United States and certain foreign countries, the
process of obtaining and maintaining required regulatory clearances or approvals
is lengthy, expensive and uncertain. There can be no assurance that any
necessary clearance or approval will be granted the Company or that FDA or other
regulatory agency review will not involve delays adversely affecting the
Company. In addition, a failure to comply with applicable regulatory
requirements could result in enforcement actions including Warning Letters, 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, which could have a material adverse effect upon the Company.
Following an inspection in mid-1997, Cortet, Inc., which the Company
acquired in May 1997, received a Warning Letter from the FDA concerning
inspectional observations relating to the adequacies of Cortet's quality
assurance system. Cortet responded to the observations and the Warning Letter
and received correspondence from the FDA's Florida District Office indicating
that Cortet's responses appeared to adequately address the FDA's concerns. In
mid-1998, the State of California, under a contract with the FDA, completed a
routine inspection of ADAC's facility in Milpitas, California. The state
investigator issued a FDA Form 483 containing observations of non-compliance of
the recently implemented QSR. The state investigator also placed a temporary
shipment hold on Pinnacle3 pending the Company satisfactorily responding to the
State's concerns regarding the Company's quality systems. The Company promptly
responded to the FDA and the State and initiated a number of corrective actions.
The State lifted the Pinnacle3 shipment hold on August 28, 1998 and, in
September 1998, ADAC received a letter from the FDA indicating that the Company
had adequately responded to the FDA's concerns. Although the Company was deemed
to have adequately responded to the State and FDA following the foregoing
inspections, the Company is responsible for the full implementation of all
corrective actions. In addition, as all companies are, the Company remains
subject to periodic inspections in the future and there can be no assurance as
to the timing or outcome of any subsequent inspection. The scope of any
re-inspection could be more comprehensive than the inspections of Cortet and the
Company's Milpitas facility, and there can be no assurance that the FDA, upon
re-inspection, will deem the Company's corrective actions to be adequate or that
additional corrective action, in areas not addressed in the Warning Letter or
the Form 483, will not be required. Any failure by the Company to fully
implement the required corrective actions or to comply with any other applicable
regulatory requirements could have a material adverse effect on the Company's
ability to continue to manufacture and distribute its products,
21
<PAGE>
and in more serious cases, could result in seizure, recall, injunction and/or
civil fines. Any of the foregoing, would have a material adverse effect on the
Company.
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.
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, which could have a material adverse effect on the Company's
business.
DEPENDENCE ON 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 markets in which the Company competes are highly
competitive, the Company must continue to develop and successfully commercialize
innovative new products and product enhancements such as Forte, MCDPET, MCD/
ACPET and ENVOI in order to pursue its growth strategy. The development of new
products and product enhancements entails considerable time and expense,
including research and development costs, and the time, expense and uncertainty
involved in obtaining any necessary regulatory clearances. Failure of the
Company to develop, market and sell new products and enhancements effectively in
future periods could have a material adverse effect on the Company's results of
operations and financial condition.
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 uncertain. The timing of revenues can be affected by delays in product
introductions, shipments and installation scheduling, 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, which is
typical for the industry. Accordingly, results for a given quarter can be
adversely affected if there is a substantial order shortfall late in that
quarter. In addition, 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, customer financing and other factors. Accordingly, there can be no
assurance that orders will mature into revenue. The Company has accounts
receivable due from customers in Latin America. Recent changes in economic
conditions in that region, including the devaluation of Brazilian currency, may
adversely affect the Company's ability to collect these accounts receivable. If
the Company were unable to collect a substantial majority of these accounts
receivable, the Company's results of operations for a quarterly period could be
adversely affected.
22
<PAGE>
MATERIAL WEAKNESSES IN INTERNAL CONTROLS
After completion of their audit of the results of the Company's 1998 fiscal
year, the Company's independent accountants reported to the Company's audit
committee that they had found material weaknesses in the Company's internal
accounting controls. Following receipt of this report, the Company retained a
nationally recognized accounting firm other than its independent auditors to
review its controls. The Company has further engaged this firm to recommend to
the Company suggested improvements in these controls and to assist the Company
in implementing them. The Company believes that it has already taken steps to
remedy certain weaknesses in its control functions, and that improvements
already in place, coupled with improvements the Company plans to make in the
near future, should substantially improve the timeliness and accuracy of the
Company's internal financial reporting and monitoring functions.
RISKS RELATED TO ACQUISITIONS
In the past two years, 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 businesses. 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 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
The following statements are a "Year 2000 Readiness Disclosure" within the
meaning of the Year 2000 Information and Readiness Disclosure Act. 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, 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. Although management is
continuing to assess the expense associated with internal Year 2000 compliance,
the Company does not believe such compliance will have a material adverse effect
on the Company's results of operations or financial condition.
The Company has completed an assessment and analysis of its internal
information technology systems, software and manufacturing equipment. The
Company has implemented the majority of system changes needed to correct its
internal Year 2000 issues. While the Company currently expects that the Year
2000 will not pose significant internal operational problems, delays in the
implementation of new information systems, or a failure to fully identify all
Year 2000 dependencies in the Company's systems, could have a material adverse
effect on the Company's results of operations.
The Company has established a program to assess its products to ensure that
they are Year 2000 compliant. To monitor this program and to inform customers
about the Year 2000 issues with respect to its products, the Company has created
a website at www.adaclabs.com/about/year20001.html. This website
23
<PAGE>
identifies the status of Year 2000 compatibility of its products, including
products that are Year 2000 compliant, products that need free software updates,
products that require hardware upgrades, and products that cannot be made Year
2000 compliant. This list is periodically updated as analysis of additional
products is completed.
The Company will sell, or provide under warranty or service contracts,
software license upgrades to update the majority of its installed base to make
the products Year 2000 compliant, and anticipates completing development of such
upgrades in 1999. For older equipment which the Company no longer manufactures,
the Company will sell hardware upgrades to its customers which will address the
Year 2000 compliance where possible. The Company is contacting by mail customers
which require computer hardware upgrades, and is also posting information
relating to Year 2000 compliance for its products on the Company's website as
described above.
The Company is gathering information from its suppliers and vendors to
determine the extent to which the Company's capabilities are vulnerable to
failure by those third parties to remedy their own Year 2000 issues. The Company
is currently receiving responses to those inquiries and anticipates that the
analysis of this information will be completed by the end of 1999. The Company
will proceed with further analysis or testing of its vendors' systems as needed.
However, there is no guarantee that the systems and products of other companies
on which the Company relies will be timely converted or that they will not have
a material adverse effect on the Company.
The Company is in the process of developing a contingency plan. This plan is
expected to be in place in late 1999. The inability of the Company to develop
and implement a contingency plan could result in a material adverse effect on
the Company.
The Company currently estimates that total Year 2000 costs will be
approximately $1.2 million, of which $0.5 million has already been incurred.
These cost estimates do not include any potential costs related to any customer
or other claim. In addition, these cost estimates are based on current
assessments of the ongoing activities described above, and are subject to
changes as the Company continuously monitors these activities. The Company
believes any modifications deemed necessary will be made on a timely basis and
does not believe that the costs of such modifications will have a material
adverse effect on the Company's operating results; however, the Company's
expectations as to the extent and timeliness of any modifications required in
order to achieve Year 2000 compliance and the costs related thereto are
forward-looking statements subject to risks and uncertainties. Actual results
may vary as a result of number of factors, including those described herein.
There can be no assurance that the Company will be able to successfully modify
on a timely basis such products, services and systems to comply with Year 2000
requirements, which failure could have a material adverse effect on the
Company's operating results.
In addition, the Company is currently seeking to ensure that the software
included in its products 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.
24
<PAGE>
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.
25
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1998 Annual Meeting of Shareholders on May 6, 1999
(the "Annual Meeting").
(b) At the Annual Meeting, the following directors were duly elected:
Stanley D. Czerwinski, R. Andrew Eckert, Graham O. King, David L. Lowe,
F. David Rollo, and Edmund H. Shea Jr.
(c) At the Annual Meeting, the following votes were cast for each of the
items voted upon at the meeting:
1) Election of Directors:
<TABLE>
<CAPTION>
IN FAVOR WITHHELD
------------ ---------
<S> <C> <C>
Stanley D. Czerwinski...................................... 17,598,106 312,478
R. Andrew Eckert........................................... 17,625,665 284,919
Graham O. King............................................. 17,639,546 271,038
David L. Lowe.............................................. 17,633,180 277,404
F. David Rollo............................................. 17,634,163 276,421
Edmund H. Shea, Jr......................................... 17,600,859 309,725
</TABLE>
2) Proposal to approve the 1999 Long-Term Incentive Plan and reserve
920,000 shares of stock for issuance there under, subject to
additional shareholder approval: FOR--8,622,925; AGAINST--5,526,619;
ABSTAIN--496,399; and BROKER NON-VOTES--3,264,641.
3) Proposal to approve an amendment to the Company's 1999 Long-Term
Incentive Plan to increase shares reserved for issuance on an annual
basis: FOR--4,460,805; AGAINST-- 9,611,027; ABSTAIN--574,111; and
BROKER NON-VOTES--3,264,641.
4) Proposal to approve an amendment to the Company's 1994 Employee Stock
Purchase Plan to increase the shares authorized thereunder by
100,000: FOR--12,777,928; AGAINST-- 1,319,430; ABSTAIN--481,655; and
BROKER NON-VOTES--3,331,571.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
10.23 1999 Long-Term Incentive Plan
10.24 Amendment No. 3 to Employee Stock Purchase Plan (1994)
27 Financial Data Schedule
</TABLE>
(b) Form 8-K Reports:
None filed during the fiscal quarter described in this Report on Form
10-Q.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: July 1, 1999 ADAC LABORATORIES
(Registrant)
By: /s/ R. ANDREW ECKERT
-----------------------------------------
R. Andrew Eckert
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
</TABLE>
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
10.23 1999 Long-Term Incentive Plan
10.24 Amendment No. 3 to Employee Stock Purchase Plan (1994)
27 Financial Data Schedule
</TABLE>
28
<PAGE>
EXHIBIT 10.23
ADAC LABORATORIES
1999 LONG-TERM INCENTIVE PLAN
1. PURPOSES OF THE PLAN. The purpose of the ADAC Laboratories 1999
Long-Term Incentive Plan is to enable ADAC Laboratories to provide an
incentive to eligible Service Providers whose present and potential
contributions are important to the continued success of the Company, to
afford these individuals the opportunity to acquire a proprietary interest in
the Company, and to enable the Company to enlist and retain in its service
the best available talent for the successful conduct of its business and
align the interests of such persons with the interests of the Company's
shareholders. It is intended that these purposes will be effected through
the granting of (a) Options, (b) Stock Purchase Rights, (c) SARs, and (d)
Long-Term Performance Awards.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or such of its Committees as
shall be administering the Plan, in accordance with Section 5 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Options or Stock Purchase Rights
are granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 5 of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means ADAC Laboratories, a California corporation.
(h) "CONSULTANT" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
<PAGE>
(j) "DISABILITY" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed
by statute or contract. If reemployment upon expiration of a leave of
absence approved by the Company is not so guaranteed, on the 181st day of
such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as
a Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment"
by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination, as
reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the last market trading day prior to the
day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code
and the regulations promulgated thereunder.
(o) "INSIDE DIRECTOR" means a Director who is an Employee.
(p) "LONG-TERM PERFORMANCE AWARD" means an award under Section 10
below. A Long-Term Performance Award shall permit the recipient to receive a
cash or stock bonus (as
-2-
<PAGE>
determined by the Administrator) upon satisfaction of such performance
factors as determined by the Administrator and as are set out in the
recipient's individual grant.
(q) "LONG-TERM PERFORMANCE AWARD AGREEMENT" means a written
agreement between the Company and an Optionee evidencing the terms and
conditions of an individual Long-Term Performance Award. The Long-Term
Performance Award Agreement is subject to the terms and conditions of the
Plan.
(r) "NONSTATUTORY STOCK OPTION" means any Option that is not an
Incentive Stock Option.
(s) "NOTICE OF GRANT" means a written notice evidencing certain
terms and conditions of an individual Option, Stock Purchase Right, SAR or
Long-Term Performance Award. The Notice of Grant is part of the Option
Agreement, the SAR Agreement or the Long-Term Performance Award Agreement.
(t) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(u) "OPTION" means a stock option granted pursuant to the Plan.
(v) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option. The Option Agreement is subject to the terms and conditions of the
Plan.
(w) "OPTIONED STOCK" means the Common Stock subject to an Option
or Right.
(x) "OPTIONEE" means the holder of an outstanding Option or Right.
(y) "OUTSIDE DIRECTOR" means a Director who is not an Employee.
(z) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(aa) "PLAN" means this 1999 Long-Term Incentive Plan.
(bb) "RESTRICTED STOCK" means shares of Common Stock subject to a
Restricted Stock Purchase Agreement acquired pursuant to a Stock Purchase
Right under Section 9 below.
(cc) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
(dd) "RIGHT" means and includes SARs, Long-Term Performance Awards
and Stock Purchase Rights granted pursuant to the Plan.
-3-
<PAGE>
(ee) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor rule thereto, as in effect when discretion is being exercised with
respect to the Plan.
(ff) "SAR" means a stock appreciation right granted pursuant to
Section 7 of the Plan.
(gg) "SAR AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual SAR.
The SAR Agreement is subject to the terms and conditions of the Plan.
(hh) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(ii) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(jj) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock
pursuant to Section 8 of the Plan.
(kk) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. ELIGIBILITY. Nonstatutory Stock Options and Rights may be granted
to Service Providers. Incentive Stock Options may be granted only to
Employees. If otherwise eligible, a Service Provider who has been granted an
Option or Right may be granted additional Options or Rights.
4. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section
11, the maximum aggregate number of Shares which may be issued under the Plan
is 920,000 Shares. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Right expires or becomes unexercisable without
having been exercised in full, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan
(unless the Plan has terminated); provided, however, that Shares that have
actually been issued under the Plan, whether upon exercise of an Option or
Right, shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if Shares of Restricted Stock
are repurchase by the Company at their original purchase price, such Shares
shall become available for future grant under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different groups of
Service Providers.
-4-
<PAGE>
(ii) SECTION 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options of SARs granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above, the
Plan shall be administered by (A) the Board or (B) a Committee, which
Committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option or Right;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of Options and Rights. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options or Rights 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 Right or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to construe and interpret the terms of the Plan;
(vii) to prescribe, amend and rescind rules and regulations
relating to the Plan;
(viii)to modify or amend each Option or Right (subject to
Section 13 of the Plan);
(ix) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Right
previously granted by the Administrator;
-5-
<PAGE>
(x) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the 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
an Optionee to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary or
advisable;
(xi) to determine the terms and restrictions applicable to
Options and Rights and any Restricted Stock; and
(xii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on
all Optionees and any other holders of Options or Rights.
6. DURATION OF THE PLAN. The Plan shall remain in effect until
terminated by the Board under the terms of the Plan; provided that in no
event shall the Plan terminate later than the date five (5) years from the
date the Plan was adopted by the Board.
7. OPTIONS AND SARS.
(a) OPTIONS. The Administrator, in its discretion, may grant
Options to eligible participants and shall determine whether such Options
shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option
shall be evidenced by a Notice of Grant which shall expressly identify the
Option as Incentive Stock Option or as Nonstatutory Stock Option, and shall
be in such form and contain such provisions as the Administrator shall from
time to time deem appropriate. Option agreements shall contain the following
terms and conditions:
(i) OPTION EXERCISE PRICE. The per Share exercise price for
the Shares to be issued pursuant to the exercise of an Option shall be
determined by the Administrator; provided, however, that in no event shall it
be less than 100% of the Fair Market Value per Share on the date of grant,
although it may be in excess of such amount.
(ii) WAITING PERIOD AND EXERCISE DATES. At the time an
Option is granted, the Administrator shall fix the period within which the
Option may be exercised, and shall determine any conditions that must be
satisfied before the Option may be exercised.
(iii) FORM OF PAYMENT. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of:
-6-
<PAGE>
(A) cash;
(B) check;
(C) promissory note;
(D) other Shares which (1) in the case of Shares
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (2) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(E) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(F) a reduction in the amount of any Company liability
to the Optionee;
(G) any combination of the foregoing methods of payment;
or
(H) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
(iv) SPECIAL INCENTIVE STOCK OPTION PROVISIONS. In addition
to the foregoing, Incentive Stock Options shall be subject to the following
terms and conditions:
(A) DOLLAR LIMITATION. To the extent that the aggregate
Fair Market Value of (a) the Shares with respect to Options designated as
Incentive Stock Options, plus (b) the shares of stock of the Company, Parent
and any Subsidiary with respect to which other incentive stock options are
exercisable for the first time by an Optionee during any calendar year (under
all plans of the Company and any Parent and Subsidiary) exceeds $100,000,
such Options shall be treated as Nonstatutory Stock Options. For purposes of
the preceding sentence, (a) Options shall be taken into account in the order
in which they were granted, and (b) the Fair Market Value of the Shares shall
be determined as of the time the Option or other incentive stock option is
granted.
(B) EXERCISE PRICE. In the case of any Optionee who is,
on the date of grant, the owner of Common Stock (as determined under Section
424(d) of the Code) possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary of
the Company (a "10% Owner"), then the per Share exercise price of an
Incentive Stock Option shall be not less than 110% of the Fair Market Value
on the date of grant. In the case of any other Optionee, the per Share
exercise price shall be no less than 100% of Fair Market Value on the date of
grant.
(C) TERM OF OPTION. The term of each Option shall be
stated in the Option Agreement. In the case of an Incentive Stock Option,
the term shall be ten (10) years from the date of grant or such shorter term
as may be provided in the Option Agreement; provided,
-7-
<PAGE>
however, that in the case of an Incentive Stock Option granted to an Optionee
who is a 10% Owner, the term of the Incentive Stock Option shall be five (5)
years from the date of grant or such shorter term as may be provided in the
Option Agreement.
(v) OTHER PROVISIONS. Each Option granted under the Plan
may contain such other terms, provisions, and conditions not inconsistent
with the Plan as may be determined by the Administrator.
(vi) BUYOUT PROVISIONS. The Administrator may at any time
offer to buyout for a payment in cash, promissory notes or Shares, an Option
previously granted, based on such terms and conditions as the Administrator
shall establish and communicate to the Optionee at the time that such offer
is made.
(b) PROCEDURE FOR GRANTS TO OUTSIDE DIRECTORS. Outside Directors
shall be granted Options in accordance with the following provisions:
(i) Each Outside Director shall be automatically granted an
Option to purchase 20,000 Option Shares (the "First Option") on the date on
which such person first becomes an Outside Director, whether through election
by the shareholders of the Company or appointment by the Board to fill a
vacancy; provided, however, that an Inside Director who ceases to be an
Inside Director but who remains a Director shall not receive a First Option.
(ii) Each Outside Director shall be automatically granted a
subsequent Option (a "Subsequent Option") to purchase 3,333 Shares on March
15th of each year after such person first becomes an Outside Director (or the
next business day if March 15 is on a weekend or holiday); provided he or she
is then an Outside Director, and if as of such date, he or she shall have
served on the Board for at least the preceding six (6) months; provided,
further, that on March 15 following the fourth anniversary of the date on
which such person first becomes an Outside Director, he or she shall receive
a Subsequent Option of 20,000 shares (in lieu of the 3,333 share Subsequent
Option) ( a "Fourth Year Subsequent Option").
(iii) The terms of all Outside Director Options granted
hereunder shall be as follows:
(A) the term of the each Option shall be five (5) years.
(B) each Option shall be exercisable only while the
Outside Director remains a Service Provider, and may be exercised only in
installments as follows:
(1) FIRST OPTIONS. Each First Option shall
vest and become exercisable as to 25% of the Shares subject thereto on the
first anniversary of the date of grant, and as to an additional 25% of the
shares subject thereto on each of the next three (3) anniversaries of its
date of grant, provided the Outside Director remains a Director on such dates.
-8-
<PAGE>
(2) SUBSEQUENT OPTIONS. Each Subsequent
Option shall vest and become fully exercisable upon the first anniversary of
the date of grant provided the Outside Director remains a Director on such
date and provided further, however, that each Fourth Year Subsequent Option
shall vest and become exercisable pursuant to Section 7(b)(iii)(B)(1) as if
it were a First Option.
(3) the exercise price per Share shall be 100%
of the Fair Market Value per Share on the date of grant.
(C) Except as otherwise set forth in this Section 7(b),
Options granted pursuant to this Section 7(b) shall be governed by the terms
of the Plan applicable to Options generally.
(c) SARS. At the sole discretion of the Administrator, SARs may
be granted either alone, in addition to or in tandem with other Options and
Rights. The following provisions apply to SARs:
(i) The SAR shall entitle the Optionee, by exercising the
SAR, to receive from the Company an amount equal to the excess of (1) the
Fair Market Value of the exercised portion of the SAR, as of the date of such
exercise, over (2) the Fair Market Value of the exercised portion of the SAR,
as of the date on which the SAR was granted; PROVIDED, however, that the
Administrator may place limits on the aggregate amount that may be paid upon
exercise of an SAR.
(ii) SARs shall be exercisable, in whole or in part, at such
times as the Administrator shall specify in the Optionee's SAR agreement.
(iii) The Company's obligation arising upon the exercise of an
SAR may be paid in Shares or cash, or in any combination of Shares and cash,
as the Administrator, in its sole discretion, may determine. Shares issued
upon the exercise of an SAR shall be valued at their Fair Market Value as of
the date of exercise.
(d) LIMITATIONS.
(i) Neither the Plan nor any Option or Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(ii) The following limitations shall apply to grants of
Options and SARs:
(A) No Service Provider shall be granted, in any fiscal
year of the Company, Options or SARs to purchase more than 300,000 Shares.
-9-
<PAGE>
(B) In connection with his or her initial service, a
Service Provider may be granted Options or SARs to purchase up to an
additional 300,000 Shares that shall not count against the limit set forth in
subsection (i) above.
(C) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 11.
(D) If an Option or SAR is canceled in the same fiscal
year of the Company in which it was granted (other than in connection with a
transaction described in Section 11), the cancelled Option or SAR will be
counted against the limits set forth in subsections (1) and (2) above. For
this purpose, if the exercise price of an Option or SAR is reduced, the
transaction will be treated as a cancellation of the Option and the grant of
a new Option or SAR.
(e) METHOD OF EXERCISE.
(i) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. An
Option or SAR granted hereunder shall be exercisable at such times and under
such conditions as determined by the Administrator and as shall be
permissible under the terms of the Plan. An Option or SAR may not be
exercised for a fraction of a Share.
An Option or SAR shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option or SAR by the person entitled to exercise the Option or
SAR and (in the case of an Option) full payment for the Shares with respect
to which the Option is exercised has been received by the Company. Full
payment may, as authorized by the Administrator (and, in the case of an
Incentive Stock Option, determined at the time of grant) and permitted by the
Option Agreement consist of any consideration and method of payment allowable
under Section 7(a)(iii). Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of
the Company) of the stock certificate evidencing such Shares, no right to
vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the
Option or SAR. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock certificate is issued,
except as provided in Section 11 of the Plan.
Exercise of an Option or SAR in any manner shall result in a
decrease in the number of Shares which thereafter shall be available, both
for purposes of the Plan and for issuance under the Option or SAR, by the
number of Shares as to which the Option is exercised.
(ii) TERMINATION OF EMPLOYMENT/SERVICE PROVIDER. In the
event that an Optionee ceases to be a Service Provider (other than upon the
Optionee's death or Disability), the Optionee may exercise his or her Option
or SAR within such period of time as is determined by the Administrator at
the time of grant, but only to the extent that the Optionee was entitled to
exercise the Option or SAR at the date of such termination (but in no event
later than the expiration of the term of such Option or SAR as set forth in
the Option or SAR Agreement). In the absence of a determination by the
Administrator, the Option or SAR shall remain exercisable for three (3)
months
-10-
<PAGE>
following the Optionee's termination. To the extent that Optionee was not
entitled to exercise an Option or SAR at the date of such termination, and to
the extent that the Optionee does not exercise such Option or SAR (to the
extent otherwise so entitled) within the time specified herein, the Option or
SAR shall terminate.
(iii) DISABILITY OF OPTIONEE. In the event an Optionee ceases
to be a Service Provider as a result of the Optionee's Disability, the
Optionee may exercise his or her Option or SAR within such period of time as
is determined by the Administrator at the time of grant (but in no event
later than the expiration of the term of such Option or SAR as set forth in
the Option or SAR Agreement) as to all of the Shares subject thereto,
including Shares as to which the Option is not otherwise exercisable at the
date of Optionee's termination. In the absence of a determination by the
Administrator, the Option or SAR shall remain exercisable for twelve (12)
months following the Optionee's termination. To the extent that the Optionee
does not exercise such Option or SAR within the time specified herein, the
Option or SAR shall terminate.
(iv) DEATH OF OPTIONEE. In the event of an Optionee's death,
the Optionee's estate or the person(s) who acquired the right to exercise the
Optionee's Option or SAR by bequest or inheritance may exercise the Option or
SAR within such period of time as is determined by the Administrator at the
time of grant (but in no event later than the expiration of the term of such
Option or SAR as set forth in the Option or SAR Agreement) as to all of the
Shares subject thereto, including Shares as to which the Option is not
otherwise exercisable at the date of Optionee's termination. In the absence
of a determination by the Administrator, the Option or SAR shall remain
exercisable for twelve (12) months following the Optionee's termination. To
the extent that the Optionee's estate or a person who acquired the right to
exercise such Option does not exercise such Option or SAR within the time
specified herein, the Option or SAR shall terminate.
8. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under
the Plan and/or cash awards made outside of the Plan. After the
Administrator determines that it will offer Stock Purchase Rights under the
Plan, it shall advise the offeree in writing or electronically, by means of a
Notice of Grant, of the terms, conditions and restrictions related to the
offer, including the number of Shares that the offeree shall be entitled to
purchase, the price to be paid, and the time within which the offeree must
accept such offer, provided, however, that no more than 25% of the shares
available for issuance under this Plan on the first day of each fiscal year
during its term shall be issued pursuant to Restricted Stock Purchase Rights
(or Long Term Performance Awards) during that fiscal year. The offer shall
be accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or Disability). The purchase price for Shares repurchased pursuant to the
Restricted
-11-
<PAGE>
Stock Purchase Agreement shall be the original price paid by the purchaser
and may be paid by cancellation of any indebtedness of the purchaser to the
Company. The repurchase option shall lapse at such rate as the Administrator
may determine (generally ratable over four (4) years, but in no event shall
it lapse over a period of less than one (1) year).
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 11 of the Plan.
9. LONG-TERM PERFORMANCE AWARDS.
(a) GENERAL. Long-Term Performance Awards are cash or stock bonus
awards that may be granted either alone or in addition to other awards
granted under the Plan. Such awards may be granted for no cash
consideration. The Administrator shall determine the nature, length and
starting date of any performance period (the "Performance Period") for each
Long-Term Performance Award, and shall determine the performance or
employment factors, if any, to be used in the determination of Long-Term
Performance Awards and the extent to which such Long-Term Performance Awards
are valued or have been earned. Long-Term Performance Awards may vary from
participant to participant and between groups of participants and shall be
based upon the achievement of Company, Subsidiary, Parent and/or individual
performance factors or upon such other criteria as the Administrator may deem
appropriate. Performance Periods may overlap and participants may
participate simultaneously with respect to Long-Term Performance Awards that
are subject to different Performance Periods and different performance
factors and criteria. Long-Term Performance Awards shall be confirmed by,
and be subject to the terms of, a Long-Term Performance Award agreement. The
terms of such awards need not be the same with respect to each participant.
(b) ADJUSTMENT OF AWARDS. The Administrator may adjust the
performance factors applicable to the Long-Term Performance Awards to take
into account changes in legal, accounting and tax rules and to make such
adjustments as the Administrator deems necessary or appropriate to reflect
the inclusion or exclusion of the impact of extraordinary or unusual items,
events or circumstances in order to avoid windfalls or hardships.
10. NON-TRANSFERABILITY OF OPTIONS AND RIGHTS. Unless determined
otherwise by the Administrator, Options and Rights may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than
by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Right transferable, such Option or Right may
contain such additional terms and conditions as the Administrator deems
appropriate.
-12-
<PAGE>
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER,
ASSET SALE OR CHANGE OF CONTROL.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Right, and the number of shares of Common
Stock which have been authorized for issuance under the Plan but as to which
no Options or Rights have yet been granted or which have been returned to the
Plan upon cancellation or expiration of an Option or Right, as well as the
price per share of Common Stock covered by each such outstanding Option or
Right, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company;
PROVIDED, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Administrator, whose
determination in that respect shall be final, binding and conclusive. Except
as expressly provided herein, no issuance by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares of Common Stock subject to an Option or
Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option or
Right has not been previously exercised, it will terminate immediately prior
to the consummation of such proposed action. The Administrator may, in the
exercise of its sole discretion in such instances, declare that any Option or
Right shall terminate as of a date fixed by the Administrator and give each
Optionee the right to exercise his or her Option or Right as to all or any
part of the Optioned Stock, including Shares as to which the Option or Right
would not otherwise be exercisable.
(c) MERGER OR ASSET SALE. Subject to the provisions of paragraph
(d) hereof, 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 and Right 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 does
not agree to assume the Option or Right, or to substitute an equivalent
option or right, the Optionee shall fully vest in and have the right to
exercise the Option or Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option or Right becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee that the Option or Right shall be exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Right shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option or Right shall be considered assumed if,
immediately following the merger or sale of assets, the Option or Right
confers the right to purchase, for each Share of Optioned Stock subject to
the Option or Right 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 for each
-13-
<PAGE>
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 Shares); 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 Administrator
may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Option or Right, for
each Share of Optioned Stock subject to the Option or Right, to be solely
common stock of the successor corporation or its Parent equal in Fair Market
Value to the per share consideration received by holders of Common Stock in
the merger or sale of assets.
(d) CHANGE IN CONTROL. In the event of a "Change in Control" of
the Company, as defined in paragraph (e) below, any Options and Rights
outstanding on the date such Change in Control is determined to have occurred
that are not yet fully exercisable and vested on such date shall become fully
exercisable and vested.
(e) DEFINITION OF "CHANGE IN CONTROL". For purposes of this
Section 11, a "Change in Control" means the happening of any of the following:
(i) When any "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act (other than the Company, a Subsidiary or
a Company employee benefit plan, including any trustee of such plan acting as
trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the combined voting power of the
Company's then outstanding securities entitled to vote generally in the
election of directors; or
(ii) A merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation, or the shareholders of the Company approve an
agreement for the sale or disposition by the Company of all or substantially
all the Company's assets; or
(iii) A change in the composition of the Board, as a result of
which fewer than a majority of the directors are Incumbent Directors.
"Incumbent Directors" shall mean directors who either (A) are directors of
the Company as of the date hereof, or (B) are elected, or nominated for
election, to the Board with the affirmative votes of at least a majority of
those directors whose election or nomination was not in connection with any
transaction described in subsections (i) or (ii) or in connection with an
actual or threatened proxy contest relating to the election of directors of
the Company.
12. DATE OF GRANT. The date of grant of an Option or Right shall be,
for all purposes, the date on which the Administrator makes the determination
granting such Option or Right, or such other later date as is determined by
the Administrator.
-14-
<PAGE>
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Administrator may at any time
amend, alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws. Such shareholder approval, if required, shall
be obtained in such a manner and to such a degree as is required by
Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee
under any previously granted Option or Right, unless mutually agreed
otherwise between the Optionee and the Administrator, which agreement must be
in writing and signed by the Optionee and the Company. Termination of the
Plan shall not affect the Administrator's ability to exercise the powers
granted to it hereunder with respect to Options or Rights granted under the
Plan prior to the date of such termination.
14. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Right unless the exercise of such Option or Right
and the issuance and delivery of such Shares shall comply with all Applicable
Laws, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option or Right, the Company may require the person exercising such Option
or Right to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required.
15. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
16. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
17. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before
or after the date the Plan is adopted. Such shareholder approval shall be
obtained in the manner and to the degree required under applicable federal
and state law.
-15-
<PAGE>
EXIBIT 10.24
AMENDMENT NO. 3
TO
ADAC LABORATORIES
EMPLOYEE STOCK PURCHASE PLAN (1994)
The Employee Stock Purchase Plan (1994) (the "Plan") of ADAC
Laboratories, a California corporation (the "Company"), is hereby amended in
the following respects:
1. NUMBER OF SHARES TO BE OFFERED. The first sentence of Section 4,
entitled "Number of Shares to be Offered," is deleted in its entirety and the
following sentence is substituted in its place:
The maximum aggregate number of shares which shall be offered under
the Plan shall be 470,000 shares of Stock, subject to adjustment as
provided in Section 8 hereof.
This amendment reflects an increase in the number of shares authorized for
issuance under the Plan by 100,000 shares.
2. EFFECTIVE DATE. Except as amended above, in all other respects the
Plan is hereby ratified and confirmed. The amendment of the Plan, as set
forth above, was approved by the Board of Directors on February 3, 1999 and
by the shareholders on May 6, 1999.
By Order of the Board of Directors:
By: /s/ Karen L. Masterson
----------------------------------------
Karen L. Masterson
Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> OCT-03-1999 OCT-03-1999
<PERIOD-START> JAN-04-1999 SEP-28-1998
<PERIOD-END> APR-04-1999 APR-04-1999
<CASH> 1,449 1,449
<SECURITIES> 0 0
<RECEIVABLES> 96,346 96,346
<ALLOWANCES> 11,478 11,478
<INVENTORY> 54,050 54,050
<CURRENT-ASSETS> 154,021 154,021
<PP&E> 29,190 29,190
<DEPRECIATION> 13,808 13,808
<TOTAL-ASSETS> 260,429 260,429
<CURRENT-LIABILITIES> 121,350 121,350
<BONDS> 0 0
0 0
0 0
<COMMON> 153,203 153,203
<OTHER-SE> (30,867) (30,867)
<TOTAL-LIABILITY-AND-EQUITY> 260,429 260,429
<SALES> 63,520 134,426
<TOTAL-REVENUES> 87,393 181,672
<CGS> 55,697 94,782
<TOTAL-COSTS> 73,947 129,611
<OTHER-EXPENSES> 40,806 71,962
<LOSS-PROVISION> 9,758 2,530
<INTEREST-EXPENSE> 1,741 2,981
<INCOME-PRETAX> (29,101) (22,882)
<INCOME-TAX> (8,310) (5,947)
<INCOME-CONTINUING> (20,791) (16,935)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (20,791) (16,935)
<EPS-BASIC> (1.02) (0.83)
<EPS-DILUTED> (1.02) (0.83)
</TABLE>
