-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KRyHaZAcPTzF79Ws7AHEB0tk2+XOtF5jYC0/32tmTduDX2DLX6CJjwN74YUkopxl T+jcZnkphGcN1Fr9z5mJSg== 0001047469-99-026271.txt : 19990702 0001047469-99-026271.hdr.sgml : 19990702 ACCESSION NUMBER: 0001047469-99-026271 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990404 FILED AS OF DATE: 19990701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAC LABORATORIES CENTRAL INDEX KEY: 0000313798 STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844] IRS NUMBER: 941725806 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09428 FILM NUMBER: 99658209 BUSINESS ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083219100 MAIL ADDRESS: STREET 1: 540 ALDER DR CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (This document contains a total of 28 pages) ADAC LABORATORIES QUARTERLY REPORT ON FORM 10-Q INDEX
PAGE ----- 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
2 PART I--FINANCIAL INFORMATION ADAC LABORATORIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ---------------------- 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 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ADAC LABORATORIES CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 4, SEPTEMBER 27, 1999 1998 ----------- ------------- (UNAUDITED) (AMOUNTS IN THOUSANDS) 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 ----------- ------------- ----------- -------------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ADAC LABORATORIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ---------------------- APRIL 4, MARCH 29, 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) 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
5 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:
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- 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) ---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
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 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. INVENTORIES
APRIL 4, 1999 SEPTEMBER 27, 1998 ------------ ------------------ (DOLLAR AMOUNTS IN THOUSANDS) 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 ------------ ------- ------------ -------
5. SERVICE PARTS
APRIL 4, 1999 SEPTEMBER 27, 1998 ------------ ------------------ (DOLLAR AMOUNTS IN THOUSANDS) Service parts consist of: Field service parts, at cost.................................................... $ 29,286 $ 26,327 Less accumulated depreciation................................................... (9,724) (8,264) ------------ ------- $ 19,562 $ 18,063 ------------ ------- ------------ -------
6. FIXED ASSETS
APRIL 4, 1999 SEPTEMBER 27, 1998 ------------ ------------------ (DOLLAR AMOUNTS IN THOUSANDS) 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 ------------ -------- ------------ --------
7 ADAC LABORATORIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. INTANGIBLES
APRIL 4, 1999 SEPTEMBER 27, 1998 ------------ ------------------ (DOLLAR AMOUNTS IN THOUSANDS) 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 ------------ ------- ------------ -------
8. OTHER ACCRUED LIABILITIES
APRIL 4, 1999 SEPTEMBER 27, 1998 ------------ ------------------ (DOLLAR AMOUNTS IN THOUSANDS) 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 ------------ ------- ------------ -------
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 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 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 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. 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 --------- ---------
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 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:
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- 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) ---------- ----------- ---------- ----- ---------- ----------- ---------- -----
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 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 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. 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 --------- ---------
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 three and six-month periods ended April 4, 1999 compared to the corresponding periods in fiscal 1998 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ---------------------- 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%
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 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 for the three and six-month periods ended April 4, 1999 compared to the corresponding periods in fiscal 1998 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ---------------------- 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%
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:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- 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%
17 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 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 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 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 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 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 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 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 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:
IN FAVOR WITHHELD ------------ --------- 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
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: 10.23 1999 Long-Term Incentive Plan 10.24 Amendment No. 3 to Employee Stock Purchase Plan (1994) 27 Financial Data Schedule
(b) Form 8-K Reports: None filed during the fiscal quarter described in this Report on Form 10-Q. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: July 1, 1999 ADAC LABORATORIES (Registrant) By: /s/ R. ANDREW ECKERT ----------------------------------------- R. Andrew Eckert CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
27 EXHIBIT INDEX 10.23 1999 Long-Term Incentive Plan 10.24 Amendment No. 3 to Employee Stock Purchase Plan (1994) 27 Financial Data Schedule
28 EX-10.23 2 EXHIBIT 10.23 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. (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- 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- (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- (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- (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- (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- 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- (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- (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- 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- 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- 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- 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- 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- EX-10.24 3 EXHIBIT 10.24 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 EX-27 4 EXHIBIT 27
5 1,000 3-MOS 6-MOS OCT-03-1999 OCT-03-1999 JAN-04-1999 SEP-28-1998 APR-04-1999 APR-04-1999 1,449 1,449 0 0 96,346 96,346 11,478 11,478 54,050 54,050 154,021 154,021 29,190 29,190 13,808 13,808 260,429 260,429 121,350 121,350 0 0 0 0 0 0 153,203 153,203 (30,867) (30,867) 260,429 260,429 63,520 134,426 87,393 181,672 55,697 94,782 73,947 129,611 40,806 71,962 9,758 2,530 1,741 2,981 (29,101) (22,882) (8,310) (5,947) (20,791) (16,935) 0 0 0 0 0 0 (20,791) (16,935) (1.02) (0.83) (1.02) (0.83)
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