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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 September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 2-7670
ENGINEERING ANIMATION, INC.
[EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER]
DELAWARE 42-1323712
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2321 NORTH LOOP DRIVE
AMES, IOWA 50010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
______________________
(515)296-9908
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
______________________
INDICATE BY CHECK ( X ) 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.
(1) YES /X/ NO / /
(2) YES /X/ NO / /
AS OF NOVEMBER 12, 1997, THERE WERE 5,778,869 SHARES OF THE REGISTRANT'S
$0.01 PAR VALUE COMMON STOCK OUTSTANDING.
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ENGINEERING ANIMATION, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income
For the three and nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1997 1996
------------ ------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 4,842 $ 9,350
Short-term investments 33,105 9,884
Accounts receivable:
Billed 11,636 6,666
Unbilled 6,182 3,334
Deferred income taxes 228 48
Prepaid expenses 1,312 390
-------- -------
Total current assets 57,305 29,672
Property and equipment, net 9,896 5,192
Other assets:
Note receivable 1,408 1,408
Software development costs, net 1,400 602
Other 762 1,082
-------- -------
Total assets $ 70,771 $ 37,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,795 $ 1,058
Accrued expenses 1,192 991
Accrued compensation 1,889 1,135
-------- -------
Total current liabilities 4,876 3,184
Debt and lease obligations, long term portion 593 872
Deferred income taxes 1,171 826
Stockholders' equity 64,131 33,074
-------- -------
Total liabilities and stockholders' equity $ 70,771 $ 37,956
======== =======
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. See
accompanying notes.
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ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
1997 1996 1997 1996
----------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Net revenues:
3D visualization software products $ 6,978 $ 2,922 $ 13,635 $ 5,022
Interactive Products 4,108 2,793 13,929 8,330
-------- -------- --------- --------
Total revenues 11,086 5,715 27,564 13,352
Cost of revenues 3,158 1,812 8,362 4,466
-------- -------- --------- --------
Gross profit 7,928 3,903 19,202 8,886
Operating expenses:
Sales and marketing 3,267 2,192 8,224 4,810
General and administrative 1,073 569 2,968 1,661
Research and development 1,415 623 3,361 1,261
-------- -------- --------- --------
Total operating expenses 5,755 3,384 14,553 7,732
-------- -------- --------- --------
Income from operations 2,173 519 4,649 1,154
Interest income, net 594 336 1,154 731
-------- -------- --------- --------
Income before income taxes 2,767 855 5,803 1,885
Income taxes 1,078 334 2,288 754
-------- -------- --------- --------
Net income $ 1,689 $ 521 $ 3,515 $ 1,131
======== ======== ======== =======
Earnings per share of common stock $ 0.25 $ 0.10 $ 0.59 $ 0.22
======== ======== ======== =======
Weighted average number of common and
equivalent shares outstanding 6,659 5,387 5,950 5,052
======== ======== ======== =======
</TABLE>
See accompanying notes.
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ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Nine Months ended September 30,
-------------------------------
1997 1996
----- -----
NET CASH USED BY OPERATING ACTIVITIES $ (1,470) $ (2,585)
INVESTING ACTIVITIES
Purchase of notes receivable - (658)
Purchases of property and equipment (5,795) (3,009)
Development of software (948) (182)
Other activities (9) (145)
Purchases of marketable securities (23,221) -
--------- --------
Net cash used by investing activities (29,973) (3,994)
FINANCING ACTIVITIES
Proceeds from short-term borrowing - 600
Payments on short-term borrowing - (600)
Decrease in restricted cash 212 -
Payments on long-term debt (278) (1,208)
Net proceeds from issuance of common stock 27,001 29,066
-------- -------
Net cash provided by financing activities 26,935 27,858
-------- -------
Net (decrease) increase in cash and
cash equivalents (4,508) 21,279
Cash and cash equivalents at beginning of period 9,350 491
-------- ---------
Cash and cash equivalents at end of period $ 4,842 $ 21,770
========= ==========
See accompanying notes.
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ENGINEERING ANIMATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Engineering
Animation, Inc. and the Company's wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring accruals which in
the opinion of management are necessary to fairly state the Company's financial
position, results of operations, and cash flows for the periods presented.
These financial statements should be read in conjunction with the Company's
audited financial statements as included in the Company's Form 10-K as filed
with the Securities and Exchange Commission on March 31, 1997. The results of
operations for the nine month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for any subsequent
quarter or for the fiscal year ending December 31, 1997. The December 31, 1996
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
2. PUBLIC OFFERINGS
In February 1996, the Company completed its initial public offering and
issued 1,825,000 shares of its common stock. The Company received approximately
$29.0 million of cash, net of underwriting discounts and other offering costs.
In June 1997, the Company completed a follow-on offering of 1,000,000 shares of
its common stock. The Company received approximately $26.6 million of cash, net
of underwriting discounts and other offering costs.
3. EARNINGS PER SHARE
Per share earnings are based on the weighted average number of shares of
common stock and common stock equivalents outstanding. The dilutive effect of
outstanding stock options was determined based upon the treasury stock method.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock equivalents granted at exercise prices less than the initial
public offering price during the twelve months immediately preceding the initial
public offering have been included in the determination of shares used in the
calculation of earnings per share as if they were outstanding for all periods.
The Company repaid approximately $1,712,000 of bank debt with the proceeds
of the initial public offering. The impact on earnings per share was not
significant.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the
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Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the three months ended September
30, 1997 and September 30, 1996 of $0.04 and $0.01 per share, respectively
and an increase in primary earnings per share for the nine months ended
September 30, 1997 and September 30, 1996 of $0.10 and $0.04 per share,
respectively. The impact of Statement 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be material.
4. PENDING MERGERS WITH ROSETTA TECHNOLOGIES, INC. AND CIMTECHNOLOGIES
CORPORATION
On October 30, 1997, the Company entered into definitive merger
agreements with Technology Company Ventures L.L.C. ("Ventures"), the majority
shareholder of Rosetta Technologies, Inc., ("Rosetta") and Cimtechnologies
Corporation ("Cimtech"). Both the Ventures and Cimtech mergers will be
accounted for as poolings of interests. In a separate transaction, the
Company will acquire the remaining minority interest in Rosetta. This
transaction will be accounted for as a purchase. The definitive agreements
provide that, upon the effective date of the transactions, the Company will
acquire Ventures and the minority interest in Rosetta for approximately
$25.5 million of the Company's common stock and Cimtech for approximately
$6 million of the Company's common stock. The Company expects all the
transactions to be completed in the fourth quarter of 1997, subject to
regulatory and shareholder approvals.
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ENGINEERING ANIMATION, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
NET REVENUES
The Company's total revenues are derived from sales of three dimensional ("3D")
visualization software products and interactive products. Interactive products
combines two products, formerly referred to as interactive software products and
custom animation products. Revenues from sales of 3D visualization software
products are recognized upon delivery of the product to the customer and
satisfaction of significant related obligations, if any. Revenues from customer
support are included in 3D visualization software products revenue and represent
less than 5% of total revenues. Customer support revenues are deferred and
recognized ratably over the period the customer support services are provided.
The Company recognizes revenues from interactive products based upon labor and
other costs incurred and progress to completion on contracts.
The Company's total revenues increased 94% to $11.1 million for the three
months ended September 30, 1997 from $5.7 million for the three months ended
September 30, 1996, and increased 106% to $27.6 million for the nine months
ended September 30, 1997 from $13.4 million for the nine months ended
September 30, 1996. 3D visualization software products revenue increased
139% to $7.0 million for the three months ended September 30, 1997 from $2.9
million for the three months ended September 30, 1996, and increased 172% to
$13.7 million for the nine months ended September 30, 1997 from $5.0 million
for the nine months ended September 30, 1996, as a result of increased
product sales. Interactive product revenues increased 47% to $4.1 million
for the three months ended September 30, 1997 from $2.8 million for the three
months ended September 30, 1996, and increased 67% to $13.9 million for the
nine months ended September 30, 1997 from $8.3 million for the nine months
ended September 30, 1996, primarily due to additional projects for
interactive products.
COST OF REVENUES
The Company's cost of revenues includes cost of production, packaging and
distribution costs, royalties and amortization of capitalized software costs.
The Company's cost of revenues increased 74% to $3.2 million for the three
months ended September 30, 1997 from $1.8 million for the three months ended
September 30, 1996, and increased 87% to $8.4 million for the nine months ended
September 30, 1997 from $4.5 million for the nine months ended September 30,
1996, primarily due to expenses associated with new development contracts in 3D
visualization software products and increased development costs for interactive
projects. The Company's cost of revenues as a percentage of revenues decreased
to 29% for the three months ended September 30, 1997 from 32% for the three
months ended September 30, 1996 and decreased to 30% for the nine months ended
September 30, 1997 compared to 33% for the nine months ended September
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30, 1996. The decrease in cost of revenues as a percentage of revenues was
primarily the result of spreading expenses over higher revenues.
OPERATING EXPENSES
SALES AND MARKETING. The Company's sales and marketing expenses include
personnel costs related to sales, marketing and customer service activities, as
well as costs attributable to promotional materials, mail campaigns, trade shows
and advertising. The Company's sales and marketing expenses increased 49% to
$3.3 million for the three months ended September 30, 1997 from $2.2 million for
the three months ended September 30, 1996, and increased 71% to $8.2 million for
the nine months ended September 30, 1997 from $4.8 million for the nine months
ended September 30, 1996, primarily due to costs associated with expansion of
sales force and increased marketing costs. Sales and marketing expenses
decreased to 30% of total revenues for the three months ended September 30, 1997
from 38% for the three months ended September 30, 1996, and decreased to 30% of
total revenues for the nine months ended September 30, 1997 from 36% for the
nine months ended September 30, 1996. The decrease in sales and marketing
expenses as a percentage of revenues was primarily the result of spreading
expenses over higher revenues.
GENERAL AND ADMINISTRATIVE. The Company's general and administrative expenses
consist of salaries and facility costs for administrative, executive and
accounting personnel, as well as consulting expenses, insurance costs,
professional fees and other costs. The Company's general and administrative
expenses increased 89% to $1.1 million for the three months ended September 30,
1997 from $569,000 for the three months ended September 30, 1996, and increased
78% to $3.0 million for the nine months ended September 30, 1997 from $1.7
million for the nine months ended September 30, 1996, primarily a result of
increased administrative staff and related costs. General and administrative
expenses remained at 10% of total revenues for the three months ended September
30, 1997 and 1996, and decreased to 11% of total revenues for the nine months
ended September 30, 1997 from 12% for the nine months ended September 30, 1996.
The decrease of general and administrative expenses as a percentage of revenues
was primarily a result of spreading expenses over higher revenues.
RESEARCH AND DEVELOPMENT. The Company's research and development expenses
consists of salaries, related facility costs, equipment costs and outside
consulting fees. The Company's research and development expenses increased 127%
to $1.4 million for the three months ended September 30, 1997 from $623,000 for
the three months ended September 30, 1996, and increased 166% to $3.4 million
for the nine months ended September 30, 1997 from $1.3 million for the nine
months ended September 30, 1996. Research and development expenses increased to
13% of total revenues for the three months ended September 30, 1997 from 11% for
the three months ended September 30, 1996, and increased to 12% of total
revenues for the nine months ended September 30, 1997 from 9% for the nine
months ended September 30, 1996. The increase in research and development
expenses was primarily due to additional personnel and related costs required to
meet the increased demand for 3D visualization software and interactive software
products.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company historically has satisfied its cash requirements through borrowings,
customer advances, capital lease financing and net proceeds of approximately
$29.0 million from the Company's initial public offering of Common Stock in
February 1996 and approximately $26.6 million from the Company's follow-on
offering of Common Stock in June 1997. As of September 30, 1997, the Company
had $37.9 million in cash, cash equivalents and short-term investments.
Net cash used by operating activities was $1.5 million for the nine months ended
September 30, 1997, primarily due to increases in receivables, offset by net
income, depreciation and increases in accounts payable and accrued compensation.
Accounts receivable at September 30, 1997 increased approximately $4.9 million
to $11.6 million from $6.7 million at December 31, 1996. The increase in
accounts receivable was due to increased revenues and increased size of the
Company's contracts, which historically have taken a longer period to collect
than smaller contracts. The Company's accounts receivable balance will vary
from quarter to quarter, depending on the number and size of client projects and
on the timing of completion of the projects.
The Company believes its current cash and short-term investment balances will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. There can be no assurance
that additional capital beyond the amounts currently forecasted by the Company
will not be required nor that any such required additional capital will be
available on reasonable terms, if at all, at such time as required by the
Company.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company or its representatives from time to time may make or may have made
certain forward-looking statements, orally or in writing, including without
limitations any such statements made or to be made in the Management's
Discussion and Analysis contained in its various SEC filings. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to ensure to the fullest extent possible the protections of
the safe harbor established in the Private Securities Litigation Reform Act of
1995. Accordingly, such statements are qualified in their entirety by reference
to and are accompanied by the following discussion of certain important factors
that could cause actual results to differ materially from those projected in
such forward-looking statements.
The Company cautions the reader that this list of factors may not be exhaustive.
The Company operates in a continually changing business environment, and new
risk factors emerge from time to time. Management cannot predict such risk
factors, nor can it assess the impact, if any, of such risk factors on the
Company's business or the extent to which any factors, or combination of
factors, may cause actual results to differ materially from those projected in
any forward-
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looking statements. Accordingly, forward-looking statements should not be
relied upon as a prediction of actual results.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis resulting from a number of
factors, including: the time of the introduction of new visualization software
and interactive software products by the Company and by its competitors;
seasonality of certain customer purchases of interactive software products;
product mix; general economic conditions; and the Company's ability to obtain
agreements from publishers and distributors to market the Company's interactive
software products. The Company's products are sold in markets which change
rapidly and the Company must continually anticipate and adapt its products to
emerging computer technologies and capabilities. The market for the Company's
three-dimensional visualization software products is emerging and dependent upon
a number of a variables, including consumer preferences and the rate of adoption
of new technology. There is a risk that these markets will not continue to grow
and that the Company's three-dimensional visualization software products will
not be accepted by the markets. The market for the Company's interactive
software products is emerging and dependent upon a number of variables,
including consumer preferences, shipments of, and the installed base of,
multimedia personal computers, and the number of developers creating interactive
software products. There is risk that the Company's interactive software
products will not be accepted by the market or that the Company will be unable
to respond to evolving requirements of the market.
For a more complete discussion of these risk factors, see the Company's Form
10-K, filed March 31, 1997.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Index to Exhibits
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended
September 30, 1997.
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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: NOVEMBER 12, 1997 ENGINEERING ANIMATION,INC.
(Registrant)
By: /S/ JEROME M. BEHAR
------------------------------
Jerome M. Behar
Vice President of Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
10.26 1997 Non-Qualified Stock Option Plan
27. Financial Data Schedule
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EXHIBIT 10.26
ENGINEERING ANIMATION, INC.
1997 NON-QUALIFIED STOCK OPTION PLAN
(ESTABLISHED EFFECTIVE SEPTEMBER 1, 1997)
1. PURPOSE. The purpose of the Engineering Animation, Inc. 1997
Non-Qualified Stock Option Plan (the "Plan"), as hereinafter set forth, is to
enable Engineering Animation, Inc., a Delaware corporation (the "Company"), to
attract, retain and reward employees of the Company or its subsidiaries and
selected non-employees who have an ongoing consulting or independent contractor
relationship with the Company or its subsidiaries, by offering them an
opportunity to have a greater proprietary interest in and closer identity with
the Company and with its financial success.
Options granted under the Plan shall be non-qualified stock options
(hereinafter "Options"). Proceeds of cash or stock received by the Company from
the sale of Common Stock of the Company pursuant to Options granted under the
Plan will be used for general corporate purposes.
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company (the "Board"). Subject to the express provisions of
the Plan, the Board shall have the power to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to the Plan, to determine the
terms and provisions of Participants' individual option agreements (which need
not be identical) and to make such other determinations as it deems necessary or
advisable in carrying out the administration of the Plan. All decisions of the
Board on matters within its jurisdiction shall be conclusive and binding. No
member of the Board shall be liable for any action taken or determination made
in good faith.
3. DEFINITIONS. Whenever used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Beneficial Owner" shall have the meaning ascribed to such term
in Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934.
(b) "Change in Control" of the Company shall be deemed to have
occurred if the conditions set forth in any one or more of the following
paragraphs shall have been satisfied:
(i) Any Person (other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or a
corporation owned directly or indirectly by the stockholders of the
Company in substantially
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the same proportions as their ownership of Shares of the Company, or
other than a Person whose stock ownership is approved by a vote of
two-thirds (2/3) of the Directors who are not affiliated with such
Person) becomes the Beneficial Owner, directly or indirectly, of
securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities; or
(ii) During any period of two consecutive fiscal years,
individuals who at the beginning of such period constitute the Board
(and any new Director whose election to the Board was approved by a
vote of at least two-thirds (2/3) of the Directors then still in
office who either were Directors at the beginning of the period or
whose election was previously so approved), cease for any reason to
constitute a majority thereof; or
(iii) The stockholders of the Company approve (a) a plan of
complete liquidation of the Company; or (b) an agreement for the sale
or disposition of all or substantially all the Company's assets; or
(c) 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), at
least 50% of the combined voting securities of the Company (or such
surviving entity) outstanding immediately after such merger or
consolidation;
(iv) The Board agrees by a two-thirds (2/3) vote, that a
Change in Control of the Company has occurred.
However, in no event shall a Change in Control be deemed to have occurred,
with respect to a Participant, if that Participant is part of a purchasing
group which consummates the Change in Control transaction. A Participant
shall be deemed "part of a purchasing group" for purposes of the preceding
sentence if the Participant is an equity participant or has agreed to
become an equity participant in the purchasing company or group (except for
(i) passive ownership of less than 3% of the shares of the purchasing
company; or (ii) ownership or equity participation in the purchasing
company or group which is otherwise not deemed to be significant, as
determined prior to the Change in Control by a majority of the
disinterested Directors of the Company).
(c) "Common Stock" shall mean the Company's $0.01 par value common
stock.
(d) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Securities Exchange Act of 1934 and used in Sections 13(d)
and 14(d) thereof, including a group defined in Section 13(d).
4. ELIGIBILITY. Options may be granted under this Plan to any employee
of the Company or its subsidiaries whose participation the Board determines is
in the best interest of
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the Company and to any non-employee who is a consultant or independent
contractor to the Company or its subsidiaries whose participation the Board
determines is in the best interests of the Company ("Participants"). The
Board shall have absolute discretion to determine, within the limits of the
express provisions of the Plan, those Participants to whom and the time or
times at which Options shall be granted. The Board shall also determine the
number of shares to be subject to each Option, the duration of each Option,
the exercise price (Option price) under each Option, the time or times within
which (during the term of the Option) all or portions of each Option may be
exercised, and whether cash or Common Stock may be accepted in full or
partial payment upon exercise of an Option. In making such determination,
the Board may take into account the nature of the services rendered by the
Participant, his or her present and potential contributions to the Company's
success and such other factors as the Board in its discretion shall deem
relevant.
5. COMMON STOCK. Options may be granted for a number of shares not to
exceed, in the aggregate, 400,000 shares of Common Stock, except as such number
of shares shall be adjusted in accordance with the provisions of Section 11 of
the Plan.
In the event that any Option granted under the Plan expires unexercised, is
surrendered by a Participant for cancellation or is terminated or ceases to be
exercisable for any other reason without having been fully exercised prior to
the end of the period during which Options may be granted under the Plan, the
shares subject to such Option, or to the unexercised portion thereof, shall
again become available for new Options to be granted under the Plan to any
eligible Participant (including the holder of such former Option) at an Option
price determined in accordance with Section 6(a) hereof, which price may then be
greater or less than the Option price of such former Option. Any shares of
Common Stock that are surrendered or withheld in payment of the exercise price
of an Option or that are surrendered or withheld in satisfaction of any tax
liabilities resulting from the exercise of an Option will be added to the
aggregate number of shares of Common Stock available for new Option grants
hereunder.
6. REQUIRED TERMS AND CONDITIONS OF OPTIONS. The Options granted under
the Plan shall be in such form and upon such terms and conditions, including
provisions as to the treatment of outstanding Options upon the occurrence of a
Change in Control, as the Board shall from time to time determine, subject to
the general provisions of the Plan, and the following specific rules:
(a) OPTION PRICE. The option price of each Option to purchase Common
Stock shall, unless the Board determines otherwise, be 100% of the Fair
Market Value per share of Common Stock at the date the option is granted.
(b) MAXIMUM TERM. No Option shall be exercisable after the
expiration of fifteen (15) years from the date it is granted, except as
provided in Section 9(b), (c), (d) or (e).
(c) TIME OF EXERCISE. The Board shall determine the duration of each
Option and the time or times within which (during the term of Option) all
or portions of each
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Option may be exercised, except to the extent that other terms of exercise
are specifically provided by other provisions of the Plan.
7. FAIR MARKET VALUE. "Fair Market Value" shall be the amount determined
by the Board from time to time, using such good faith valuation methods as it
deems appropriate, except that as long as the Common Stock is traded on NASDAQ
or a recognized stock exchange, it shall mean the average of the highest and
lowest quoted selling prices for the Shares on the relevant date, or (if there
were no sales on such date) the weighted average of the means between the
highest and the lowest quoted selling prices on the nearest day before and the
nearest day after the relevant date, as prescribed by Treasury Regulation
20.2031-2(b)(2), as reported in the Wall Street Journal or a similar publication
selected by the Board.
8. MODIFICATION. The Company may modify grants of options to
Participants who are foreign nationals or employed outside the United States to
fulfill Plan purposes and recognize differences in local law, tax policy and
custom.
9. EXPIRATION OF OPTION.
(a) GENERAL RULE. Except with respect to Options expiring pursuant
to Section 9(b), (c), (d) or (e), each Option shall expire on the first to
occur of: (i) the fifteenth anniversary of the date of grant thereof, or
(ii) the expiration date or dates set forth in the applicable Option
agreement.
(b) EXPIRATION UPON TERMINATION. Except with respect to Options
expiring pursuant to Section 9(c), (d) or (e), an Option shall expire on
the first to occur of the applicable date or dates determined pursuant to
Section 9(a) or the date that the employment or relationship of the
Participant with the Company terminates. Notwithstanding the preceding
provisions of this Section 9(b), the Board, in its sole discretion, may
permit such a Participant to exercise an Option during a period following
his or her termination of employment, which period shall not exceed three
months. In no event, however, may the Board permit such Participant to
exercise an Option under this Section 9(b) after the expiration date
computed under Section 9(a).
(c) EXPIRATION UPON DISABILITY OR DEATH. If the employment or
relationship of a Participant with the Company terminates by reason of
disability (as determined in the discretion of the Board) or by reason of
death, his or her Options, if any, shall expire after the first to occur of
the expiration date computed under Section 9(a) or the one-year anniversary
of termination of employment or relationship by reason of disability or
death.
(d) EXPIRATION UPON RETIREMENT. If the employment of a Participant
with the Company terminates due to "retirement," as defined below, with the
consent of the Board, his or her Options, if any, shall expire on the first
to occur of the applicable date or dates determined pursuant to Section
9(b). If a Participant who has so retired dies prior to exercising in full
an Option which has not expired pursuant to the preceding sentence, then,
notwithstanding the preceding sentence, his or her Options shall
18
<PAGE>
expire after the first to occur of the expiration date computed under
Section 9(a) or the one-year anniversary of the date of the Participant's
death. "Retirement" for purposes of this Plan shall mean the termination of
employment of a Participant with the Company on or after the date a
Participant attains age 65.
(e) EXPIRATION UPON TERMINATION FOR CAUSE. If the employment or
relationship of a Participant is terminated by the Company for substantial
cause, the Participant's right to exercise his or her Options shall
terminate at the time notice of termination of employment, or cancellation
of relationship is given by the Company to such Participant. For purposes
of this provision, substantial cause shall include:
(i) The commission of an action against or in derogation of
the interests of the Company which, if proven in a court of law, would
constitute a violation of a criminal code or similar law;
(ii) Divulging the Company's confidential information; or
(iii) The performance of any similar action that the Board, in
its sole discretion, may deem to be sufficiently injurious to the
interest of the Company to constitute substantial cause for
termination.
10. METHOD OF EXERCISE. Options may be exercised by giving written notice
to the Corporate Secretary of the Company, stating the number of shares of
Common Stock with respect to which the Option is being exercised and tendering
payment therefor. The exercise price of an Option shall be paid in full at the
time that the Option, or any part thereof, is exercised. Subject to the
approval of the Board, payment may be made (i) in cash, (ii) through the
surrender of previously acquired shares of Common Stock having a Fair Market
Value equal to the exercise price of the Option or the withholding of shares of
Common Stock having a Fair Market Value equal to the exercise price of the
Option, or (iii) a combination of (i) and (ii).
11. ADJUSTMENTS.
(a) The aggregate number of shares of Common Stock with respect to
which Options may be granted hereunder, the number of shares of Common
Stock subject to each outstanding Option and the Option price per share for
each such Option may all be appropriately adjusted, as the Board may
determine, for any increase or decrease in the number of shares of issued
Common Stock of the Company resulting from a subdivision or consolidation
of shares whether through reorganization, payment of a share dividend or
other increase or decrease in the number of such shares outstanding
effected without receipt of consideration by the Company, distribution of
assets to stockholders, or the assumption and conversion of outstanding
Options in an acquisition of the Company; provided, however, that no
adjustment in the number of shares with respect to which Options may be
granted under the Plan or in the number of shares subject to outstanding
Options shall be made except in the event that such adjustment, together
with all
19
<PAGE>
respective prior adjustments which were not made as a result of this
provision, involve a net change of more than 10%.
(b) Subject to any required action by the stockholders, if the
Company shall be a party to a transaction involving a sale of substantially
all its assets, a merger or a consolidation, any Option granted hereunder
shall pertain to and apply to the securities to which a holder of the
number of shares of Common Stock subject to the Option would have been
entitled if the Participant actually owned the stock subject to the Option
immediately prior to the time any such transaction became effective;
provided, however, that all unexercised Options under the Plan may be
canceled by the Company as of the effective date of any such transaction by
giving notice to the holders thereof of its intention to do so and by
permitting the exercise, during the 30-day period preceding the effective
date of such transaction, of all partly or wholly unexercised Options in
full (without regard to installment exercise limitations). This provision
shall apply provided that the Participant is not terminated for cause.
(c) In the case of dissolution of the Company, every Option
outstanding hereunder shall terminate; provided, however, that each
Participant shall have 30 days' prior written notice of such event, during
which time the holder shall have a right to exercise the partly or wholly
unexercised Option (without regard to installment exercise limitations).
(d) On the basis of information known to the Company, the Board shall
make all determinations under this Section 11, including whether a
transaction involves a sale of substantially all the Company's assets, and
all such determinations shall be conclusive and binding.
12. OPTION AGREEMENTS. Each Participant shall agree to such terms and
conditions in connection with the exercise of an Option, including restrictions
on the disposition of the Common Stock acquired upon the exercise thereof, as
the Board may deem appropriate. Option agreements need not be identical. The
certificates evidencing the shares of Common Stock acquired upon exercise of an
Option may bear a legend referring to the terms and conditions contained in the
respective Option agreement and the Plan, and the Company may place a stop
transfer order with its transfer agent against the transfer of such shares. If
requested to do so by the Board at the time of exercise of an Option, each
Participant shall execute a certificate indicating that he or she is purchasing
the Common Stock under such Option for investment and not with any present
intention to sell the same.
13. WITHHOLDING OF TAXES. Upon the exercise of an Option, the Company may
deduct any federal, state or local taxes required by law to be withheld with
respect to such exercise. Any holder of an Option may elect to surrender shares
of Common Stock previously acquired by the holder or to have the Company
withhold shares that would have otherwise been issued to the holder pursuant to
the exercise of an Option, the number of such withheld or surrendered shares to
be sufficient to satisfy all or a portion of the income tax liability that
arises upon such exercise.
20
<PAGE>
14. LEGAL AND OTHER REQUIREMENTS. The obligation of the Company to sell
and deliver Common Stock under Options granted under the Plan shall be subject
to all applicable federal and state laws, regulations, rules and approvals. A
Participant shall have no rights as a stockholder with respect to any shares
covered by an Option granted to or exercised by him or her until the date of
delivery of a stock certificate to him or her for such shares. No adjustment
other than pursuant to Section 11 hereof shall be made for dividends or other
rights for which the record date is prior to the date such stock certificate is
delivered.
15. NONTRANSFERABILITY. Subject to the discretion of the Board to permit
transfers of Options to a Participant's immediate family members, to one or more
trusts for the benefit of such family members or to partnerships in which such
family members are the only partners (in which case (i) the applicable Option
agreement, as approved by the Board, must expressly so permit such transfer,
(ii) the Participant must not receive any consideration for such transfer and
(iii) the Participant must provide such documentation and information regarding
such transfer or transferees as the Board may reasonably request), during the
lifetime of a Participant, any Option granted to him or her shall be exercisable
only by him or her or by his or her guardian or legal representative, and no
Option shall be assignable or transferable, except by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Internal Revenue Code or the Employee Retirement Income Security
Act. The granting of an Option shall impose no obligation upon the Participant
to exercise such Option.
16. INDEMNIFICATION OF BOARD. In addition to such other rights of
indemnification as they may have as members of the Board, the members of the
Board shall be indemnified by the Company against the reasonable expenses,
including attorneys' fees actually and necessarily incurred in connection with
the defense of any action, suit or proceeding (or in connection with any appeal
therein), to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding that such Board member is liable for gross negligence or
misconduct in the performance of his or her duties; provided, that within 60
days after institution of any such action, suit or proceeding, Board members
shall in writing offer the Company the opportunity, at its own expense, to
handle and defend the same.
17. NO CONTRACT OF EMPLOYMENT. Neither the adoption of this Plan nor the
grant of any Option shall be deemed to obligate the Company to continue the
employment or relationship of any Participant for any particular period, nor
shall the granting of an Option constitute a request or consent to postpone the
retirement date of any Participant.
18. TERMINATION AND AMENDMENT OF PLAN. The Board, acting by a majority of
its members may from time to time alter, amend or suspend the Plan or any Option
granted hereunder or may at any time terminate the Plan; provided, however, that
no such action shall materially and adversely affect any outstanding Options
without the consent of the respective Participants.
21
<PAGE>
19. EFFECTIVE DATE OF PLAN. The Plan is hereby adopted, effective
September 1, 1997, by action of the Board.
22
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<PAGE>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,842
<SECURITIES> 33,105
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<PP&E> 12,278
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0
0
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