<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
-----------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________to________________________
Commission file number 0-27588
-----------------------
VITALCOM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3662 33-0538926
(State or other jurisdiction of (Primary Standard or Industrial (I.R.S. Employer
incorporation organization) Classification Code Number) Identification Number)
</TABLE>
15222 DEL AMO AVENUE
TUSTIN, CALIFORNIA 92780
(714) 546-0147
(Address and telephone number of principal executive offices)
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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 2, 1997, there were 8,009,503 shares outstanding of the issuer's
common stock.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITALCOM INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------
MARCH 31, DECEMBER 31,
1997 1996
---------------- ------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 17,434,550 $ 20,120,203
Accounts receivable, net 2,736,002 2,299,360
Inventories 3,092,645 3,191,043
Prepaid expenses 458,736 361,272
Income tax refund receivable 2,660,064 2,874,276
------------ ------------
Total current assets 26,381,997 28,846,154
Property
Machinery and equipment 1,359,337 1,352,898
Office furniture and computer equipment 1,889,604 1,820,607
Leasehold improvements 67,919 67,919
------------ ------------
3,316,860 3,241,424
Less accumulated amortization and depreciation (1,128,833) (976,328)
------------ ------------
Property, net 2,188,027 2,265,096
Other assets 165,626 140,101
Goodwill, net 659,031 669,525
------------ ------------
$ 29,394,681 $ 31,920,876
============ ============
</TABLE>
2
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
<TABLE>
<CAPTION>
--------------------------------
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,002,426 $ 1,085,972
Accrued payroll and related costs 864,486 875,344
Accrued warranty costs 944,308 951,381
Accrued marketing commitments 110,908 309,377
Other accrued liabilities 1,600,228 1,623,278
Current portion of capital lease obligations 21,120 21,120
------------ ------------
Total current liabilities 4,543,476 4,866,472
Capital lease obligations, less current portion 77,349 81,834
Redeemable preferred stock, 5,000,000 shares authorized,
$.001 par value; no shares issued and outstanding
at December 31, 1996 and March 31, 1997, respectively -- --
Stockholders' equity (deficit):
Common stock, including paid-in capital, $.0001 par value; 25,000,000
shares authorized, 7,983,688 and 7,942,688 shares
issued and outstanding at March 31, 1997 and December 31, 1996, 36,834,256 36,832,936
respectively
Accumulated deficit (12,060,400) (9,860,366)
------------ ------------
Net stockholders' equity 24,773,856 26,972,570
------------ ------------
$ 29,394,681 $ 31,920,876
============ ============
</TABLE>
3
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VITALCOM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS ENDED
MARCH 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Facility wide networks $ 1,785,386 $ 2,959,973
Departmental products 2,187,978 3,009,134
----------- -----------
Total revenues 3,973,364 5,969,107
Cost of revenues 2,282,602 2,532,250
Gross profit 1,690,762 3,436,857
----------- -----------
Operating expenses:
Sales and marketing 2,361,460 2,106,225
Research and development 1,069,357 918,348
General and administration 675,678 517,763
----------- -----------
Total operating expenses 4,106,495 3,542,336
----------- -----------
Operating loss (2,415,733) (105,479)
Other income, net 222,997 107,414
----------- -----------
Income (loss) before provision for income taxes (2,192,736) 1,935
Provision for income taxes 7,300 841
Net income (loss) $(2,200,036) $ 1,094
=========== ===========
Pro forma and net income (loss) per common share $ (0.28) $ 0.00
=========== ===========
Pro forma and weighted average common shares 7,958,274 7,115,598
=========== ===========
</TABLE>
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,200,036) $ 1,094
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 156,789 127,452
Loss on disposal of property 6,211 7,053
Changes in operating assets and liabilities:
Accounts receivable (436,641) 1,714,927
Inventories 98,398 (679,260)
Income taxes receivable 214,213 (312,127)
Prepaid expenses and other current assets (97,465) (52,362)
Accounts payable (83,546) 238,763
Accrued payroll and related costs (10,858) (360,394)
Accrued warranty costs (7,073) 24,584
Accrued marketing commitments (198,469) 53,824
Accrued liabilities (23,051) (260,919)
------------ ------------
Net cash (used in ) provided by operating activities (2,581,528) 502,635
Cash flows from investing activities:
Purchases of property (75,436) (220,937)
(Increase) decrease in other assets (25,525) 198,186
------------ ------------
Net cash used in investing activities (100,961) (22,751)
Cash flows from financing activities:
Repayment of capital lease obligation and long-term debt (4,484) (1,547,153)
Net proceeds from issuance of common stock 1,320 25,659,945
------------ ------------
Net cash (used in) provided by financing activities (3,164) 24,112,792
Net (decrease) increase in cash and cash equivalents (2,685,653) 24,592,676
Cash and cash equivalents, beginning of period 20,120,203 2,163,645
------------ ------------
Cash and cash equivalents, end of period $ 17,434,550 $ 26,756,321
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 6,211 $ 40,361
Income taxes paid $ 7,956 $ 380,600
</TABLE>
5
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VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed financial statements included herein have been prepared by
the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations; nevertheless, the management
of the Company believes that the disclosures herein are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K/A for the year ended December 31, 1996 and
filed with the SEC. In the opinion of management, the condensed financial
statements included herein reflect all normal, recurring adjustments necessary
to present fairly the financial position of the Company as of March 31, 1997,
and the results of its operations and its cash flows for the three-month periods
ended March 31, 1996 and 1997. The results of operations for the interim periods
are not necessarily indicative of the results of operations for the full year.
2. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Net income per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. For the three-month
periods ended March 31, 1996 and 1997 weighted average common and common
equivalent shares include common shares and stock options using the treasury
stock method. For the three-month period ended March 31, 1997, the adjusted
weighted average shares were equal to the basic weighted average shares due to
the anti-dilutive effect the conversion of options would have given the
Company's net loss for the period.
3. STOCK PLANS
Stock Option Plans - The following is a summary of stock option transactions
under the 1993 Stock Option Plan (the "1993 Plan") for the three months ended
March 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
---------- --------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996 660,224 $0.60 to $15.75
Granted 283,000 $4.75 to $5.50
Exercised (1,000) $1.28
Canceled (203,114) $4.75 to $6.00
========== ===============
Balance, March 31,1997 739,110 $0.60 to $15.75 248,603
========== ===============
</TABLE>
At March 31, 1997, 22,176 options were available for grant the 1996 Plan.
The following is a summary of stock option transactions under the 1996 Stock
Option Plan (the "1996 Plan") for the three months ended March 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
------- --------------
<S> <C> <C>
Balance, December 31, 1996 55,600 $5.50 to $6.00
Granted 35,500 $4.97
Canceled (6,000) $6.00
======= ==============
Balance, March 31, 1997 85,100 $4.97 to $6.00
======= ==============
</TABLE>
At March 31, 1997, 14,900 options were available for grant under the 1996 Plan
and no options were exercisable.
6
<PAGE> 7
The following is a summary of stock option transactions under the 1996 Director
Option Plan (the "Director Plan") for the three months ended March 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
------- -------
<S> <C> <C>
Balance, December 31, 1996 0
Granted 6,000 $4.97
===== =====
Balance, March 31, 1997 6,000 $4.97
===== =====
</TABLE>
As of March 31, 1997 54,000 options were available for grant under the Director
Plan and no options were exercisable.
The Company has reserved an aggregate of 150,000 shares of Common Stock for
issuance under its 1996 Employee Stock Purchase Plan (the "ESPP"). The ESPP was
adopted by the Board of Directors in January 1996 and approved by the Company's
stockholders prior to the consummation of the Company's initial public offering
in February 1996. The ESPP is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, and permits eligible employees of the
Company to purchase Common Stock through payroll deductions of up to 10% of
their compensation provided that no employee may purchase more than $25,000
worth of stock in any calendar year. The ESPP was implemented by an offering
period commencing on February 14, 1996 and ending on the last business day in
the period ending October 31, 1996. Each subsequent offering period (an
"Offering Period") will commence on the day following the end of the prior
Offering Period and will have a duration of six months. The price of Common
Stock purchased under the ESPP will be 85% of the lower of the fair market value
of the Common Stock on the first or last day of each offering period. The ESPP
will expire in the year 2006. In the year ended December 31, 1996 the Company
issued 32,815 shares of Common Stock under the ESPP for $153,410. At March 31,
1997, $101,901 had been withheld from employee earnings for stock purchases
under the ESPP.
New Accounting Pronouncement--In March 1997 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, `Earnings Per
Share'. This new standard requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the earnings statement and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. This statement will be effective for the Company's 1997 fiscal
year. The Company's current EPS calculation conforms to basic EPS. Diluted EPS
will not be materially different from basic EPS since potential common shares in
the form of stock options are not materially dilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q,
INCLUDING THE INFORMATION SET FORTH IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, ARE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE THOSE REGARDING THE COMPANY'S WORKING CAPITAL
POSITION AND IMPROVING SALES FORCE PRODUCTIVITY. ACTUAL RESULTS MAY VARY
SUBSTANTIALLY FROM THESE FORWARD LOOKING STATEMENTS FOR MANY REASONS. SEE ALSO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS - FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS, INCLUDED IN THE
COMPANY'S FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 1996, ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION . ADDITIONAL INFORMATION IS AVAILABLE IN
OTHER COMPANY REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
GENERAL
The Company provides facility-wide computer networks that acquire,
interpret and distribute real-time patient monitoring information. The Company's
networks acquire physiologic data generated by proprietary ambulatory ECG
monitors and other manufacturers' bedside equipment located throughout a
healthcare facility. The Company's products are sold directly to acute care
hospitals and integrated healthcare delivery networks ("IHDNs") and on an OEM
basis to patient monitoring equipment manufacturers.
During the quarter ended March 31, 1997 direct sales of the Company's
facility-wide computer networks of $1,785,386 were 39.7% lower than the
$2,959,973 achieved in the same quarter in 1996. The Company believes that the
reduction in sales resulted from a mid-1996 restructuring of the sales force and
implementation of a new selling method focused on quantifying the financial
benefits and re-engineering opportunities enabled by its facility-wide network.
These changes shifted the Company's sales strategy from a clinical to a
financial and information systems focus. This new strategy lengthened the sales
cycle and disrupted focus on the Company's selling its core competency in
clinical applications. Although direct sales of facility-wide networks in the
quarter ended March 31, 1997 were 33.5% higher than the preceding quarter ended
December 31, 1996, and the Company believes that sales force productivity will
continue to increase in 1997, there can be no assurance that the Company's sales
efforts will result in sequentially increasing or historical sales levels in
future periods.
Revenues from sales of facility-wide networks are recognized upon shipment.
The sales cycle for facility-wide networks has typically been from nine to 18
months. The Company has experienced seasonal variations in sales of its
facility-wide networks, with sales in the first quarter typically lower than the
preceding fourth quarter's sales due to customer budget cycles and sales
remaining relatively flat during the third quarter. Furthermore, a large
percentage of a particular quarter's shipments of facility-wide networks has
historically been booked in the last weeks of the quarter.
Revenues from sales of departmental products are recognized upon shipment.
The selling cycle for departmental products varies depending upon product mix
and the extent to which the Company develops customized operating software for a
particular OEM customer. In addition, the Company has experienced seasonal
variations in sales of its departmental products, with third quarter sales of
departmental products generally being lower than other quarters.
The Company's products are generally shipped as orders are received and,
accordingly, the Company typically operates with limited backlog. As a result,
sales in any quarter are dependent on orders booked and shipped in that quarter.
To date the Company has not capitalized software development expenses.
However, the development of new products or the enhancement of existing products
may require capitalization of such expenses in the future.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Total Revenues. Total revenues consist of revenue from sales of facility-wide
networks and departmental products, together with fees for installation and
servicing of products. Total revenues for the first quarter were $3,973,364,
compared to $5,969,107 achieved in the same period in 1996 and $3,496,151 in the
fourth quarter of 1996. Revenues in the first quarter of 1997 were 33.4% lower
than the same period in 1996, reflecting a 39.7% decrease in the Company's sales
of facility-wide network systems and a 27.3% decrease in departmental products
from the comparable period a year ago. When compared to the fourth quarter of
1996, total revenues were up 13.6%, with facility-wide sales increasing 33.5%
over the fourth quarter of 1996 and departmental sales up 1.4% from the fourth
quarter of 1996. Facility-wide network sales represented 44.9% of the revenues
in the quarter ended March 31, 1997 compared to 49.6% for the same quarter a
year ago.
Gross Profit. Cost of revenues sold generally includes material, direct labor,
overhead and, for facility-wide networks, installation expenses. Gross profits
in the first quarter of 1997 were 42.6% of revenues as compared to 57.6% in the
first quarter of 1996. Total gross profit decreased 50.8% to $1,690,762 in the
first quarter of 1997 from $3,436,897 in the first quarter of 1996, on a 33.4%
decrease in revenues. The decrease in gross profit in the first quarter of 1997
as compared to the first quarter of 1996 was due to lower revenues with fixed
costs in overhead constituting a higher percentage of revenues. In the first
quarter of 1997, the Company accrued one-time costs of $155,000 associated with
the termination of the Vice President of Operations; without this charge, gross
profit would have been 3.9% higher, or 46.5% of revenues.
Sales and Marketing Expenses. Sales and marketing expenses include payroll,
commissions and related costs attributable to direct and OEM sales and marketing
personnel, travel and entertainment expenses, and other promotional expenses.
Sales and marketing expenses of $2,361,460 were 59.4% of revenues in the first
quarter of 1997 compared to $2,106,225 in the
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first quarter of 1996, or 35.3% of revenues in the comparable period a year ago.
The $255,235 increase in sales and marketing expenses in the first quarter of
1997 as compared to the first quarter of 1996 was primarily attributable to an
increase in sales and marketing payroll and related support and travel and
entertainment expenses associated with the increased number of sales and
marketing personnel.
Research and Development Expenses. Research and development expenses include
payroll and related costs attributable to research and development personnel,
prototyping expenses and other costs. Research and development expenses of
$1,069,357 were 26.9% of revenues in the first quarter of 1997 as compared to
$918,348 or 15.4% of revenues for the first quarter of 1996. The $151,014
increase in the first quarter of 1997 as compared to the first quarter of 1996
was due primarily to an increase in the number of research and development
personnel and an increasing number of projects.
General and Administrative Expenses. General and administrative expense includes
accounting, finance, MIS, human resources, general administration, executive
officers and professional fee expenses. General and administrative expenses in
the first quarter of 1997 were $675,678, or 17.0% of revenues, as compared to
$517,763, or 8.7% of revenues for the same period in 1996. The $157,915 increase
in the first quarter of 1997 as compared to the first quarter of 1996 was
attributable to an increase in the number of administrative employees and the
costs associated with being a public company.
Other Income, Net. Other income, net consists primarily of interest income from
short term investments. Other income, net improved from $107,414 for the first
quarter of 1996 to $222,997 for the first quarter of 1997. The improvement
resulted from the payoff of the Company's long term debt in February 1996 which
caused a reduction in interest expense.
Provision for Income Taxes: The Company's effective tax rate for the first
quarter of 1996 was 43.5%, consisting of a federal income tax rate of 33.8%,
combined with a weighted average state income tax rate of 9.7%. In the first
quarter of 1997, the Company's tax provision was $7,300, representing minimum
tax payments to various states. In the first quarter of 1997 a tax benefit for
net operating losses was not recognized as all federal tax loss carrybacks were
recognized in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations, including capital
expenditures, through cash flow from operations, cash and cash equivalent
balances, a bank line of credit and long-term debt. During the first quarter of
1996, the Company issued 2,300,000 shares of common stock in its initial public
offering, raising $25.6 million, net of expenses.
In the first quarter of 1997, the Company used cash from operating
activities of $2,581,528 to fund a $2,200,036 net loss and an increase in
accounts receivable and generated cash through a decrease in income taxes
receivable. In the same period approximately $104,000 of cash was used for
investing and financing activities.
In the first quarter of 1996, the Company generated approximately $24.1
million of cash from financing activities which consisted of $25.6 million, net,
from the sale of 2,300,000 shares of common stock in the Company's initial
public offering and used $1.5 million to pay off long-term debt. The Company
used $22,751 for investing activities which consisted of $220,937 for purchases
of property and generated $198,186 from other assets. In the first quarter of
1996 the Company generated $502,635 from operating activities through
collections on accounts receivable which was used in targeted inventory
procurement as well as reducing accrued liabilities.
At December 31, 1995, the Company had a secured promissory note in the
amount of $1,541,667 due to Silicon Valley Bank which bore interest at the
bank's prime rate plus 3.0% (11.75% at December 31, 1995) per annum, payable
monthly in arrears. In February 1996 the Company paid the loan off in full,
without pre-payment penalty. In August 1996, the Company entered into a secured
lending arrangement (the "Agreement") with Silicon Valley Bank, providing for a
$5.0 million revolving line of credit bearing interest at the bank's prime rate.
The bank does not have a security interest in any of the Company's assets unless
the Company is borrowing under the line of credit and fails to comply with
certain financial covenants. The Agreement expires in August 1997 and has
certain financial and other covenants. At March 31, 1997, there were no
borrowings outstanding under the Agreement and the Company was in compliance
with all covenants. As such the bank held no security interest in any of the
Company's assets.
The Company's principal commitment at March 31, 1997 consisted of a lease
on its office and manufacturing facility. The Company expects to spend
approximately $1.5 million for capital expenditures during 1997.
The Company believes that existing cash resources, cash flows from
operations, if any, and line of credit facilities will be sufficient to fund the
Company's operations for at least the next twelve months.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Second Amendment to Employment Agreement dated January 1, 1997 between
the Registrant and David L. Schlotterbeck
10.2 Consulting Agreement dated January 1, 1997 between the Registrant and
David L. Schlotterbeck
9
<PAGE> 10
10.3 Outside Board of Directors Agreement dated February 20, 1997 between
the Registrant and David L. Schlotterbeck
10.4 Stock Option Amendment Agreement dated February 20, 1997 between the
Registrant and David L. Schlotterbeck
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
10
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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 on May 12, 1997.
VITALCOM INC.
/s/ Donald W. Judson
-------------------------------------
Donald W. Judson
President, Chief Executive Officer
/s/ Shelley B. Thunen
-------------------------------------
Shelley B. Thunen
Vice President Finance and
Chief Financial Officer
11
<PAGE> 1
Exhibit 10.1
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment to Employment Agreement (the "Amendment") is made as of the
first day of January, 1997 by and among VITALCOM INC., a Delaware corporation
("VitalCom") and David L. Schlotterbeck (the "Executive").
WITNESSETH
WHEREAS, on or about August 29, 1995 VitalCom entered into an employment
agreement with Executive (the "Employment Agreement"), as modified on or about
January 5, 1996, pursuant to which the services of Executive had been retained
by VitalCom;
WHEREAS, the Executive has terminated his employment with VitalCom
effective January 1, 1997 and VitalCom and Executive wish to modify certain
sections of the Employment Agreement;
NOW, THEREFORE, on the basis of the foregoing premises and for good and
valuable consideration, the receipt of which is hereby acknowledged, including
the mutual covenants and agreements set forth herein, the parties agree as
follows:
1. Section 3(a) Compensation. Salary. Salary shall be changed from $220,000.00
per annum, to $198,000.00 per annum.
2. Section 6(f) Termination and Default. Payments, sentence number three, shall
be changed from: "In the event the Executive accepts other employment or engages
in his own business prior to the last date of the Severance Term, the Executive
shall forthwith notify the Company and the Company shall be entitled to set off
from amounts due the Executive under this Section 6(f) the amounts paid to the
Executive in respect of such other employment or business activity."
to:
"In the event the Executive accepts other employment or engages in his own
business prior to the last date of the Severance Term, the Executive shall
forthwith notify the Company and the Company shall be entitled to set off from
amounts due the Executive under this Section 6(f) the amounts paid to the
Executive in respect of such other employment or business activity; however, any
consulting performed for VitalCom pursuant to the Consulting Agreement between
VitalCom and Executive dated January 1, 1997 shall not be set off from amounts
due the Executive under this Section 6(f)."
3. Except as expressly set forth herein and the Amendment dated January 5, 1996,
the Employment Agreement will remain in full force and effect as originally
executed.
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment as
of the first day and year first above written.
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<PAGE> 2
/s/ David L. Schlotterbeck
--------------------------
David L. Schlotterbeck "Executive"
VITALCOM INC.
/s/ Donald W. Judson
--------------------
Donald W. Judson
Its: President & CEO, Chairman of the Board
13
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of this 29th day of August, 1995, between PACIFIC
COMMUNICATIONS, INC., a California corporation (the "Company"), and David L.
Schlotterbeck (the "Executive").
RECITALS:
WHEREAS, the Company recognizes that the future growth, profitability and
success of the Company's business will be substantially and materially enhanced
by the employment of the Executive by the Company;
WHEREAS, the Company desires to employ the Executive and the Executive has
indicated Executive's willingness to provide services, on the terms and
conditions set forth herein;
NOW, THEREFORE, on the basis of the foregoing premises and in consideration of
the mutual covenants and agreements contained herein, the parties hereto agree
AS follows:
SECTION 1. EMPLOYMENT. The Company hereby agrees to employ the Executive
and the Executive hereby accepts employment with the Company, on the terms and
subject to the conditions hereinafter set forth. Subject to the terms and
conditions contained herein, the Executive shall serve as President and Chief
Executive Officer of the Company and, in such capacity, shall report directly to
the Chairman of the Company (the "Chairman") and shall have such duties as are
typically performed by a President and Chief Executive Officer of the Company in
the areas of managing the Company's operations including sales, marketing,
finance, engineering, R&D, quality, regulatory, and manufacturing functions on a
daily basis, together with such additional duties, commensurate with the
Executive's position as President and Chief Executive Officer the of the
Company, as may be assigned to the Executive from time to time by the Chairman
of the Company. The principal location of the Executive's employment shall be at
the Company's principal executive office located in Orange County, California,
although the Executive understands and agrees that Executive may be required to
travel from time to time for business reasons.
SECTION 2. TERM. Subject to the provisions and conditions of this Agreement
(including Section 6), the Executive's employment hereunder shall commence on
the date hereof and shall continue during the period ending on the third
anniversary of the date hereof (the "Employment Term")
SECTION 3. COMPENSATION.
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<PAGE> 4
(a) SALARY. As compensation for the PERFORMANCE of the Executive's services
hereunder, the Company shall pay to the Executive a SALARY (the "Salary") of
$220,000.00 per annum with increases, if any, as may be approved by the Board of
Directors. The Salary shall be payable in accordance with the payroll practices
of the Company as the same shall exist from time to time. In no event shall the
Salary be decreased during the Employment Term.
(b) BONUS Plan. The Executive shall be eligible to receive an annual cash
bonus ( "Bonus") which shall be determined by the Board of Directors.
(c) BENEFITS. In addition to the Salary and Bonus, the Executive shall be
entitled to participate in health, insurance, pension, and other benefits
provided to other senior executives of the Company on terms no less favorable
than those available to such senior executives of the Company. The Executive
shall also be entitled to the same number of vacation days, holidays, sick days
and other benefits as are generally allowed to other senior executives of the
Company in accordance with the Company policy in effect from time to time.
SECTION 4. EXCLUSIVITY. During the Employment Tem-4 the Executive shall
devote Executive's full time to the business of the Company, shall faithfully
serve the Company, shall in all respects conform to and comply with the lawful
and reasonable directions and instructions given to him by the Chairman in
accordance with the terms of this Agreement, shall use Executive's best efforts
to promote and serve the interests of the Company and shall not engage in any
other business activity, whether or not such activity shall be engaged in for
pecuniary profit, except that the Executive may: (i) participate in the
activities of professional trade organizations related to the business of the
Company; (ii) engage in personal investing activities; and (iii) participate on
one or more boards of directors of entities which are not directly competitive
with the Company or its affiliates; and (iv) participate in community,
charitable or similar activities and associations which are not competitive with
the Company for other than pecuniary profit; provided that activities set forth
in these clauses (i) through (iv), either singly or in the aggregate, do not
interfere in any material respect with the services to be provided by the
Executive hereunder.
SECTION 5. REIMBURSEMENT FOR EXPENSES. The Executive is authorized to incur
reasonable expenses in the discharge of the services to be performed hereunder,
including expenses for travel, entertainment, lodging and similar items in
accordance with the Company's expense reimbursement policy, as the same may be
modified by the Company from time to time. The Company shall reimburse the
Executive for all such proper expenses upon presentation by the Executive of
itemized accounts of such expenditures in accordance with the financial policy
of the Company, as in effect from time to time.
SECTION 6. TERMINATION AND DEFAULT.
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<PAGE> 5
(a) DEATH. This Agreement shall automatically terminate upon the
death of the Executive and upon such event, the Executive's estate shall be
entitled to receive the amounts specified in Section 6(f) below.
(b) DISABILITY. If the Executive is unable to perform the duties
required of him under this Agreement because of illness, incapacity, or physical
or mental disability, this Agreement shall remain in full force and effect and
the Company shall pay all compensation required to be paid to the Executive
hereunder, unless the Executive is unable to perform the duties required of him
under this Agreement for an aggregate of 180 days (whether or not consecutive)
during any 12month period during the term of this Agreement, in which event this
Agreement (other than Sections 6(f), 7, 8, 9, and 12 hereof), including, but not
limited to, the Company's obligations to pay any Salary or to provide any
privileges under this Agreement, shall terminate.
(c) JUST CAUSE. The Company may terminate this Agreement (other than
Sections 6(f), 7, 8, 9 and 12 hereof) at any time. If the Executive's employment
is terminated pursuant to this Section 6(c), the Executive shall be entitled to
receive the amounts specified in Section 6(f) below. In the event of termination
pursuant to this Section 6(c) for Just Cause, the Company shall deliver to the
Executive written notice setting forth the basis for such termination, which
notice shall specifically set forth the nature of the Just Cause which is the
reason for such termination. Termination of the Executive's employment hereunder
shall be effective upon delivery of such notice of termination. For purposes of
this Agreement, "Just Cause" shall mean: (i) any @l or intentional act of the
Executive that has the effect of injuring the business prospects of the Company
or its affiliates in any material respect; (ii) any continued or repeated
absence from the Company, unless such absence is (A) approved or excused by the
Chairman or (B) is the result of the Executive's illness, disability or
incapacity (in which event the provisions of Section 6(b) hereof shall control),
(iii) use of illegal drugs by the Executive or repeated drunkenness; (iv)
conviction of the Executive for the commission of a felony involving moral
turpitude; or (v) the commission by the Executive of a material act of fraud or
embezzlement against the Company.
(d) GOOD Reason. The Executive may terminate this Agreement (other
than Sections 6(b), 7, 8, 9 and 12) for "Good Reason" if Executive resigns from
Executive's employment hereunder following a Substantial Breach (as hereinafter
defined) and such Substantial Breach shall not have been corrected by the
Company within thirty (30) days of receipt by the Company of written notice from
the Executive of the occurrence of such Substantial Breach, which notice shall
specifically set forth the nature of the Substantial Breach which is the reason
for such resignation. The term "Substantial Breach" means: (i) the failure by
the Company to pay to the Executive the Salary and Bonus, if any, in accordance
with Sections 3(a) and 3(b) hereof, (H) the failure by the Company to allow the
Executive to participate in the Company's employee benefit plans generally
available from time to time to senior executives of the Company; or (iii) the
16
<PAGE> 6
failure of any successor to all or substantially all of the business and/or
assets of the Company to assume this Agreement; provided, however, that the term
"Substantial Breach" shall not include a termination of the Executives
employment hereunder pursuant to Sections 6(b) or (c) hereof The date of
termination of the Executive's employment under this Section 6(d) shall be the
effective date of any resignation specified in writing by the Executive, which
shall not be less than thirty (30) days after receipt by the Company of written
notice of such resignation, provided that such resignation shall not be
effective pursuant to this Section 6(d) and the Substantial Breach shall be
deemed to have been cured if such Substantial Breach is corrected by the Company
during such 30-day period.
(e) RESIGNATION. The Executive shall have the right immediately to
terminate this Agreement (other than Sections 6(f), 7, 8, 9 and 12) by giving
notice of the Executive's resignation other than for Good Reason. Upon receipt
of such notice, this Agreement, other than Sections 6(f), 7, 8, 9 and 12, shall
terminate immediately.
(f) PAYMENTS. In the event that the Executive's employment hereunder
terminates for any reason, the Company shall pay to the Executive all amounts
accrued but unpaid hereunder through the date of termination in respect of
Salary, accrued vacation, and unreimbursed expenses. In the event the
Executive's employment hereunder is terminated by the Company without Just Cause
or by the Executive with Good Reason, in addition to the amounts specified in
the foregoing sentence, (i) the Executive shall continue to receive the Salary
(less any applicable withholding or similar taxes) at the rate in effect
hereunder on the date of such termination periodically, in accordance with the
Company's prevailing payroll practices, for a period of twelve months following
the date of such termination (the "Severance Term") and (H) the Executive shall
continue to receive any health or other insurance benefits (including, but not
limited to, self-insured dental, eye care or other benefits) provided to him as
of the date of such termination in accordance with the Section 3(c) hereof
during the Severance Term; provided, however, that Executive shall not be
entitled to participate in any pension, profit sharing or 401-K plan benefits,
or to accrue any vacation time or benefits, during the Severance Tenn. In the
event the Executive accepts other employment or engages in his own business
prior to the last date of the Severance Term, the Executive shall forthwith
notify the Company and the Company shall be entitled to set off from amounts due
the Executive under this Section 6(f) the amounts paid to the Executive in
respect of such other employment or business activity. Amounts owed by the
Company in respect of the Salary or reimbursement for expenses under the
provisions of Section 5 hereof shall, except as otherwise set forth in this
Section 6(f), be paid promptly upon any termination. Upon any termination of
this Agreement, all of the rights, privileges and duties of the Executive
hereunder shall cease, except for Executive's rights under this Section, 6(f)
and Executive's obligations under Sections 7, 8, 9, and 12 hereunder.
17
<PAGE> 7
SECTION 7. SECRECY AND NON-COMPETITION.
(a) NON COMPETING EMPLOYMENT. The Executive acknowledges that the
agreements and covenants contained in this Section 7 are essential to protect
the value of the Company's business and assets and by Executive's current
employment with the Company and its subsidiaries, the Executive has obtained and
will obtain such knowledge, contacts, know-how, training and experience and
there is a substantial probability that such knowledge, know-how, contacts,
training and experience could be used to the substantial advantage of a
competitor of the Company and to the Company's substantial detriment. Therefore,
the Executive agrees that for the period commencing on the date of this
Agreement and ending on the second anniversary (or, in the event of termination
by the Company without Just Cause, or by the Executive with Good Reason, ending
on the first anniversary) of the termination of the Executive's employment
hereunder, (such period is hereinafter referred to as the "Restricted Period")
with respect to any county or parish in the United States in which the Company
or any of its subsidiaries or affiliates is actively providing services or
otherwise doing business on the date of the termination of the Executive's
employment hereunder, the Executive shall not participate or engage, directly or
indirectly, for himself or on behalf of or in conjunction with any person,
partnership, corporation or other entity whether as an employee, agent, officer,
director, shareholder, partner, joint venturer, investor (other than owning or
holding not greater than a two percent (21/o) interest in a publicly held
entity), or otherwise, in any business activities if such activity consists of
any activity undertaken or expressly contemplated to be undertaken by the
Company or any of its subsidiaries or affiliates or by the Executive at any time
during the Employment Term.
(b) NO INTERFERENCE. During the Restricted Period, the Executive
shall not, whether for Executive's own account or for the account of any other
individual, partnership, corporation or other business organization (other than
the Company), directly or indirectly solicit, endeavor to entice away from the
Company, its affiliates or subsidiaries, or otherwise directly interfere with
the relationship of the Company, its affiliates or subsidiaries with any person
who, to the knowledge of the Executive, is employed by or otherwise engaged to
perform services for the Company, its affiliates or subsidiaries (including, but
not limited to, any independent sales representatives or organizations) or who
is, or was within the then most recent twelve-month period, a customer or
client, of the Company, its predecessors or any of its subsidiaries or
affiliates. The placement of any general classified or "help wanted"
advertisements and/or general solicitations to the public at large shall not
constitute a violation of, this Section 7(b) unless the Executive's name is
contained in such advertisements or solicitations.
(c) COORDINATION WITH OTHER AGREEMENT. In addition to the foregoing
provisions of this Section 7, Executive hereby ratifies and confirms all of the
terms, provisions, and obligations set forth in that certain Proprietary
Information and Inventions Agreement entered into by Executive and the Company
dated August 23, 1995, all of the terms and provisions of which are hereby
incorporated herein by this reference.
18
<PAGE> 8
SECTION 8. INJUNCTIVE Relief. Without intending to limit the remedies
available to the Company, the Executive acknowledges that A breach of any of the
covenants contained in Section 7 hereof may result in material irreparable
injury to the Company or its subsidiaries or affiliates for which there is no
adequate remedy at law, that it will not be possible to measure damages for such
injuries precisely and that, in the event of such a breach or threat thereof,
the Company shall be entitled to obtain a temporary restraining order and/or a
preliminary or permanent injunction, without the necessity of proving
irreparable harm or injury as a result of such breach or threatened breach of
Section 7 hereof, restraining the Executive from engaging activities prohibited
by Section 7 hereof or such other relief as may be required specifically to
enforce any of the covenants in Section 7 hereof
SECTION 9. EXTENSION OF RESTRICTED PERIOD. In addition to the
remedies the Company may seek and obtain pursuant to Section 8 of this
Agreement, the Restricted Period shall be extended by any and all periods during
which the Executive shall be found by a court to have been in violation of the
covenants contained in Section 7 hereof
SECTION 10. SUCCESSORS AND ASSIGNS: NO THIRD-PARTY BENEFICIARIES.
This Agreement shall inure to the benefit of, and be binding upon, the
successors and assigns of each of the parties, including, but not limited to,
the Executive's heirs and the personal representatives of the Executive's heirs
and the personal representatives of the Executive's estate; provided, however
that neither party shall assign or delegate any of the obligations created under
this Agreement without the prior written consent of the other party.
Notwithstanding the foregoing, the Company shall have the unrestricted right to
assign this Agreement and to delegate all or any part of its obligations
hereunder to any of its subsidiaries or affiliates, but in such event such
assignee shall expressly assume all obligations of the Company hereunder and the
Company shall remain fully liable for the performance of all of such obligations
in the manner prescribed in this Agreement. Nothing in this Agreement shall
confer upon any person or entity not a party to this Agreement, or the legal
representatives of such person or entity, any rights or remedies of any nature
or kind whatsoever under or by reason of this Agreement.
SECTION 11. WAIVER AND AMENDMENTS. Any waiver, alteration, amendment
or modification of any of the terms of this Agreement shall be valid only if
made in writing and signed by the parties hereto; provided, however, that any
such waiver, alteration, amendment or modification is consented to on the
Company's behalf by the Board of Directors. No waiver by either of the parties
hereto of their rights hereunder shall be deemed to constitute a waiver with
respect to any subsequent occurrences or transactions hereunder unless such
waiver specifically states that it is to be construed as a continuing waiver.
SECTION 12. SEVERABILITY AND GOVERNING LAW. The Executive
acknowledges and agrees that the covenants set forth in Section 7 hereof are
reasonable and valid in geographical and temporal scope and in all other
respects. If any of such covenants or such other provisions of this Agreement
are found to be invalid or unenforceable by a final determination of a court of
19
<PAGE> 9
competent jurisdiction, (a) the remaining terms and provisions hereof shall be
unimpaired and (b) the invalid or unenforceable term or provision shall be
deemed replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term
or provision. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED ENTIRELY SUCH STATE.
SECTION 13. NOTICES.
(i) All communications under this Agreement sham be in writing and shall be
delivered by hand or mailed by overnight courier or by registered or certified
mail, postage prepaid:
(1) if to the Executive, at 26373 Parkside Drive, Hayward, CA 94542 or at such
other address as the Executive may have furnished the Company in writing, or
(2) if to the Company, at 2041 South Grand Avenue, Santa Ana, California 92705,
marked for the attention of Donald W. Judson, Chairman, or at such other address
as it may have furnished in writing to the Executive.
(ii) Any notice so addressed shall be deemed to be given: if delivered by
hand, on the date of such delivery; if mailed by overnight courier, on the first
business day following the date of such mailing; and if mailed by registered or
certified mail, on the third business day after the date of such mailing.
SECTION 14. SECTION HEADINGS. The headings Of the sections and subsections
of this Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof, affect the meaning or interpretation of this
Agreement or of any term or provision hereof
SECTION 15. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement of the parties hereto regarding the employment of
the Executive. Except as expressly provided herein, this Agreement supersedes
all prior negotiations, discussions, correspondence, communications,
understandings and agreements between the parties relating to the subject matter
of this Agreement.
SECTION 16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
20
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
PACIFIC COMMUNICATIONS, INC., a California
Corporation
By:
/s/ Donald W. Judson
---------------------------------
Name: Donald W. Judson
Title: Chairman
/s/ David L. Schlotterbeck
---------------------------------
Executive: David L. Schlotterbeck
21
<PAGE> 11
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is made and
entered into as of the 5th day of January, 1996 by and among PACIFIC
COMMUNICATIONS, INC., a California corporation (PCI), ACCUCORE, INC., a Delaware
corporation ("ACCUCORE"), and David L. Schlotterbeck (the "Executive").
WITNESSETH
WHEREAS, on or about August 29, 1995, Employee entered into an employment
agreement with Executive(the "Employment Agreement") pursuant to which the
services of Executive have been retained by PCI;
WHEREAS, PCI has been merged with and into ACCUCORE as of December 28,
1995, and ACCUCORE has assumed all of the liabilities and obligations of PCI as
of the date of such merger;
WHEREAS, in the event of such merger, ACCUCORE desires to retain the
services of Executive, and Executive desires to be employed by ACCUCORE, on
substantially the same terms and conditions as those set forth in the Employment
Agreement.
NOW, THEREFORE, on the basis of the foregoing premises and for good and
valuable consideration, the receipt of which is hereby acknowledged, including
the mutual covenants and agreements set forth herein, and to be effective
December 28, 1995, when PCI merged with and into ACCUCORE (the "Effective
Date"), the parties hereby agree as follows:
1. AMENDMENT OF EMPLOVMENT AGREEMENT. On the Effective Date, the Employment
Agreement is hereby amended to substitute ACCUCORE in the place and stead of
PCI. Executive hereby accepts and agrees to such substitution.
2. ASSUMPTIONOF0BLIENTIONS. On the Effective Date, ACCUCORE will assume all of
the liabilities and obligations of PCI pursuant to the Employment Agreement.
2. NO OTHER CHANGES. Except as expressly set forth herein, the Employment
Agreement will remain in full force and effect as originally executed.
22
<PAGE> 12
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first
day and year first above written
/s/ David L. Schlotterbeck
--------------------------
"Executive"
PACIFIC COMMUNICATIONS, INC.
By: /s/ Donald W. Judson
--------------------
Its: Chairman
ACCUCORE, INC.
By: /s/ Donald W. Judson
--------------------
Its: Chairman
23
<PAGE> 1
EXHIBIT 10.2
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated as of this first day of January, 1997, between
VITALCOM INC., a Delaware corporation ("VitalCom") and David L. Schlotterbeck
("Schlotterbeck").
RECITALS
WHEREAS, VitalCom will require the consulting services of a senior level
executive on an interim, part-time basis for assistance with special projects
and management in manufacturing, operations, research and development and
certain sales opportunities;
WHEREAS, VitalCom desires to obtain consulting services and Schlotterbeck
has indicated his willingness to provide services, on the terms and conditions
set forth herein;
NOW THEREFORE, on the basis of the foregoing premises and in consideration
of the mutual covenants and agreements herein, the parties hereto agree as
follows:
Section 1. CONSULTING. VitalCom hereby agrees to contract for the personal
services of Schlotterbeck and Schlotterbeck hereby accepts consulting work from
VitalCom, on the terms and subject to the conditions hereinafter set forth.
Donald W. Judson, VitalCom's President & CEO ("Judson"), shall periodically
authorize Schlotterbeck to perform personal services and complete special
projects in manufacturing, operations, research and development, sales and other
areas designated by Judson . The principal location that such services shall be
rendered shall be at VitalCom's principal offices located in Tustin, California,
although Schlotterbeck understands and agrees that he may be required to travel
from time to time to accomplish assignments.
Section 2. TERM. This consulting agreement shall commence on the date
hereof and shall continue until June 30, 1997.
Section 3. COMPENSATION. Schlotterbeck will be paid $850 per day for
services rendered. Schlotterbeck will be remunerated for reasonable travel,
entertainment, and other expenses, such as telephone calls, incurred on behalf
of VitalCom in authorized work. Schlotterbeck will submit an itemized bill for
services rendered and expenses incurred at least one time per month. All
invoices will be submitted to Judson for approval. Payment will be made on all
invoices within 10 days after approval by Judson.
24
<PAGE> 2
Section 4. WORK AUTHORIZATION. Judson will authorize projects and work on a
weekly basis by a verbal authorization to Schlotterbeck. However, it is
anticipated that projects and services to be performed by Schlotterbeck will not
exceed one to two days work per week. Work authorization in excess of three days
per week will require a written authorization by Judson.
Section 5. INDEPENDENT CONTRACTOR. Schlotterbeck is an independent
contractor to VitalCom. Schlotterbeck shall be responsible for any income,
employment, franchise, or any other taxes on remuneration paid by VitalCom.
Pursuant to this consulting agreement Schlotterbeck shall not be entitled to any
VitalCom fringe benefits, including but not limited to employer payroll taxes,
insurance, paid time off or pension plans.
Section 6. SECRECY AND NON-COMPETITION. Schlotterbeck acknowledges that
during consulting assignments he will obtain and be exposed for confidential and
proprietary material, knowledge, contacts and know-how of VitalCom's which could
be used to the substantial advantage of a competitor of VitalCom and to
VitalCom's substantial detriment. During the term of this consulting agreement
and for period of two years after Schlotterbeck shall not participate or engage,
directly or indirectly, for himself on or behalf of or in conjunction with any
person, partnership, corporation or other entity, whether as an employee, agent,
officer, director, shareholder, partner, joint venturer, investor (other than
owning or holding not greater than a two percent (2%) interest in a publicly
held entity), or otherwise, in any business activities if such activity consists
of any activity undertaken or expressly contemplated to be undertaken by
VitalCom or any of its subsidiaries.
In addition, Schlotterbeck hereby ratifies and confirms all of the terms,
provisions, and obligations set forth in that certain Proprietary Information
and Inventions Agreement entered into by Schlotterbeck and VitalCom dated August
23, 1995, and all of the terms and provisions of Section 7 of the Employment
Agreement dated August 29, 1995 by and between Schlotterbeck and VitalCom, as
amended January 5, 1996 and January 1, 1997.
Section 7. SEVERABILITY AND GOVERNING LAW. Schlotterbeck acknowledges and agrees
that the covenants set forth in Section 6 are reasonable. If any of such
covenants or such other provisions of this Agreement are found to invalid or
unenforceable by a final determination of a court of competent jurisdiction the
remaining terms and provisions hereof shall be unimpaired and the invalid or
unenforceable term shall be replaced with a valid and enforceable provision that
expresses the intent of the parties. This agreement shall be governed by and
construed in accordance with the laws of the State of California.
Section 8. TERMINATION. Either party may terminate this Agreement, except for
the provisions of Section 6, upon 15 days written notice.
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<PAGE> 3
Section 9. NOTICES. Notice, by hand delivery or mailed by overnight courier or
by registered or certified mail, postage prepaid shall be:
(i) if to Schlotterbeck, at 57 Poppy Hill Rd., Laguna Niguel, CA 92677
(ii) if to VitalCom, at 15222 Del Amo Avenue, Tustin, CA 92780, Attn.:
Donald W. Judson.
Section 10. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement of the parties hereto regarding consulting services
to be provided by Schlotterbeck. This Agreement supersedes all prior
negotiations, discussions, and understandings between the parties relating to
the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
/s/ David L. Schlotterbeck
------------------------------------------
Consultant: David L. Schlotterbeck
VITALCOM INC.
/s/ Donald W. Judson
------------------------------------------
Donald W. Judson
Its President & CEO, Chairman of the Board
26
<PAGE> 1
EXHIBIT 10.3
OUTSIDE BOARD OF DIRECTORS AGREEMENT
OUTSIDE BOARD OF DIRECTORS AGREEMENT, dated as of this 20th day of
February, 1997, between VITALCOM INC., a Delaware corporation (the "Company"),
and David L. Schlotterbeck ("Schlotterbeck").
RECITALS:
WHEREAS, the Company recognizes that the future growth, profitability and
success of the Company's business will be materially enhanced by the
participation of qualified outside board of directors members;
WHEREAS, the Company desires Schlotterbeck's participation as an outside
board member and Schlotterbeck is willing to provide such services, on the terms
and conditions set forth herein;
NOW THEREFORE, on the basis of the foregoing premises and in consideration
of the mutual covenants and agreements contained herein, the parties hereto
agree as follows:
Section 1. OUTSIDE DIRECTORS' RESPONSIBILITY. Schlotterbeck agrees as an
outside director of the Company to provide the appropriate oversight to the
Company's business and financial condition, including attendance at regularly
scheduled Board meetings and other meetings as appropriate, and will serve, if
requested by the other Board members on committees of the Board of Directors.
Section 2. TERM. Schlotterbeck shall serve as an outside director until the
next regularly scheduled annual meeting or other sooner meeting at which the
board of directors of the Company are elected by the Company's stockholders and
each successive term for which Schlotterbeck is nominated, agrees to stand for
election, and is elected by the Company's stockholders as a Company board
member. Nothing in this Agreement implies that Schlotterbeck will be nominated
or elected as a Board member for any successive term.
Section 3. REMUNERATION. In recognition of the time required as a Board
member, effective January 1, 1997, the Company will pay Schlotterbeck $1,000 for
each board meeting attended by Schlotterbeck, excluding telephonic board
meetings. The Company will reimburse Schlotterbeck for reasonable travel,
living, and meal expenses incurred to attend board meetings.
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<PAGE> 2
Section 4. STOCK OPTIONS. At a regularly scheduled board of directors
meeting of the Company, in the first calendar quarter of 1997, the Stock Option
Committee of the board of directors will grant Schlotterbeck the option to
purchase 6,000 shares of the Company's common stock, pursuant to the terms of
the 1996 Director Option Plan ("Plan"), at the then fair market value on the
date of grant. The Stock Option Committee of the board of directors will grant
Schlotterbeck an additional option to purchase 6,000 shares of the Company's
common stock, at the then fair market value on the date of grant, at the first
regularly scheduled board of directors meeting each calendar year, starting in
1998, if Schlotterbeck is then a member of the board of directors of the
Company, pursuant to the terms of the Plan, and so long as there are shares
available in the Plan available for grant.
Section 5. INDEPENDENT CONTRACTOR. Schlotterbeck as an outside director is
an independent contractor to the Company. Schlotterbeck shall be responsible for
any income, employment, franchise and other taxes paid on outside directors'
remuneration paid by the Company. Schlotterbeck shall not be entitled to any
Company fringe benefits, including but not limited to employer payroll taxes,
insurance, paid time off or pension plans.
Section 6. SECRECY. Schlotterbeck acknowledges that as a Board member to
the Company he will obtain and be exposed to confidential and proprietary
material, knowledge, contacts and know-how of the Company's which could be used
to the substantial advantage of a competitor of the Company and to Company's
substantial detriment. As a Board member Schlotterbeck agrees to keep
confidential and not use any Company proprietary material, knowledge, contacts
and know-how for others or for his own business purposes.
In addition, Schlotterbeck hereby ratifies and confirms all of the terms,
provisions, and obligations set forth in that certain Proprietary Information
and Inventions Agreement entered into by Schlotterbeck and the Company, dated
August 23, 1995.
Section 7. SEVERABILITY AND GOVERNING LAW. Schlotterbeck acknowledges and
agrees that the covenants set forth in Section 6 are reasonable. If any of such
covenants or such other provisions of this Agreement are found to invalid or
unenforceable by a final determination of a court of competent jurisdiction the
remaining terms and provisions hereof shall be unimpaired and the invalid or
unenforceable term shall be replaced with a valid and enforceable provision that
expresses the intent of the parties. This agreement shall be governed by and
construed in accordance with the laws of the State of California.
Section 8. TERMINATION. Nothing in this Agreement prevents Schlotterbeck
from resigning from the board of directors of the Company at any time upon
written notice.
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<PAGE> 3
Section 9. NOTICES. Notice, by hand delivery or mailed by overnight courier
or by registered or certified mail, postage prepaid shall be:
(i) if to Schlotterbeck, at 57 Poppy Hill Rd., Laguna Niguel, CA 92677
(ii) if to the Company, at 15222 Del Amo Avenue, Tustin, CA 92780, Attn.:
Donald W. Judson.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
/s/ David L.Schlotterbeck
------------------------------------
David L. Schlotterbeck
VITALCOM INC.
/s/ Donald W. Judson
------------------------------------
Donald W. Judson
Its President & CEO, Chairman of the
Board of Directors
29
<PAGE> 1
Exhibit 10.4
VITALCOM INC.
STOCK OPTION AMENDMENT AGREEMENT
This Agreement is made this 20th day of February, 1997, by and between VitalCom
Inc. (the "Company") and David L. Schlotterbeck (the "Optionee").
WHEREAS: the Company granted the Optionee options on September 20, 1995 and
November 3, 1995 to purchase 242,958 and 59,052 shares, respectively, of the
common stock of the Company under the Company's 1993 Stock Option Plan ("the
Plan");
WHEREAS: The Optionee ceased to be an employee of the Company as of January
1, 1997;
WHEREAS: Optionee will remain a director of the Company and the Company
will nominate the Optionee to be a director of the Company at the next annual
meeting of the Company's shareholders; and
WHEREAS: the Company and the Optionee desire to cancel the Option as to all
shares that were not vested as of January 1, 1997 (the "Unvested Shares") in the
amount of 169,900 shares;
NOW THEREFORE: the Optionee and the Company agree that the Option is hereby
canceled, and shall be of no further force or effect, as to the Unvested Shares.
IN WITNESS WHEREOF, this Agreement has been entered into as of the date first
set forth above.
VITALCOM INC. OPTIONEE
By: /s/ Donald W. Judson /s/ David L. Schlotterbeck
---------------------- --------------------------
Donald W. Judson David L. Schlotterbeck
President & CEO
Chairman of the Board
30
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,434,550
<SECURITIES> 0
<RECEIVABLES> 2,736,002
<ALLOWANCES> 123,206
<INVENTORY> 3,092,645
<CURRENT-ASSETS> 26,381,997
<PP&E> 3,316,860
<DEPRECIATION> 1,128,833
<TOTAL-ASSETS> 29,394,681
<CURRENT-LIABILITIES> 4,543,476
<BONDS> 0
0
0
<COMMON> 36,834,256
<OTHER-SE> (12,060,400)
<TOTAL-LIABILITY-AND-EQUITY> 29,394,681
<SALES> 3,973,364
<TOTAL-REVENUES> 3,973,364
<CGS> 2,282,602
<TOTAL-COSTS> 2,282,602
<OTHER-EXPENSES> 4,106,495
<LOSS-PROVISION> 4,927
<INTEREST-EXPENSE> (222,997)
<INCOME-PRETAX> (2,192,736)
<INCOME-TAX> 7,300
<INCOME-CONTINUING> (2,200,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,200,036)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
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