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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
X THE SECURITIES EXCHANGE ACT OF 1934
- ---
For the quarterly period ended June 30, 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 Industrial (I.R.S. Employer
incorporation or 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 August 7, 1997, there were 8,012,396 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>
---------------------------------
JUNE 30, DECEMBER 31,
1997 1996
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 18,360,896 $ 20,120,203
Accounts receivable, net 2,612,214 2,299,360
Inventories 2,814,929 3,191,043
Prepaid expenses 482,517 361,272
Income tax refund receivable 156,308 2,874,276
-------------- ----------------
Total current assets 24,426,864 28,846,154
Property
Machinery and equipment 1,365,052 1,352,898
Office furniture and computer equipment 1,993,209 1,820,607
Leasehold improvements 87,351 67,919
-------------- ----------------
3,445,611 3,241,424
Less accumulated amortization and depreciation (1,303,940) (976,328)
-------------- ----------------
Property, net 2,141,672 2,265,096
Other assets 323,371 140,101
Goodwill, net 648,537 669,525
------------- ----------------
$ 27,540,444 $ 31,920,876
============== ================
</TABLE>
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
<TABLE>
<CAPTION>
----------------------------------
JUNE 30, DECEMBER 31,
1997 1996
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 337,577 $ 1,085,972
Accrued payroll and related costs 1,030,288 875,344
Accrued warranty costs 924,402 951,381
Accrued marketing commitments - 309,377
Accrued liabilities 1,508,128 1,623,278
Current portion of capital lease obligations 21,120 21,120
--------------- -----------------
Total current liabilities 3,821,515 4,866,472
Capital lease obligations, less current portion 71,804 81,834
Redeemable preferred stock, 5,000,000 shares authorized,
$.001 par value; no shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively - -
Stockholders' equity (deficit):
Common stock, including paid-in capital, $.0001 par value; 25,000,000
shares authorized, 8,009,646 and 7,942,688 shares
issued and outstanding at June 30, 1997 and December 31, 1996, 36,938,379 36,832,936
respectively
Accumulated deficit (13,291,254) (9,860,366)
--------------- -----------------
Net stockholders' equity 23,647,125 26,972,570
--------------- -----------------
$ 27,540,444 $ 31,920,876
=============== =================
</TABLE>
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VITALCOM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
-------------- ---------------- ------------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Facility-wide networks ............................$ 2,059,426 $ 3,243,007 $ 3,844,812 $ 6,202,980
Departmental products ............................ 3,570,173 2,761,896 5,758,151 5,771,030
-------------- ---------------- -------------- ------------
Total revenues ........................ 5,629,599 6,004,903 9,602,963 11,974,010
Cost of sales ................................. 3,000,656 2,707,340 5,283,258 5,239,590
-------------- ---------------- -------------- ------------
Gross profit ................................. 2,628,943 3,297,563 4,319,705 6,734,420
Operating expenses ........................
Sales and marketing ............. 2,290,038 2,170,482 4,651,498 4,276,707
Research and development ............. 1,219,890 1,223,029 2,289,247 2,141,377
General and administration ............. 582,542 606,284 1,258,220 1,124,047
Total operating expenses 4,092,470 3,999,795 8,198,965 7,542,131
-------------- ---------------- -------------- ------------
Operating loss ........................ (1,463,527) (702,232) (3,879,260) (807,711)
Other income, net ............. 238,963 302,959 461,960 410,373
-------------- ---------------- -------------- ------------
Loss before provision for income taxes (1,224,564) (399,273) (3,417,300) (397,338)
Provision (benefit) for income taxes ............. 6,290 (173,322) 13,590 (172,481)
-------------- ---------------- -------------- ------------
Net loss .................................$ (1,230,854) $ (225,951) $ (3,430,890) $ (224,857)
============== ================ ============== ============
Pro forma net loss
and net loss per common share $ (0.15) $ (0.03) $ (0.43) $ (0.03)
Weighted average common shares 8,001,354 8,225,982 7,992,521 7,579,145
</TABLE>
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------
SIX MONTHS ENDED
JUNE 30,
1997 1996
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities: (UNAUDITED)
Net (loss) $ (3,430,890) $ (224,857)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 360,544 235,556
Loss on disposal of property 7,759 10,000
Changes in operating assets and liabilities:
Accounts receivable (312,854) 848,264
Inventories 376,114 (986,337)
Income taxes receivable 2,717,968 (249,994)
Prepaid expenses and other current assets (304,515) (63,956)
Accounts payable (748,395) (189,202)
Accrued payroll and related costs 154,944 (115,457)
Accrued warranty costs (26,978) 45,234
Customer deposits - 57,456
Accrued marketing commitments (309,377) -
Income taxes payable - (312,127)
Accrued liabilities (115,151) (174,561)
------------------ -----------------
Net cash used in operating activities (1,630,831) (1,119,981)
Cash flows from investing activities:
Purchases of property (244,877) (578,797)
(Increase) decrease in other assets 20,988 181,264
------------------ -----------------
Net cash used in investing activities (223,889) (397,533)
Cash flows from financing activities:
Repayment of capital lease obligation and long-term debt (10,030) (1,549,160)
Net proceeds from issuance of common stock 105,443 25,656,377
------------------ -----------------
Net cash provided by financing activities 95,413 24,107,217
Net (decrease) increase in cash and cash equivalents (1,759,307) 22,589,703
Cash and cash equivalents, beginning of period 20,120,203 2,163,645
------------------ -----------------
Cash and cash equivalents, end of period $ 18,360,896 $ 24,753,348
================== =================
Supplemental disclosures of cash flow information:
Interest paid $ 20,395 $ 3,169
Income taxes paid $ 7,956 $ 386,400
</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 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 June 30, 1997, and the
results of its operations and its cash flows for the three-month and six-month
periods ended June 30, 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
and six-month periods ended June 30, 1996 the weighted average common and common
equivalent shares include common shares and stock options using the treasury
stock method. For the three-month and six-month periods ended June 30, 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 six months ended June
30, 1997:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
----------------------- ---------------------- ---------------
<S> <C> <C> <C>
Balance, January 1, 1997 660,224 $0.60 to $15.75
Granted 283,000 $4.75 to $5.50
Exercised (1,250) $1.28
Canceled (223,620) $4.75 to $6.00
=======================
Balance, June 30, 1997 718,354 $0.60 to $15.75 259,795
=======================
</TABLE>
At June 30, 1997, 793,704 options were available for grant in the 1993 Plan.
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The following is a summary of stock option transactions under the 1996 Stock
Option Plan (the "1996 Plan") for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
----------------------- ----------------------
<S> <C> <C>
Balance, January 1, 1997 55,600 $5.50 to $6.00
Granted 35,500 $4.97
Canceled (12,500) $6.00
=======================
Balance, June, 1997 78,600 $4.97 to $6.00
=======================
</TABLE>
At June 30, 1997, 21,400 options were available for grant under the
1996 Plan and no options were exercisable.
The following is a summary of stock option transactions under the 1996 Director
Option Plan (the "Director Plan") for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
----------------------- ----------------------
<S> <C> <C>
Balance, January 1, 1997 0
Granted 6,000 $4.97
=======================
Balance, June 30, 1997 6,000 $4.97
=======================
</TABLE>
As of June 30, 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. In the
offering period ended April 30, 1997 the Company issued 25,708 shares of Common
Stock under the ESPP for $102,193.24. At June 30, 1997, $34,466.92 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
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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.
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, IMPROVING SALES FORCE PRODUCTIVITY AND THE RECRUITMENT OF A NEW CHIEF
EXECUTIVE OFFICER. ACTUAL RESULTS MAY VARY SUBSTANTIALLY FROM THESE FORWARD
LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING WITHOUT
LIMITATION THE SIZE AND TIMING OF PENDING AND FUTURE CUSTOMER ORDERS, THE EFFECT
OF CHANGES IN THE COMPANY'S SALES AND MARKETING EFFORTS, THE COMPANY'S ABILITY
TO CONTROL COSTS, THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, CHANGING
MARKET CONDITIONS, HOSPITAL OPERATIONS, GOVERNMENT APPROVAL PROCESSES, THE
ABILITY OF THE COMPANY TO HIRE AND RETAIN A QUALIFIED NEW CHIEF EXECUTIVE
OFFICER, THE HEALTH CONDITION OF THE COMPANY'S CURRENT CHIEF EXECUTIVE OFFICER
AND OTHER RISKS DESCRIBED 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 its 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 six months ended June 30, 1997 direct sales of the
Company's facility-wide computer networks of $3,844,813 were 38.0% lower than
the $6,202,980 achieved in the same period 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
quarters ended June 30, 1997 and March 31, 1997 were 15.3% and 33.5% higher than
the respective preceding quarters, and the Company believes that sales force
productivity will continue to increase in 1997, there can be no
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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 and are not predictable with any degree of certainty. In addition, a
significant portion of the Company's expenses are relatively fixed. If revenues
are below expectations in any given quarter, the adverse effect may be magnified
by the Company's inability to decrease spending to compensate for the revenue
shortfall.
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
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 quarter ended June 30, 1997 were $5,629,599, compared to
$6,004,903 achieved in the same period in 1996. This represents a 6.2% decrease
in total revenues consisting of a 36.5% decrease in facility-wide network
systems sales and a 29.3% increase in departmental sales for the second quarter
of 1997 when compared to the same quarter of 1996. The Company believes that the
reduction in facility-wide total revenues resulted from a mid-1996
implementation of a new selling method which lengthened the sales cycle and
disrupted the building of the funnel of potential customers. The increase in
departmental sales is due to differences in timing of orders between the first
and second quarters as total departmental revenues for the six months ended June
30, 1997 as compared to the comparable six months a year ago is $12,879.
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Total revenues for the six months ended June 30, 1997 were $9,602,963 compared
to $11,974,010 achieved in the same period in 1996. This 19.8% decrease in total
revenues, reflected a 38.0% decrease in the Company's sales of facility-wide
network systems and a 0.2% decrease in departmental products from the comparable
period a year ago. The Company believes that the reduction in facility-wide
total revenues resulted from a mid-1996 implementation of a new selling method
which lengthened the sales cycle and disrupted the building of the funnel of
potential customers.
Total revenues increased for the third consecutive quarter in the quarter ended
June 30, 1997. Total revenues increased 13.6% in the first quarter of 1997 when
compared to the fourth quarter of 1996, and in the quarter ended June 30, 1997,
total revenues increased 41.7% when compared to the first quarter of 1997. In
the quarters ended March 31 and June 30, 1997 facility-wide sales increased
33.5% and 15.3%, respectively, and departmental sales increased 1.3% and 63.2%,
respectively.
Gross Profit. Cost of revenues sold generally includes material, direct labor,
overhead and, for facility-wide networks, installation expenses.
Gross profit in the second quarter of 1997 was 46.7% of revenues as compared to
54.9% in the second quarter of 1996. Total gross profit decreased 20.3% to
$2,628,943 in the second quarter of 1997 from $3,297,563 in the second quarter
of 1996, on a 6.2% decrease in total revenues. The decrease in gross profits was
due to price pressure on facility-wide networks and lower revenues.
Gross profit for the six month period ended June 30, 1997 was 45.0% of total
revenues as compared to 56.2% for the same period in 1996. Total gross profit
decreased 35.9% to $4,319,706 in the six months ended June 30, 1997 from
$6,734,420 for the same period in 1996 on a 19.8% decrease in total revenues.
The decrease in gross profit in the first six months of 1997 as compared to the
same period of 1996 was due to price pressure on facility-wide networks and
lower revenues with fixed costs in overhead constituting a higher percentage of
revenues.
Gross profit increased for the second consecutive quarter during the quarter
ended June 30, 1997. Gross profit increased 62.0% in the first quarter of 1997
when compared to the fourth quarter of 1996 on a 13.6% increase in total
revenues and in the quarter ended June 30, 1997, gross profit increased 55.5%
when compared to the first quarter of 1997 on a 41.7% increase in total
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 increased 42.4% from the first
quarter of 1997 to the second quarter of 1997.
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 for the quarter ended June 30, 1997 were $2,290,038
or 40.7% of revenues as compared to $2,170,482 or 36.1% of revenues in the same
period a year ago. The $119,556 increase in sales and marketing expenses in the
three months ended June 30, 1997 as compared to the comparable three months of
1996 was primarily attributable to increases in marketing and promotional
expenses and professional sales consulting fees.
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<PAGE> 11
Sales and marketing expenses of $4,651,498 were 48.4% of revenues in the six
month period ended June 30, 1997 compared to $4,276,707 or 35.7% of revenues in
the comparable period a year ago. The $374,791 increase in sales and marketing
expenses in the six months ended June 30, 1997 as compared to the comparable six
months of 1996 was primarily attributable to increases in professional sales
consulting fees, marketing and promotional expenses and approximately $133,000
for a market research study. Sales and marketing expenses increased as a
percentage of total revenues primarily due to the lower total revenues. 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 for the quarter ended June 30, 1997 were
$1,219,890 or 21.7% of revenues as compared to $1,223,029 or 20.4% of revenues
in the same period a year ago. The $3,139 increase in the three months ended
June 30, 1997 as compared to the three months ended June 30, 1996 was due
primarily to an increase in depreciation expense on fixed assets offset by lower
recruiting expenses.
Research and development expenses of $2,289,247 were 23.8% of revenues in the
six month period ended June 30, 1997 compared to $2,141,377 or 17.9% of revenues
in the comparable period a year ago. The $147,870 increase in the six months
ended June 30, 1997 as compared to the six months ended June 30, 1996 was due
primarily to an increase in research and development labor and depreciation
expense on fixed assets, offset in part by lower recruiting expenses. Research
and development expenses increased as a percentage of total revenues primarily
due to lower total revenues.
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 for the quarter ended June 30, 1997 were
$582,542, or 10.3% of revenues as compared to $606,284 or 10.1% of revenues for
the same period a year ago. The $23,742 decrease in the three months ended June
30, 1997 as compared to the comparable three months ended June 30, 1996 was due
primarily to lower recruiting costs.
General and administrative expenses in the six month period ended June 30, 1997
were $1,258,220 or 13.1% of revenues as compared to expenses of $1,124,047 or
9.4% of revenues in the comparable period a year ago. The $134,173 increase in
the six months ended June 30, 1997 as compared to the comparable six months
ended June 30, 1996 was due primarily to an increase in the number of
administrative employees and the costs associated with being a public company
offset in part by lower recruiting costs. The Company intends to hire a new
Chief Executive Officer. To the extent the Company is successful in recruiting
and hiring a new Chief Executive Officer, general and administrative expense
levels will increase.
Other Income, Net. Other income, net consists primarily of interest income from
short term investments.
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Other income, net decreased to $238,963 for the second quarter ending June 30,
1997 from $302,959 for the same period in 1996. The decrease was due to the net
use of cash by the Company, primarily from operating losses resulting in reduced
interest income from the Company's short term investment portfolio.
Other income, net improved $51,587 to $461,960 for the six month period ended
June 30, 1997 from $410,373 for the same period a year ago. 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 six
months of 1996 was 43.4%, consisting of a federal income tax rate of 33.8%,
combined with a weighted average state income tax rate of 9.6%. In the six
months of 1997, the Company's tax provision was $13,590, representing minimum
tax payments to various states. In the six months 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. In February 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 six months of 1997, the Company used cash from operating
activities of $1,630,831 to fund a $3,430,890 net loss, a $312,854 increase in
accounts receivable and to pay down accounts payable by $748,395 as well as
increase prepaid expenses and reduce accrued marketing commitments. The Company
generated cash through a decrease in income taxes receivable of $2,717,968 and a
reduction of $376,114 in inventories. The Company used $223,889 for investing
activities which consisted of $244,877 for purchases of property and generated
$20,988 from other assets. The Company generated $95,413 in cash through
financing activities which consisted of $105,443 from the issuance of common
stock offset, in part, by $10,030 for payments on a capital lease obligation.
In the first six months 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 $397,533 for investing activities which consisted of $578,797 for
purchases of property and generated $181,264 from other assets. In the first six
months of 1996 the Company used cash from operating activities of $1,119,981,
generating $848,264 through collections on accounts receivable which was used to
reduce accrued liabilities and increase inventories.
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
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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.
The Company has entered into a letter of commitment with the bank to renew the
line of credit facility with substantially the same terms and conditions. At
June 30, 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 June 30, 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.
SUBSEQUENT EVENTS
On July 23, 1997 the Company announced that Donald W. Judson, its
Chairman of the Board, President and Chief Executive Officer intends to augment
the management team by recruiting a new President and Chief Executive Officer.
Mr. Judson intends to remain active in the Company in his role as Chairman of
the Board, setting the strategic direction of the Company while the new
President and Chief Executive Officer assumes responsibility for operations. A
recent health problem, although not serious, has limited Mr. Judson's ability to
fulfill both the day-to-day operations and strategic roles.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held an Annual Meeting of Stockholders on May 23, 1997. At
the Annual Meeting, the following votes were cast for the proposals indicated:
Proposal One: Election of Directors:
<TABLE>
<CAPTION>
Name For Withheld
-------------------------------------------------------------------------
<S> <C> <C>
Donald W. Judson 7,139,880 270,700
David L. Schlotterbeck 7,138,673 271,907
Jack W. Lasersohn 7,140,231 270,349
Elizabeth H. Weatherman 7,140,531 270,049
Timothy T. Weglicki 7,140,531 270,049
</TABLE>
Proposal Two: Ratification and approval of amendments of the
Corporation's 1993 Stock Option Plan to increase the shares reserved under the
plan by 750,000, allow participation by non-employee directors and make other
administrative changes:
13
<PAGE> 14
<TABLE>
<S> <C>
For 6,461,100
Against 393,228
Abstain 4,146
Broker Non-Votes 552,106
</TABLE>
Proposal Three: Ratification of the appointment of Deloitte & Touche
LLP as independent public accountants of the Company for the fiscal period
ending December 31, 1997:
<TABLE>
<S> <C>
For 7,403,580
Against 4,649
Abstain 2,351
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Full-Recourse Promissory Note Secured by Deed of Trust between
the Registrant and David R. Clare and Jennifer H. Clare
10.2 1993 Stock Option Plan (Amended and Restated April 1997)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
14
<PAGE> 15
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 August 11, 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
15
<PAGE> 1
EXHIBIT 10.1
$175,OOO.OO Tustin, California
April 30,1997
FOR VALUE RECEIVED, the undersigned, David R. CIare, Jr. ("Employee")
and Jennifer H. Clare, husband and wife (collectively, "Borrower"), promise to
pay to VitalCom Inc. a Delaware corporation (the "Company"), or order, the
principal amount of One Hundred Seventy-Five Thousand Dollar. ($l75,000)
together with interest thereon at the rate of eight and fifty hundredths percent
(8.50%) per annum. The principal amount hereof and all accrued and unpaid
interest on the outstanding principal amount shall be due and payable to the
holder hereof at 15222 Del Amo Avenue, Tustin, California 92780, or such other
place as the holder hereof may designate as follows:
A. All accrued and unpaid interest, if not sooner paid, shall be due
and payable as follows upon the earlier of the following dates
(collectively, "Interest Maturity Events")
(1) May 1, 2000 and annually each May 1 thereafter, until one
of the other Interest Maturity Events occur and final payment
is made On the principal amount.
(2) Thirty (30) days fo1lowing the date of termination of the
employment of Employee with the Company, whether voluntary or
involuntary, and whether with cause or without cause.
(3) The date of any sale, conveyance, assignment, alienation
or any other form of transfer, whether voluntary or
involuntary, of that certain real property commonly known as
6535 Vanderbilt, Houston, TX (the "First Property") or of that
certain real property commonly known as 52 Emerald, Irvine, CA
92604 (the "Second Property"), or any part or interest in
either.
B. The principal amount, if not sooner paid, shall be due and payable
as follows upon the earlier of the following dates (collectively,
'Maturity Events"):
(1) Thirty (30) days following the date of termination of the
employment of Employee with the Company, whether voluntary or
involuntary, and whether with cause or without cause.
(2) The date of any sale, conveyance, assignment, alienation
or any other form of transfer, whether voluntary or
involuntary, of the First Property or of
16
<PAGE> 2
the Second Property, or any part or interest in either;
except that the following transfers of the Property sha11
not be deemed to be a Maturity Event:
(a) A transfer upon the death of Employee to
Employee's surviving spouse provided the surviving
spouse is an obligor hereunder) or upon the death of
Employee's spouse to Employee;
(b) A transfer by an obligor hereof whereby such
obligor's spouse becomes a co-owner of the property
transferred;
(c) A transfer resulting from a decree of dissolution
of the marriage or legal separation of Employee and
Jennifer H. Clare or from a property settlement
agreement incidental to such a decree which requires
the obligor spouse to assume responsibility for the
obligations under this Note and pursuant to which
Employee or Jennifer H. Clare (whoever is the
obligor) becomes the sole owner of the First property
or Second Property; or
(d) a transfer by one or both obligors under this
Note into an inter vivos trust in which one or both
obligors are beneficiaries.
(3) The fifth (5th) anniversary of the date hereof (the
"Maturity Date"). The obligations of borrower under this Note shall be
secured by a second-priority deed of trust (the "Deed of Trust") on the
First Property (the "Property"). Borrower hereby represents and
warrants to the Company as follows:
1. The Deed of Trust on the Property shall be subordinate only to a
deed of trust made by Borrower, as trustor, for the benefit of The Prudential
Home Mortgage Company, Inc. securing a note in the amount of $420,000 (the
"First Deed of Trust").
2. Borrower has good and marketable title to the Property free and
clear of any security interests, liens or encumbrances other than the First Deed
of Trust.
3. The consent of no other person or entity is required to grant a
security interest in the Property to the Company.
There is no deed of trust, mortgage or encumbrance against the
Property other than the First Deed of Trust.
-2-
17
<PAGE> 3
If it should hereafter be determined that there are defects against tide or
matters that could result in defects against title to the Property or that the
consent of another person or entity is required to grant to, and perfect in, the
Company a valid second-priority lien on the Property, Borrower shall promptly on
demand by the Company, take all actions necessary to remove such defects and to
obtain such consent and grant (or cause to be granted) and perfect such lien on
the Property Failure of Borrower to comply with the provisions of this paragraph
shall be deemed a default under this Note and the Deed of Trust.
At the request of the Company, Borrower shall enter into a note (the
"California Note") in the face amount of $100,000 and terms substantially
similar to those set forth in this Note, secured by a recorded second deed of
trust on the Second Property. In such event, the principal amount of this Note
shall be reduced by an amount equa1 to the face amount of the California Note
In addition to causing the execution and delivery of the Deed of mist,
Borrower shall take any and all further actions that may from time to time be
required to ensure that the Deed of Trust creates a valid lien on the Property
in favor of the Company, which shall secure this Note and be junior in priority
only to the First Deed of Trust.
In the event that any of the following occurs, then unless otherwise
prohibited by law, the holder hereof shall have the option, without demand or
notice, to declare the entire outstanding principal balance of this Note,
together with all accrued arid unpaid interest thereon, to be immediately due
and payable: (i) Borrower defaults in the payment of principal or interest when
due pursuant to the terms hereof, (ii) Borrower defaults in its performance of
any obligation contained in the Deed of Trust or any other deed of trust,
security agreement or other agreement (including any amendment, modification or
extension thereof which may hereafter be executed by Borrower for the purpose of
securing this Note; (iii) ally representation or warranty contained in this Note
or the Deed of Trust or any other agreement Or instrument executed in connection
with the loan evidenced hereby proves to have been false or misleading in any
material respect; (iv) Borrower defaults in obligation to pay any indebtedness
or to perform any other obligation which is secured by a deed of trust or other
lien on the Property or default under any deed of trust securing such
indebtedness; (V) Borrower defaults in any obligation to pay, or there is an
acceleration of, any indebtedness evidenced by any promissory note executed by
Borrower and payable to the holder hereof, including, but not limited to, the
California Note, or there occurs any other default under any deed of trust,
mortgage or other document securing repayment of such indebtedness; or (vi) the
amount of the indebtedness secured by any deed of trust, lien or other
encumbrance encumbering the Property that is senior to the Deed of Trust is
increased over the amount of such indebtedness existing as of the date of this
Note
-3-
18
<PAGE> 4
In the event any amount owed by Borrower pursuant to this Note is not
paid when due, such unpaid amount shall bear interest from the due date until
paid at a rate equal to the lesser of: (i) ten percent (10%) per annum; or (ii)
the maximum rate permitted by law. After such due date, all payments shall be
credited first to accrued interest and then to principal.
If an action is instituted for collection of this Note, Borrower agrees
to pay court costs and reasonable attorneys' fees incurred by the holder
thereof.
This Note may be amended or modified, and provisions hereof may be
waived, only by the written agreement of Borrower and the holder hereof. No
delay or failure by the holder hereof in exercising any right, power or remedy
hereunder shall operate as a waiver of such right, power or remedy, and a waiver
of any right, power or remedy on any one occasion shall not operate as a bar or
waiver of any such right, power or remedy on any other occasion. without
limiting the generality of the foregoing, the delay or failure by the holder
hereof for any period of time to enforce collection of any amounts due hereunder
shall not be deemed to be a waiver of any rights of the holder hereof under
contract or under law. The rights of the bolder hereof under this note are in
addition to any other rights and remedies which the holder hereof may have.
This Note shall be governed by and construed in accordance with the
laws of the State of Texas. Borrower acknowledges, notwithstanding the deed of
trust securing the payments made hereunder, that this Note and all amounts due
hereunder are the personal joint and several liability of the Borrower, and are
fully recourse to the Borrower.
This Note may be prepaid at any time without penalty.
BORROWER:
/s/ David R. Clare
------------------
/s/ Jennifer H. Clare
---------------------
-4-
19
<PAGE> 1
EXHIBIT 10.2
VITALCOM INC.
1993 STOCK OPTION PLAN
(AMENDED AND RESTATED APRIL 1997)
I. Purposes of the Plan.
---------------------
The purposes of this 1993 Stock Option Plan (the "Plan") of
VITALCOM INC., a Delaware corporation (the "Company"), are (a) to insure the
retention of the services of existing executive personnel, key employees and
directors of the Company and its subsidiaries or its affiliates; (b) to attract
and retain competent new executive personnel and key employees; and (c) to
provide incentive to all such personnel and employees to devote their utmost
effort and skill to the advancement and betterment of the Company, by permitting
them to participate in the ownership of the Company and thereby in the success
and increased value of the Company.
II. Shares Subject to the Plan.
---------------------------
The shares of stock subject to the incentive options having
the terms and conditions set forth in Section 6 below (hereinafter "incentive
options") and/or nonqualified options having the terms and conditions set forth
in Section 7 below (hereinafter "nonqualified options") and other provisions of
the Plan shall be shares of the Company's authorized but unissued or reacquired
Common Stock (herein sometimes referred to as the "Common Stock"). The total
number of shares of the Common Stock of the Company which may be issued under
the Plan shall not exceed, in the aggregate, 839,885 shares. The limitations
established by the preceding sentence shall be subject to adjustment as provided
in Section 8 below. In the event that any outstanding incentive option or
nonqualified option granted under the Plan can no longer under any circumstances
be exercised, for any reason, the shares of Common Stock allocable to the
unexercised portion of such incentive option or nonqualified option may again be
subject to grant or issuance under the Plan.
III. Eligibility.
------------
a. Incentive Options. Officers and other key employees of the
Company or of any subsidiary corporation (including directors if they are also
employees of the Company or a subsidiary), as may be determined by the Board or
the Committee, who qualify for incentive stock options under the applicable
provisions of the Internal Revenue Code, will be eligible for selection to
receive incentive stock options under the Plan. An employee who has been granted
an incentive option may, if otherwise eligible, be granted a nonqualified option
or options or an additional incentive option or options if the Board or
Committee shall so determine.
20
<PAGE> 2
b. Nonqualified Options. Officers, other key employees of the
Company or of any subsidiary corporation, directors and consultants to the
Company or any subsidiary corporation will be eligible to receive nonqualified
options under the Plan. An individual who has been granted a nonqualified option
may, if otherwise eligible, be granted an incentive option or options or an
additional nonqualified option or options if the Board or Committee shall so
determine.
c. Limitations. The following limitations shall apply to
grants of options to employees of the Company:
(i) No employee of the Company shall be granted, in any
fiscal year of the Company, options to purchase more than 400,000 shares of
Common Stock of the Company.
(ii) In connection with his or her initial employment, an
employee of the Company may be granted options to purchase up to an additional
400,000 shares of Common Stock of the Company which shall not count against the
limit set forth in subsection i. above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 8.
(iv) If an option is canceled in the same fiscal year of
the Company in which it was granted (other than in connection with a transaction
described in Section 8), the canceled option will be counted against the limits
set forth in subsections i. and ii. above. For this purpose, if the exercise
price of an option is reduced, the transaction will be treated as a cancellation
of the option and the grant of a new option.
IV. Administration of the Plan.
---------------------------
a. This Plan shall be administered by a committee
(the "Committee") of "non-employee directors" within the meaning of Rule 16b-3
of the Securities Exchange Act of 1934, as amended. Such Committee shall be
appointed by, and serve at the pleasure of, the Board of Directors.
b. The Committee shall have full and final authority
to determine the persons to whom, and the time or times at which, incentive
options or nonqualified options shall be granted, the number of shares to be
represented by each incentive option and nonqualified option and the
consideration to be received by the Company upon the exercise thereof; to
interpret the Plan; to establish, amend and rescind rules and regulations
relating to the Plan; to determine the form and content of the incentive options
or nonqualified options to be granted under the Plan; to determine the identity
or capacity of any persons who may be entitled to exercise a participant's
rights under any incentive option or nonqualified option under the Plan; to
correct any defect or supply any omission or reconcile any inconsistency in the
Plan or in any incentive option or nonqualified option in the manner and to the
extent the Board or Committee deems desirable to carry the Plan, incentive
option or nonqualified option into effect; to
21
<PAGE> 3
accelerate the exercise date of any incentive option or nonqualified option; to
provide for an option to the Company to repurchase any shares issued upon
exercise of an option upon termination of employment; and to make all other
determinations necessary or advisable for the administration of the Plan, but
only to the extent not contrary to the express provisions of the Plan. Any
action, decision, interpretation or determination by the Committee with respect
to the application or administration of the Plan shall be final and binding on
all participants and prospective participants.
V. Option Price of Shares.
-----------------------
a. Incentive Options. The exercise price of the
shares of Common Stock covered by each incentive option granted under the Plan
shall not be less than the fair market value of such shares on the date the
incentive option is granted; provided, however, that the exercise price shall
not be less than 110% of the fair market value if the person to whom such
options are granted owns 10% or more of the total combined voting power of all
classes of stock of the Company or of its parent or subsidiary corporation.
b. Nonqualified Options. The exercise price of the
shares of Common Stock covered by each nonqualified option granted under the
Plan shall not be less than the fair market value of such shares on the date the
nonqualified option is granted.
c. Fair Market Value. For purposes of this Section 5,
fair market value shall, if the Common Stock is not listed or admitted to
trading on a stock exchange or The Nasdaq National Market on the
over-the-counter market, be the average of the closing bid price and asked price
of the Common Stock in the over-the-counter market on the date the incentive
option or nonqualified option is granted or, if the Common Stock is then listed
or admitted to trading on any stock exchange or The Nasdaq National Market, the
closing sale price on such day on the principal stock exchange on which the
Common Stock is then listed or admitted to trading or The Nasdaq National
Market, as the case may be. If no closing bid and asked prices are quoted on
such day, or if no sale takes place on such day on such principal exchange or on
The Nasdaq National Market, then the average of the closing bid and asked prices
on the next preceding day on which such prices were quoted, or closing sale
price of the Common Stock on such principal exchange or The Nasdaq National
Market on the next preceding day on which a sale occurred, as the case may be,
shall be deemed to be the fair market value of the Common Stock. During such
times as there is not a market price available, the fair market value of the
Company's Common Stock shall be determined by the Committee, which shall
consider, among other facts which it considers to be relevant, the book value of
such stock and the earnings of the Company. The exercise price shall be subject
to adjustment as provided in Section 8 below.
VI. Terms and Conditions of Incentive Options.
------------------------------------------
Each incentive option granted pursuant to this Plan shall be
evidenced by a written Option Agreement which shall specify that the options
subject thereto are incentive options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended. The granting of an incentive option
shall take place at the time of Committee action granting the option. The Option
22
<PAGE> 4
Agreement shall be in such form as the Committee shall, from time to time,
recommend, but shall comply with and be subject to the following terms and
conditions:
a. Medium and Time of Payment. The exercise price of
an incentive option shall be payable (i) in United States dollars payable in
cash, certified check, or bank draft; (ii) subject to any legal restrictions on
the acquisition or purchase of its shares by the Company, by the delivery of
shares of Common Stock which (x) in the case of shares acquired upon exercise of
an option have been owned by the optionee for more than six (6) months on the
date of surrender and (y) have an aggregate fair market value on the date of
surrender equal to the aggregate exercise price of the shares as to which the
option is being exercised; (iii) in the discretion of the Committee, by the
issuance of a promissory note in a form acceptable to the Committee; (iv)
delivery of a properly executed exercise notice together with such other
documentation as the Committee and broker, if applicable, shall require to
effect an exercise of the option and delivery to the Company of the sale or loan
proceeds required to pay the exercise price; or (v) any combination of (i),
(ii), (iii) or (iv) above.
b. Number of Shares. The incentive option shall state
the total number of shares to which it pertains.
c. Term of Incentive Option. Each incentive option
granted under the Plan shall expire within a period of not more than ten (10)
years from the date the incentive option is granted; provided, however, that the
incentive option shall expire within a period of not more than five (5) years if
granted to a person who owns more than 10% of the combined voting power of all
classes of stock of the Company or of its parent or subsidiary corporation.
d. Date of Exercise. Each incentive stock option
granted pursuant to this Plan shall become exercisable on each successive
anniversary of the grant date of such options in increments of twenty five
percent (25%); provided, however, that in the discretion of the Committee,
individual Option Agreements may contain different exercise schedules.
e. Termination of Association Except Upon Death or
Disability. In the event of an optionee's termination of association with the
Company (as hereinafter defined) for any reason other than his death or
disability, (i) all incentive options granted to any such optionee pursuant to
this Plan which are not exercisable at the date of such termination of
association shall terminate immediately and become void and of no effect, and
(ii) all incentive options granted to any such optionee pursuant to this Plan
which are exercisable at the date of such termination of association may be
exercised (but only to the extent such options were exercisable as of the date
of such termination of association) at any time within three (3) months of the
date of such termination of association, but in any event no later than the date
of expiration of the incentive option period, and if not so exercised within
such time shall become void and of no effect at the end of such time. For
purposes of this Plan, the term "termination of association" with the Company
shall mean (i) for any person who is an employee of the Company or a subsidiary
of the Company but not also a director of the Company, the cessation of such
person's employment with the Company or a subsidiary of the Company, or any
corporation or a parent or subsidiary of a corporation issuing and assuming an
option in a transaction to which Section 424(a) of the Internal
23
<PAGE> 5
Revenue Code applies (collectively, an "Affiliate"), (ii) for any person who is
both a director of the Company and an employee of the Company or a subsidiary or
Affiliate of the Company, the cessation of both the employment and status as a
director of such person, and (iii) for any person who is a director of the
Company but not also an employee of the Company or a subsidiary of the Company,
the cessation of such person's status as a director of the Company.
f. Death or Disability of Optionee. In the event of
an optionee's termination of association with the Company by reason of his or
her death or disability, (i) all incentive options granted to such person
pursuant to this Plan which are not exercisable at the date of such termination
of association shall terminate immediately and become void and of no effect, and
(ii) all incentive options granted to such person pursuant to this Plan which
are exercisable at the date of such termination of association may be exercised
(but only to the extent they were exercisable as of the date of such termination
of association) at any time within one (1) year after the optionee's termination
of association as a result of such death or disability, but in any event no
later than the date of expiration of the incentive option period, by such
optionee, or in the event of death, by the executors or administrators of the
optionee's estate or by any person or persons who shall have acquired the
incentive option directly from the optionee by bequest or inheritance. At the
end of such one (1) year period, all incentive options held by such optionee, to
the extent they remain unexercised, shall terminate and become void and of no
effect.
g. Rights as a Stockholder. An optionee or a
transferee of an incentive option shall have no rights as a stockholder with
respect to any shares of Common Stock covered by his or her incentive option
until the date of the issuance of a share certificate to him or her for such
shares. No adjustment shall be made for dividends or distributions or other
rights for which the record date is prior to the date such share certificate is
issued.
h. Nonassignability of Rights. No incentive option
shall be assignable or transferable by the person receiving same except by will
or the laws of descent and distribution. During the life of such person, the
incentive option shall be exercisable only by him or her.
i. Limitation. Notwithstanding any other provisions
of the Plan, to the extent the aggregate fair market value (determined in
accordance with the provisions of Section 5 above as of the time the incentive
option is granted) of the shares of Common Stock with respect to which incentive
stock options are exercisable for the first time by the optionee during any
calendar year (under all such plans of the Company and any parent and subsidiary
corporations) exceeds $100,000, such excess shall be treated as nonqualified
options.
j. Notice of Disposition. Each Option Agreement which
relates to the grant of an incentive stock option shall provide that the
optionee shall give prompt written notice to the Company in the event the
optionee sells or otherwise disposes of any shares of Common Stock issued upon
the exercise of such incentive stock options.
k. Other Provisions. Any Option Agreement may contain
such other terms, provisions and conditions as may be determined by the
Committee, which are not inconsistent with the provisions of Section 422 of the
Internal Revenue Code of 1986, as amended, including the
24
<PAGE> 6
option of the Company to repurchase any shares issued upon the exercise of an
option upon termination of employment. Incentive options granted to different
persons, or to the same person at different times, may be subject to terms,
conditions and restrictions which differ from each other.
VII. Terms and Conditions of Nonqualified Options.
---------------------------------------------
Each nonqualified option granted pursuant to this Plan shall
be evidenced by a written Option Agreement which shall specify that the options
subject thereto are nonqualified options. The granting of a nonqualified option
shall take place at the time of Committee action granting such option. The
Option Agreement shall be in such form as the Committee shall, from time to
time, recommend, but shall comply with and be subject to the following terms and
conditions:
a. Medium and Time of Payment. The nonqualified
option price shall be payable (i) in United States dollars payable in cash,
certified check, or bank draft; (ii) subject to any legal restrictions on the
acquisition or purchase of its shares by the Company, by the delivery of shares
of Common Stock which (x) in the case of shares acquired upon exercise of an
option have been owned by the optionee for more than six (6) months on the date
of surrender and (y) have an aggregate fair market value on the date of
surrender equal to the aggregate exercise price of the shares as to which the
option is being exercised; (iii) in the discretion of the Committee, by the
issuance of promissory note in a form acceptable to the Committee; (iv) delivery
of a properly executed exercise notice together with such other documentation as
the Committee and broker, if applicable, shall require to effect an exercise of
the option and delivery to the Company of the sale or loan proceeds required to
pay the exercise price; or (v) any combination of (i), (ii), (iii) or (iv)
above.
b. Number of Shares. The nonqualified option shall
state the total number of shares to which it pertains.
c. Term of Nonqualified Option. Each nonqualified
option granted under the Plan shall expire within a period of not more than ten
(10) years from the date the nonqualified option is granted.
d. Date of Exercise. Each nonqualified option granted
pursuant to this Plan shall become exercisable on each successive anniversary of
the grant date of such options in increments of twenty five percent (25%);
provided, however, that in the Committee's absolute discretion, individual
Option Agreements may contain different exercise schedules.
e. Termination of Association Except Upon Death or
Disability. In the event of an optionee's termination of association with the
Company or any subsidiary or Affiliate of the Company, for any reason other than
his or her death or disability, (i) all nonqualified options granted to any such
optionee pursuant to this Plan which are not exercisable at the date of such
termination of association shall terminate immediately and become void and of no
effect, and (ii) all nonqualified options granted to any such optionee pursuant
to this Plan which are exercisable at the date of such termination of
association may be exercised (but only to the extent they were exercisable as of
the date of the termination of association) at any time within three (3) months
of the date of such termination of association, but in any event no later than
the date of expiration of the
25
<PAGE> 7
nonqualified option period, and if not so exercised within such time shall
become void and of no effect at the end of such time.
f. Death or Disability of Optionee. In the event of
an optionee's termination of association with the Company by reason of his or
her death or disability, (i) all nonqualified options granted to such optionee
pursuant to this Plan which are not exercisable at the date of such termination
of association shall terminate immediately and become void and of no effect, and
(ii) all nonqualified options granted to such optionee pursuant to this Plan
which are exercisable at the date of such termination of association may be
exercised (but only to the extent they were exercisable as of the date of the
termination of association) at any time within one (1) year after the optionee's
death or disability, but in any event no later than the date of expiration of
the nonqualified option period, by such optionee, or in the event of death, by
the executors or administrators of the optionee's estate or by any person or
persons who shall have acquired the nonqualified option directly from the
optionee by bequest or inheritance. At the end of such one (1) year period, all
nonqualified options held by such optionee, to the extent they remain
unexercised, shall terminate and become void and of no effect.
g. Rights as a Stockholder. An optionee or an offeree
or a transferee of a nonqualified option shall have no rights as a stockholder
with respect to any shares of Common Stock covered by his or her nonqualified
option until the date of the issuance of a share certificate to such optionee
for such shares. No adjustment shall be made for dividends or distributions or
other rights for which the record date is prior to the date such share
certificate is issued.
h. Nonassignability of Rights. Except as provided by
the Committee, no nonqualified option shall be assignable or transferable by the
person receiving same except by will or the laws of descent and distribution.
During the life of such person, the nonqualified option shall be exercisable
only by him or her.
i. Other Provisions. Any Option Agreement may contain
such other terms, provisions and conditions as may be determined by the
Committee. Nonqualified options granted to different persons, or to the same
person at different times, may be subject to terms, conditions and restrictions
which differ from each other.
VIII. Changes in Capital Structure.
-----------------------------
In the event that the outstanding shares of Common Stock of
the Company are hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company by
reason of merger, consolidation or reorganization in which the Company is the
surviving corporation or of a recapitalization, stock split, combination of
shares, reclassification, reincorporation, stock dividend (in excess of 2%), or
other change in the corporate structure of the Company, appropriate adjustments
shall be made by the Board of Directors in the aggregate number and kind of
shares subject to this Plan, and the number and kind of shares and the price per
share subject to outstanding incentive options and nonqualified options in order
to preserve, but not to increase, the benefits to persons then holding incentive
options and/or nonqualified options.
26
<PAGE> 8
In the event that the Company at any time proposes to (i)
merge into, consolidate with or to enter into any other reorganization
(including the sale of substantially all of its assets) in which the Company is
not the surviving corporation, or (ii) enter into a merger or other
reorganization as a result of which the outstanding shares of Common Stock of
the Company will be changed into or exchanged for shares of the capital stock or
other securities of another corporation or for cash or property, then the Plan
and all unexercised incentive options and nonqualified options granted hereunder
shall terminate, unless provision is made in writing in connection with such
transaction for the assumption of incentive options and nonqualified options
theretofore granted, or the substitution for such incentive options and
nonqualified options of new options covering shares of a successor corporation,
with appropriate adjustments as to number and kind of shares and prices, in
which event the Plan and the incentive options and nonqualified options
theretofore granted, or the new incentive options and nonqualified options
substituted therefor, shall continue in the manner and under the terms so
provided. If such provision is not made in such transaction for the continuance
of the Plan and the assumption of incentive options and nonqualified options
theretofore granted or the substitution for such incentive options and
nonqualified options of new incentive options and nonqualified options covering
the shares of a successor corporation, then the Committee shall cause written
notice of the proposed transaction to be given to the persons holding incentive
options or nonqualified options not less than thirty (30) days prior to the
anticipated effective date of the proposed transaction, and all incentive
options and nonqualified options shall be accelerated and, concurrent with the
effective date of the proposed transaction, such person shall have the right to
exercise incentive options and nonqualified options in respect of any or all
shares then subject thereto.
IX. Amendment and Termination of the Plan.
--------------------------------------
The Board of Directors of the Company may from time to time
alter, amend, suspend or terminate the Plan in such respects as the Board of
Directors may deem advisable; provided, however, that no such alteration,
amendment, suspension or termination shall be made which shall substantially
affect or impair the rights of any person under any incentive option or
nonqualified option theretofore granted to such person without his or her
consent; provided further, however, that the approval of the Company's
stockholders shall be obtained to the extent necessary and desirable to comply
with applicable law.
Unless the Plan shall theretofore have been terminated, the
Plan shall be effective on September 22, 1993, and shall terminate on September
21, 2003.
X. Application of Funds.
---------------------
The proceeds received by the Company from the sale of Common
Stock pursuant to incentive options and nonqualified options will be used for
general corporate purposes.
27
<PAGE> 9
XI. No Obligation to Exercise Option.
---------------------------------
The granting of an incentive option or nonqualified option
shall impose no obligation upon the optionee to exercise such incentive option
or nonqualified option.
XII. Continuance of Employment or Status as Director.
------------------------------------------------
The Plan or the granting of any incentive option or
nonqualified option thereunder shall not impose any obligation on the Company or
its stockholders to continue the employment of any optionee who is an employee,
or to retain as a director any optionee who is a director.
XIII. Tax Withholding.
----------------
Whenever shares are to be issued under the Plan, the Company
or any subsidiary of the Company employing the recipient shall have the right to
deduct from the recipient's compensation or require the recipient to remit to
the employer corporation, prior to the issuance of the shares, an amount
sufficient to satisfy federal, state and local withholding tax requirements. The
Committee shall have the discretion to allow an optionee to satisfy tax
withholding obligations by electing to have the Company withhold from the shares
to be issued upon exercise of an Option that number of shares having a fair
market value equal to the amount required to be withheld. The fair market value
of the shares to be withheld shall be determined on the date that the amount of
tax to be withheld is determined.
XIV. Stockholder Approval.
---------------------
This Plan must be approved by the Company's stockholders
within twelve (12) months following its approval by the Board of Directors of
the Company. Any stock option exercised before stockholder approval is obtained
must be rescinded if stockholder approval is not obtained within twelve (12)
months following approval of the Plan by the Board of Directors.
XV. General Provisions.
-------------------
Notwithstanding any other provision of this Plan or agreements
made pursuant thereto, the Company shall not be required to issue or deliver any
certificate or certificates for shares of stock upon the exercise of options
granted under this Plan prior to fulfillment of all of the following conditions:
(i) Any registration or other qualification of such
shares under any state or federal law or regulation, or the maintaining in
effect of any such registration or other qualification which the Committee
shall, in its absolute discretion, deem necessary or advisable;
(ii) The obtaining of any other consent, approval or
permit from any state or federal governmental agency which the Committee shall,
in its absolute discretion, determine to be necessary or advisable; and
28
<PAGE> 10
(iii) The execution and delivery to the Company by
the recipient of an investment representation letter containing such assurances
and/or representations as the Committee shall, in its absolute discretion,
determine to be necessary or advisable to satisfy the requirements for
exemptions from registration and qualification under applicable state and
federal securities laws.
EXHIBIT A
---------
1993 STOCK OPTION PLAN
EXERCISE NOTICE
VitalCom Inc.
15222 Del Amo Avenue
Tustin, CA 92680
Attention: Secretary
1. Exercise of Option. Effective as of today, , 199 ,
the undersigned ("Purchaser") hereby elects to purchase shares
(the "Shares") of the Common Stock of VitalCom Inc. (the "Company") under and
pursuant to the 1993 Stock Option Plan (the "Plan") and the Stock Option
Agreement dated , 19 (the "Option Agreement"). The purchase price
for the Shares shall be $ , as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 8 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
29
<PAGE> 11
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by California law except for that body of law pertaining to conflict of
laws.
Submitted by: Accepted by:
PURCHASER: VITALCOM INC.
__________________________________ By: _________________________________
Signature
__________________________________ Its: ________________________________
Print Name
Address:
- --------
- ---------------------------
- ---------------------------
30
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