<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED 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: 0-28212
SUNQUEST INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 86-0378223
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4801 East Broadway Boulevard
Tucson, Arizona 85711
(Address of principal executive office) (Zip Code)
(520) 570-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
On May 7, 1997, there were 15,365,422 shares of Common Stock outstanding.
<PAGE>
Sunquest Information Systems, Inc.
Form 10-Q
For the Quarterly Period Ended March 31, 1997
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
(a.) Condensed consolidated balance sheets 3
as of March 31, 1997 (unaudited) and
December 31, 1996
(b.) Condensed consolidated statements of 4
income for each of the three month periods
ended March 31, 1997 and March 31, 1996
(unaudited)
(c.) Condensed consolidated statements of 5
cash flows for each of the three months
ended March 31, 1997 and March 31, 1996
(unaudited)
(d.) Notes to condensed consolidated 6
financial statements
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security 11
Holders
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
(a.) Exhibits 11
(b.) Reports on Form 8-K 11
Signatures 12
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Sunquest Information Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- --------
<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents $ 28,646 $31,911
Trade receivables, net 33,364 30,283
Receivable from related party 72 2
Other current assets 3,335 3,676
Deferred tax asset 3,940 3,940
-------- --------
Total current assets 69,357 69,812
Property and equipment, net 11,376 9,371
Capital leases from related party, net 4,690 4,888
Software development costs, net 12,748 9,936
Other assets 2,255 2,904
-------- --------
Total assets $100,426 $96,911
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,972 $ 2,833
Current portion of long-term debt - 289
Accrued compensation and related taxes 4,975 4,669
Accrued expenses 6,961 6,817
Obligations under capital leases from
related party 642 613
Obligations under capital lease 23 40
Deferred revenue 10,714 11,586
Related party payable 3,900 3,900
Other liabilities 1,000 -
-------- --------
Total current liabilities 32,187 30,747
Obligations under capital leases from
related party 5,612 5,783
Obligations under capital lease 138 138
Deferred income taxes 2,076 2,076
Transition costs 1,400 1,400
Other liabilities 1,000 -
Shareholders' equity 58,013 56,767
-------- --------
Total liabilities and shareholders'
equity $100,426 $96,911
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
System sales $12,818 $ 8,557
Support and service 11,789 8,160
-------- --------
Total revenues 24,607 16,717
-------- --------
Operating expenses:
Cost of system sales 6,393 3,652
Client services 6,119 4,669
Research and development 3,310 2,387
Sales and marketing 3,179 2,400
General and administrative 3,414 1,932
-------- --------
Total operating expenses 22,415 15,040
-------- --------
Operating income 2,192 1,677
Other income (expense):
Interest income 385 90
Interest expense (124) (387)
Other (166) 186
-------- --------
Income before income taxes 2,287 1,566
Income tax provision 984 31
-------- --------
Net income $ 1,303 $ 1,535
======== ========
Earnings per share determination:
Historical income before income taxes $ 2,287 $ 1,566
Income tax provision:
Actual 984 -
Pro forma - 673
-------- --------
Applicable net income $ 1,303 $ 893
======== ========
Weighted-average shares outstanding 15,364 11,904
======== ========
Net income per share:
Actual $0.08 -
======== ========
Pro forma - $0.08
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,303 $ 1,535
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,857 1,265
Bad debt expense 312 150
Deferred revenue (872) 654
Changes in operating assets and
liabilities:
Receivables (3,393) (816)
Inventory 377 (516)
Prepaid expenses and other (143) (50)
Other assets 693 (30)
Accounts payable 1,139 596
Accrued compensation and related
taxes 306 707
Other accrued expenses 144 (295)
-------- -------
Net cash provided by operating
activities 1,723 3,200
-------- -------
Cash flows from investing activities:
Issuance of notes receivable from
related party (70) (393)
Purchase of property and equipment (2,726) (146)
Capitalized software development costs (1,687) (797)
-------- -------
Net cash used in investing
activities (4,483) (1,336)
-------- -------
Cash flows from financing activities:
Net repayments under line of credit - (846)
Principal payments on debt (289) (200)
Principal payments on capitalized
leases from related party (142) (118)
Principal payments on capitalized
lease (17) -
Net proceeds from employee stock
purchase plan 35 -
S corporation distributions - (57)
-------- -------
Net cash used in financing
activities (413) (1,221)
-------- -------
Foreign currency translation adjustment (92) (29)
-------- -------
Net (decrease) increase in cash
and cash equivalents (3,265) 614
Cash and cash equivalents at beginning
of period 31,911 352
-------- -------
Cash and cash equivalents at end of
period $28,646 $ 966
======== =======
</TABLE>
See accompanying notes.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
Note 1 - Interim Statement Presentation
The unaudited, condensed, consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission and in accordance with generally accepted accounting
principles for the preparation of interim financial statements. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements have been omitted or condensed. It is suggested that these
condensed, consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference into the Company's 1996 Annual Report to the Securities and Exchange
Commission on Form 10-K. The 1996 balance sheet amounts are derived from
audited statements.
In the opinion of management, all necessary adjustments have been made to
provide a fair presentation. The operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for any other interim period or for the full year ending December 31,
1997.
Note 2 - Initial Public Offering
On June 10, 1996, the Company completed its initial offering of stock to the
public. A total of 3,450,000 shares of Common Stock were sold for net proceeds
to the Company of approximately $50.1 million, after deducting expenses of the
offering of $1.2 million and underwriters' discounts and commissions of
approximately $3.9 million.
Prior to May 30, 1996, the Company was taxed as an S corporation. During the
quarter ended June 30, 1996, the Company declared and paid to shareholders of
record as of April 30, 1996 the "First S Corporation Distribution" of $14.5
million, which was estimated to be equal to the Company's undistributed
cumulative S corporation earnings from January 1, 1990 through December 31,
1995. During the six months ended June 30, 1996 the Company also made
distributions of $531,000 to shareholders related to the shareholders' tax
liabilities on S corporation taxable earnings. In April 1996, the Company
declared, payable to shareholders of record as of April 30, 1996, the "Second S
Corporation Distribution," estimated to be $3.9 million, equal to the Company's
undistributed cumulative S corporation taxable earnings from January 1, 1996
through May 29, 1996. The Company expects to pay the "Second S Corporation
Distribution" in full on May 15, 1997.
Note 3 - Income Taxes
Prior to May 30, 1996, the Company was taxed as an S corporation and,
accordingly, was not subject to federal and certain state income taxes. As a
result, the Company's shareholders, rather than the Company, were required to
pay federal and certain state income taxes based on the Company's taxable
earnings through May 29, 1996, whether or not the earnings were distributed to
such shareholders. The Company had provided for income taxes in states in which
it operated that did not recognize S corporation status.
6
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The provisions for income taxes subsequent to the change in corporate tax status
are accounted for in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
Note 4 - Employee Stock Purchase Plan
On March 31, 1997, 2,835 shares of the Company's Common Stock were issued for
approximately $35,000 in connection with the Employee Stock Purchase Plan.
Note 5 - Pro Forma Net Income and Net Income Per Share Information
Pro forma net income has been computed as if the Company had been subject to
federal and all applicable state income taxes at an estimated tax rate of 43%.
Pro forma net income per share is based on the weighted-average number of shares
of Common Stock outstanding during the period. Common share equivalents consist
of shares issuable upon exercise of stock options that were granted on or after
May 31, 1996, using the treasury stock method. Such options were antidilutive
for the three months ended March 31, 1997.
Note 6 - Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128),
which is required to be adopted by the Company for the year ended December 31,
1997. The provisions of SFAS No. 128 will be adopted in the 1997 Annual Report.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating earnings per share, the dilutive effect of stock
options will be excluded for "basic earnings per share" and only included in
"diluted earnings per share." The impact of SFAS No. 128 on the calculation of
actual and pro forma earnings per share for the three months periods ended March
31, 1997 and 1996 is not expected to be material.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Sunquest Information Systems, Inc. designs, develops, markets, installs
and supports health care information systems for large and mid-sized hospitals,
clinics and other facilities, including integrated delivery networks. Revenues
are derived from the licensing of software, the provision of value-added
services and the sale of related hardware.
On November 26, 1996, the Company purchased all of the outstanding stock
of Antrim Corporation ("Antrim") from Antrim's parent corporation, The Compucare
Company, for $5.0 million in cash in a transaction accounted for under the
purchase method of accounting. The results of operations of Antrim have been
included in the Company's financial statements since the date of acquisition.
The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for any other
interim period or for the full year ending December 31, 1997.
Results of Operations
- ---------------------
Comparison of Three Months Ended March 31, 1997 and March 31, 1996
Revenues. The Company's total revenues were $24.6 million for the three
months ended March 31, 1997 compared to $16.7 million for the three months ended
March 31, 1996, an increase of $7.9 million, or 47.2%. Revenues from system
sales were $12.8 million for the three months ended March 31, 1997 compared to
$8.6 million for the three months ended March 31, 1996, an increase of $4.3
million, or 49.8%. This increase was primarily attributable to increases in
installations of hardware and software for new and existing customers and the
addition of Antrim. Revenues from support and service were $11.8 million for
the three months ended March 31, 1997 compared to $8.2 million for the three
months ended March 31, 1996, an increase of $3.6 million, or 44.5%. This
increase was primarily attributable to the addition of Antrim and the Company's
increased installed customer base.
At March 31, 1997, the Company had a total contract backlog of $82.2
million, which consisted of $37.0 million of system sales and $45.2 million of
support and service. At March 31, 1996, total contract backlog was $71.6
million, which consisted of $36.7 million of system sales and $34.9 million of
support and service.
Cost of System Sales. Cost of system sales was $6.4 million for the
three months ended March 31, 1997 compared to $3.7 million for the three months
ended March 31, 1996, an increase of $2.7 million, or 75.1%. This increase was
primarily attributable to the addition of Antrim and increases in hardware and
operating system deliveries. Amortization of previously capitalized software
development costs was $875,000 for the three months ended March 31, 1997
compared to $531,000 for the three months ended March 31, 1996, an increase of
$344,000, or 64.8%.
8
<PAGE>
Client Services. Client services expenses were $6.1 million for the
three months ended March 31, 1997 compared to $4.7 million for the three months
ended March 31, 1996, an increase of $1.5 million, or 31.1%. This increase was
primarily attributable to the addition of Antrim.
Research and Development. Research and development expenses were $3.3
million for the three months ended March 31, 1997 compared to $2.4 million for
the three months ended March 31, 1996, an increase of $923,000, or 38.7%. This
increase in research and development expenses was primarily attributable to the
addition of Antrim, increased staff dedicated to the infrastructure of the
Company's systems, enhancements to the managed care system and the development
of a clinical documentation system. The Company capitalized $687,000 of its
software development costs for the three months ended March 31, 1997 compared to
$797,000 for the three months ended March 31, 1996.
Sales and Marketing. Sales and marketing expenses were $3.2 million for
the three months ended March 31, 1997 compared to $2.4 million for the three
months ended March 31, 1996, an increase of $779,000 million, or 32.5%. This
increase was primarily attributable to the addition of Antrim, increased
advertising expense related to the marketing of the Company's new products,
increased costs related to exhibits and shows, increased marketing staff and
increased sales staff dedicated to sales of consulting services.
General and Administrative. General and administrative expenses were
$3.4 million for the three months ended March 31, 1997 compared to $1.9 million
for the three months ended March 31, 1996, an increase of $1.5 million, or
76.7%. This increase was primarily attributable to the addition of Antrim, a
reduction in the facility capital lease credit, increased professional services
costs related to the Company's public status, increased depreciation expense
resulting from additions of property and equipment and increased employee
benefits resulting from increased levels of operating income, partially offset
by a decrease in consulting fees.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities was $1.7 million for the three
months ended March 31, 1997 compared to $3.2 million for the three months ended
March 31, 1996.
As of March 31, 1997, the Company had billed trade receivables of $25.3
million. The Company maintains an allowance for doubtful accounts that it
believes is adequate to cover potential credit losses. The average collection
period on trade receivables was 77 days at March 31, 1997 compared to 63 days at
March 31, 1996. The increase in average collection period is related to the
larger volume of customer contracts, which requires additional management
attention to effect collections on a timely basis. This increase is considered
to be temporary and is expected to improve through increased collection efforts.
Cash used in investing activities was $4.5 million for the three months
ended March 31, 1997. Purchases of property and equipment totaled $2.7 million.
Of this amount, $1.8 million was used by the Company on February 21, 1997 to
purchase land and a building located in Tucson, Arizona, that will be used for
customer-related activities. The remaining $0.9 million was used primarily for
computers and computer-related equipment and office equipment. Capitalized
software development costs totaled $1.7 million. Of this amount, $1.0 million
was
9
<PAGE>
related to the initial payment under the Value Added Reseller ("VAR")
agreement of February 7, 1997 with Dynamic Healthcare Technologies, Inc.
("Dynamic") for the license of a software program know as CoPath Client/Server
("CoPath"). CoPath is a computer clinical information system used in surgical
pathology, cytology and autopsy. Pursuant to the terms of this agreement, the
remaining balance of $2.0 million is expected to be paid by the Company over the
next two years.
Cash used in financing activities was $413,000 for the three months ended
March 31, 1997. Of this amount, $448,000 was used for principal payments on
debt and capital leases. This amount was partially offset by the issuance of
2,835 shares of the Company's Common Stock for approximately $35,000 under the
Employee Stock Purchase Plan.
At March 31, 1997, cash and cash equivalents were $28.6 million, and
working capital was $37.2 million.
The Company has a revolving line of credit with a bank allowing the
Company to borrow up to $10.0 million. Any borrowings under the line of credit
will bear interest at the bank reference rate unless the Company elects a fixed
rate or certain variable rates contemplated by the agreement. All outstanding
principal and interest under the line of credit are due September 30, 1997
except for any amounts outstanding under stand-by letters of credit which have a
maximum maturity of 365 days. Approximately $204,000 of the line of credit is
used to secure a letter of credit and is not available for immediate
expenditure. There were no borrowings outstanding as of March 31, 1997.
Other than the $2.0 million related to the VAR agreement with Dynamic,
the Company has no significant commitments for capital expenditures at this
time. However, the Company continues to be actively involved in identifying and
evaluating potential acquisitions. The Company expects to pay the "Second S
Corporation Distribution," estimated to be $3.9 million, on May 15, 1997 from
internally generated funds.
Management believes that existing cash and cash equivalents together with
funds generated from operations will be sufficient to meet operating
requirements for at least the next twelve months.
10
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
10I.2 - Stock Incentive Plan of 1996, as amended April 3,
1997, filed herewith.
27C - Financial Data Schedule, filed herewith.
(b.) Reports on Form 8-K
An amended Current Report on Form 8-K/A, dated February 7,
1997, was filed by the registrant during the quarter ended
March 31, 1997 containing the audited financial statements
of Antrim Corporation and unaudited pro forma financial
statements related to the purchase of all of the outstanding
stock of Antrim Corporation.
11
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
SUNQUEST INFORMATION SYSTEMS, INC.
(Registrant)
Date: May 9, 1997 By: /s/ Nina M. Dmetruk
__________________________________________
Nina M. Dmetruk
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
EXHIBIT 10I.2
SUNQUEST INFORMATION SYSTEMS, INC.
STOCK INCENTIVE PLAN OF 1996/1/
1. Purpose of the Plan.
-------------------
The purpose of the Sunquest Information Systems, Inc. Stock Incentive Plan of
1996 is to promote the interests of Sunquest Information Systems, Inc. and its
shareholders by providing an opportunity for employees of the Company and its
subsidiaries and other eligible persons to acquire Common Stock of the Company.
By promoting such stock ownership, the Company seeks to attract, retain and
motivate such employees and other persons and to encourage them to devote their
best efforts to the business and financial success of the Company. It is the
view of the Company that this purpose will be best achieved by granting certain
forms of stock-based incentives and stock options as provided herein. Under the
Plan, the Committee shall have the authority to grant incentive stock options,
nonqualified stock options, restricted stock and stock appreciation rights on
the terms set forth herein.
2. Definitions.
-----------
For purposes of the Plan, the following terms shall have the meanings set forth
below, unless a different meaning is clearly required by the context:
2.1 "Award" means an Option, SAR or Restricted Stock.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Change in Control" means the occurrence of any of the following events:
(i) there is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form, or report), each as adopted under the
Exchange Act, disclosing the acquisition of twenty-five percent
(25%) or more of the voting stock of the Company in a transaction
or series of transactions by any person (as the term "person" is
used in Section 13(d) and Section 14(d)(2) of the Exchange Act),
(ii) during any period of twenty-four (24) consecutive calendar
months, individuals who at the beginning of such period
constitute the directors of the Company cease for any reason to
constitute at least a majority thereof unless the election of
each new director of the Company was approved or recommended by
the vote of at least two-thirds of the directors of the Company
then still in office who were directors of the Company at the
beginning of any such period,
- ----------------------
/1/ as amended by the Board of Directors on November 8, 1996 and April 3, 1997.
<PAGE>
(iii) the Company merges with or into or consolidates with another
corporation and, after giving effect to such merger or
consolidation, less than sixty percent (60%) of the then
outstanding voting securities of the surviving or resulting
corporation represent or were issued in exchange for voting
securities of the Company outstanding immediately prior to such
merger or consolidation,
(iv) there is a sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all the assets of the Company, or
(v) the shareholders of the Company shall approve any plan or
proposal for the liquidation or dissolution of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any regulations and rulings issued pursuant thereto.
2.5 "Committee" means the committee appointed by the Board to administer the
Plan as described in Section 4.1 hereof or, if no such committee has been
appointed by the Board, "Committee" means the Board.
2.6 "Common Stock" means the Common Stock of the Company.
2.7 "Company" means Sunquest Information Systems, Inc., a Pennsylvania
corporation.
2.8 "Disability" means an inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment that may be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than twelve
(12) months. The determination of Disability shall be made by the
Committee on the basis of medical evidence satisfactory to it.
2.9 "Eligible Independent Contractor" means an independent contractor hired by
the Company or a Subsidiary to provide consulting services or management
advice on a regular basis for the Company or Subsidiary.
2.10 "Employee" means a person who is employed by the Company or any Subsidiary
(including directors).
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and the rules promulgated thereunder by the Securities and
Exchange Commission.
2.12 "Fair Market Value" means, as of any day, the average of the closing prices
of sales of shares of Common Stock on all national securities exchanges on
which the Common Stock may at the time be listed or, if there shall have
been no sales on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or if on any day the
Common Stock shall not be so listed, the average of the representative bid
and asked prices quoted in the National Association of Securities Dealers,
Inc.
2
<PAGE>
Automated Quotation ("NASDAQ") System for such date or the next preceding
date that Common Stock was traded on such market. If at any time there is
no public market for the Common Stock, the fair market value of a share of
Common Stock shall be the amount determined in good faith by the Committee.
2.13 "ISO" means an Option which, at the time granted, constitutes and shall be
treated as an "incentive stock option" as defined in Section 422 of the
Code, or its successor.
2.14 "NSO" means an Option that is intended to be, and qualifies as, a "non-
qualified stock option" as described in Treasury Regulation Section 1.83-7
(and which shall not constitute nor be treated as an ISO).
2.15 "Option" means a right to purchase Common Stock granted pursuant to the
Plan either in the form of an ISO granted to an Employee or a NSO granted
to an Employee or Eligible Independent Contractor.
2.16 "Optionee" means an Employee or Eligible Independent Contractor to whom an
Option is granted under the Plan.
2.17 "Option Price" means the purchase price for Common Stock under an Option,
as determined in Section 6.1(b) of the Plan.
2.18 "Plan" means the Sunquest Information Systems, Inc. Stock Incentive Plan of
1996, as set forth in this document, as the same may be amended from time
to time.
2.19 "Recipient" means an Employee or Eligible Independent Contractor to whom an
Award is granted under the Plan.
2.20 "Restricted Stock" means an award of shares of Common Stock that is subject
to restrictions pursuant to Section 8 of the Plan.
2.21 "Rules" means Section 16 of the Exchange Act and the regulations
promulgated thereunder by the Securities and Exchange Commission.
2.22 "Stock Appreciation Rights" or "SAR" means the rights granted pursuant to
an award under Section 7 of the Plan.
2.23 "Subsidiary" means any corporation which, on the date of determination,
qualifies as a subsidiary corporation of the Company under Section 424 of
the Code, or any successor provision.
Except where otherwise indicated by the context, any masculine terminology used
herein shall also include the feminine and vice versa, and the definition of any
term herein in the singular shall also include the plural and vice versa.
3
<PAGE>
3. Stock Subject to the Plan.
-------------------------
3.1 The maximum number of shares of Common Stock for which Awards may be
granted under the Plan shall not exceed in the aggregate two million five
hundred thousand (2,500,000) shares of Common Stock, subject to adjustment
pursuant to Section 3.2 below. Such shares may be authorized but unissued
shares, treasury shares, or reacquired shares. In the event the number of
shares of Common Stock for which Awards are granted under the Plan (taking
into account the share counting requirements established under the Rules)
equals the maximum number of shares of Common Stock authorized under the
Plan, no further Awards shall be made unless the Plan is amended (in
accordance with the Rules, if applicable) or additional shares of Common
Stock become available for further Awards. In the event that an Option
expires (or otherwise terminates unexercised) or is converted under Section
6.2 of the Plan, the Common Stock subject to Option shall again be
available for subsequent Awards.
3.2 In the event of any change to the Common Stock (whether by reason of
merger, consolidation, reorganization, recapitalization, stock dividend,
stock split, combination of shares, exchange of shares or any other change
in capital structure made without receipt of consideration), then unless
such event or change results in the termination of all outstanding Awards,
the Committee shall preserve the value of Awards by appropriately adjusting
the number or classes of shares that may be subject to Awards, the number
or classes of shares theretofore subject to Awards, the Option Price for
Options or the per share price of SARs theretofore granted, and by making
any and all other adjustments deemed appropriate by the Committee.
4. Administration of the Plan.
--------------------------
4.1 The Plan shall be administered by the Board or by a committee of two (2) or
more members of the Board who shall be appointed by the Board and who shall
serve at the pleasure of the Board.
4.2 The Committee shall, subject to the limitations and terms of the Plan, have
the authority:
(a) to determine the Recipients of Awards,
(b) to determine the number of shares to be covered by each Award,
(c) to determine the terms, conditions, limitations and restrictions, not
inconsistent with the terms of the Plan, of Awards (including, without
limitation, whether any Option to be granted shall be an ISO or a NSO
and the time and conditions for the exercise of Options);
(d) to determine the form of the consideration that may be used to
purchase shares of Common Stock upon the exercise of any Option,
(e) to amend the terms of any outstanding Awards (with the consent of the
Recipient) to reflect terms not otherwise inconsistent with the Plan,
including amendments
4
<PAGE>
concerning vesting, acceleration, forfeiture, or waiver regarding any
Award or the extension of a Recipient's right under an Award, as a
result of termination of employment or service (or otherwise), based
on such factors as the Committee shall determine in its sole
discretion.
4.3 The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable, and to interpret the terms and
provisions of the Plan and any Award (and any agreements relating thereto
and to otherwise supervise the administration of the Plan). All decisions
made by the Committee pursuant to the provisions of the Plan shall be final
and binding on all persons, including the Company, any Subsidiary, and the
Recipients. No member of the Committee shall be liable for any action
taken or decision made in good faith relating to the Plan or any Award.
4.4 It is intended that the Plan comply with Rule 16b-3 under the Exchange Act
and all interpretations of the Plan shall be consistent with such Rule and
the Exchange Act. In order to maintain compliance with such Rule and the
Exchange Act, the Committee may make such rules and impose such limitations
as it deems advisable.
5. Eligibility to Participate in the Plan.
--------------------------------------
5.1 The Committee may grant NSOs, SARs and Restricted Stock to any Employee or
Eligible Independent Contractor. The Committee may grant ISOs to any
Employee. The Committee shall have the sole authority to select the
Recipients of Awards and the type of Award. Recipients of Awards shall be
selected by the Committee from among those Employees and Eligible
Independent Contractors who, in the opinion of the Committee, have the
capacity to contribute significantly to the long-term value-added
performance and growth of the Company or Subsidiary.
5.2 No award may be granted to an Employee or Eligible Independent Contractor
within six months of his expected retirement date (or expected date of
termination of employment or service).
6. Options.
-------
6.1 Options may be granted alone, in addition to, or in tandem with other
Awards. Options granted under the Plan shall be in such form as the
Committee may from time to time approve. The terms and conditions of each
Option granted under the Plan shall be specified by the Committee and shall
be set forth in a written agreement between the Company and the Optionee in
such form as the Committee shall approve (the "Option Agreement"). The
terms and conditions of each Option need not be identical to those of any
other Option granted hereunder. Each Option Agreement shall contain the
following terms and conditions, and such other terms and conditions, not
inconsistent with the purpose of the Plan and the requirements of
applicable law, as the Committee shall determine:
5
<PAGE>
(a) Each Option Agreement shall state the total number of shares of Common
Stock to which the Option relates.
(b) Each Option Agreement shall state the Option Price per share for the
Common Stock to which the Option relates, which shall not be less than
the Fair Market Value per share of the Common Stock on the date the
Option is granted, except for certain ISOs described in Subsection
6.1(j) hereof.
(c) Each Option Agreement shall state the expiration date of the Option to
which it relates, which date shall not be later than the tenth
anniversary of the date that the Option is granted, except for certain
ISOs described in Subsection 6.1(j) hereof. No Option may be
exercised by any person after expiration of the term of the Option.
(d) Each Option Agreement shall state the time or times at which Options
shall be exercisable and the terms and conditions applicable to such
exercise, all as determined by the Committee; provided, however, that
except as provided below in Section 6.1(f), (g) and (h) and in Section
11.1, and unless otherwise determined by the Committee at or after the
date of the grant, no Option shall be exercisable for a period of six
(6) months from the date of grant.
(e) Upon termination of an Optionee's employment or service with the
Company and Subsidiaries for reasons other than termination at or
after age 65, Disability or death, the Optionee's Option shall, unless
expressly provided otherwise in the Option Agreement, expire on the
date of such termination.
(f) If an Optionee's employment or service with the Company and
Subsidiaries terminates at or after age 65, then unless expressly
provided otherwise in the Option Agreement, the Optionee may exercise
the Option to the extent exercisable at the date of such termination
until the earlier of (i) the expiration date of the Option, or (ii)
the one hundred eightieth (180) day following such termination.
(g) In the event of the death of the Optionee while in the employment or
service of the Company or Subsidiary, then unless expressly provided
otherwise in the Option Agreement, the Option may be exercised, to the
extent the Optionee was entitled to do so on the date of his death, by
the person or persons to whom the Optionee's rights under the Option
pass by will or by applicable law, or if no such person has such
right, by his executors or administrators, until the earlier of (i)
the expiration date of the Option, or one (1) year after the
Optionee's death.
(h) If an Optionee's employment or service with the Company and
Subsidiaries terminates by reason of Disability, then unless expressly
provided otherwise in the Option Agreement, the Optionee may exercise
the Option to the extent exercisable at the date of such termination
until the earlier of (i) the expiration date of the Option, or (ii)
one (1) year after the date of such termination.
6
<PAGE>
(i) The Option Price may be paid, as permitted by the Committee, in cash
or check (payable to the order of the Company), in shares of Common
Stock already owned by the Optionee having a total Fair Market Value
equal to the purchase price, by sale of shares of Common Stock
acquired in the exercise of an Option (to the extent such cashless
exercise is permitted by the Committee and under the Rules), or any
combination thereof approved by the Committee. If payment of the
exercise price of an Option is made in whole or in part in shares of
Common Stock already owned by the Optionee, the Committee may require
that the stock be owned for a period of at least six (6) months.
Following the exercise of an Option and the payment of the full Option
price, the Company shall issue a stock certificate evidencing the
Optionee's ownership of such Common Stock. No shares shall be
delivered pursuant to any exercise of an Option until payment in full
of the Option Price is received by the Company.
(j) Any Option intended to be an ISO shall be designated as such in the
applicable Option Agreement. No ISO shall be granted to any Employee
who, at the time the Option is granted, owns more than 10% of the
total combined voting power of all classes of stock of the Company or
of its parent corporation (within the meaning of Section 424(e) of the
Code) or Subsidiary, unless the Option Price is at least 110% of the
Fair Market Value of the Common Stock subject to the ISO on the date
of grant and the Option by its terms is not exercisable after the
expiration of five years from the date the Option is granted. In
addition, as determined at the time an ISO is granted, the aggregate
Fair Market Value of the Common Stock subject to the ISO (under all
plans of the Company and of its parent corporation and Subsidiaries)
first exercisable in any calendar year shall not exceed one hundred
thousand dollars ($100,000).
(k) Options by their terms shall not be transferable other than by will or
the laws of descent and distribution, and during an Optionee's
lifetime, shall be exercisable only by the Optionee.
6.2 The Committee may, in its sole discretion, elect to cash out all or part of
the Common Stock to be exercised under an Option by paying the Optionee an
amount, in cash, equal to the excess of the Fair Market Value of the Common
Stock over the Option Price on the effective date of such exercise. If
this conversion right is exercised, an Optionee shall forfeit all other
rights associated with such converted Option.
7. Stock Appreciation Rights.
-------------------------
7.1 Grant of SARs. The Committee may grant Stock Appreciation Rights separate
-------------
and apart from, or in tandem with, any Option granted under the terms of
the Plan. When granted in tandem with Options, SARs may be granted with
respect to all or part of the Common Stock under a particular Option, and
may be granted coincident with or after the date of grant of the related
Option.
7.2 Exercise of SARs. SARs may be exercised from time to time by written
----------------
notice from the holder thereof to the Company of the holder's intent to
exercise the SARs with respect to
7
<PAGE>
a specified number of shares. SARs shall entitle the holder thereof, upon
exercise, in whole or in part, to receive payment in the amount and form
determined pursuant to Section 7.3(c). SARs granted in tandem with Options
may be exercised only to the extent that the related Option has not been
exercised. The exercise of a tandem SAR shall result in a pro rata
surrender of the related Option to the extent that the tandem SAR has been
exercised. Similarly, the exercise of a related Option shall result in a
pro rata surrender of the tandem SAR to the extent that the Option has been
exercised.
7.3 Terms and Conditions. The grant of SARs shall be evidenced by a written
--------------------
SAR agreement in a form approved by the Committee. Each SAR agreement
shall be consistent with the following express terms and conditions, and
shall include such other terms and conditions, consistent with the purposes
of the Plan and the requirements of applicable law, as the Committee shall
determine:
(a) SARs shall be exercisable at such time or times and only to the extent
specified in the SAR agreement. SARs shall in no event be exercisable
during the first six (6) months after the date of grant.
(b) SARs shall not be transferable other than by will or by the laws of
descent and distribution, and during the holder's lifetime, shall be
exercisable only by the holder.
(c) Upon exercise of SARs, the holder thereof shall be entitled to receive
an amount equal to the excess of (i) the Fair Market Value per share
of Common Stock on the day preceding the exercise date over (ii) the
price per share stated in the SAR agreement for a SAR not granted in
tandem with an Option or the Option Price per share of any related
Option for a SAR granted in tandem with an Option, multiplied by the
number of shares in respect of which the SARs shall have been
exercised. Such amount shall be paid, as determined by the Committee,
in the form of (i) cash, (ii) shares of Common Stock with a Fair
Market Value on the day preceding the exercise date equal to such
amount, or (iii) a combination of cash and such Common Stock.
(d) In no event shall a SAR be exercisable at a time when the Fair Market
Value per share of Common Stock is less than the price per share
stated in the SAR agreement for a SAR not granted in tandem with an
Option or the Option Price per share of any related Option for a SAR
granted in tandem with an Option.
(e) SARs shall terminate in accordance with the rules in Section 6.1(c),
(e), (f), (g), and (h) hereof regarding termination of Options.
8. Restricted Stock.
----------------
8.1 Rights As A Stockholder. The grant of Restricted Stock shall be evidenced
-----------------------
by a Restricted Stock agreement issued in accordance with Section 8.2. The
Committee shall direct that a certificate or certificates for Restricted
Stock be issued to the grantee, and registered in the name of the grantee,
who shall have all the rights of a shareholder with
8
<PAGE>
respect to the Restricted Stock subject to such restrictions set forth in
the Restricted Stock agreement. The certificate or certificates
representing the Restricted Stock shall be inscribed with a legend as to
the restrictions on sale, transfer, assignment, pledge or other encumbrance
during the restricted period as the Committee may impose, and may, if the
Committee in its sole discretion should direct, be delivered to and held
during the restricted period by the Company, together with a stock power
endorsed in blank by the grantee.
8.2 Restrictions. Each Restricted Stock agreement shall include such terms and
------------
conditions, including with respect to the restricted period, restrictions
on sale, transfer, assignment, pledge, or other encumbrance, forfeiture and
vesting, that are consistent with the purposes of the Plan and the
requirements of applicable law, as the Committee shall determine at the
time of granting the Restricted Stock. Any new, additional or different
shares or securities resulting from any change to the Common Stock under
Section 3.2 shall be subject to the same terms, conditions and restrictions
contained in the Restricted Stock agreement to which the Restricted Stock
was subject immediately prior to such change. The Committee may, in its
discretion, remove, modify or accelerate the release of restrictions on any
Restricted Stock in the event of hardship or of Disability of the grantee
while employed or in the service of the Company or Subsidiary, or for such
other reasons as the Committee may deem appropriate in the event that the
grantee ceases to be in employment or service with the Company and
Subsidiaries. In the event of the grantee's death following the delivery
of Restricted Stock, the personal representative of the grantee's estate or
the person or persons to whom the Restricted Stock shall have passed by
bequest or the laws of descent and distribution shall take such Restricted
Stock subject to the same terms, conditions and restrictions in effect at
the time of the grantee's death, to the extent applicable.
9. Amendment and Termination.
-------------------------
The Board may amend or discontinue the Plan at any time and for any reason
(either by resolution or unanimous consent), but no amendment or
discontinuation shall be made which would impair a Recipient's rights under
an Award theretofore granted without the Recipient's consent, or which,
without approval of the Company's shareholders, would require shareholder
approval under the Rules.
The Committee may amend the terms of any Award theretofore granted
prospectively or retroactively, but no such amendment shall impair the
rights of the Recipient of the Award without the Recipient's consent. The
power to amend the terms of any Award shall include, without limitation,
the power to reduce the Option Price of any Award, provided that the
reduced Option Price shall not be less than the Fair Market Value per share
of the Common Stock on the date of the amendment of the Award.
10. Unfunded Status of the Plan.
---------------------------
The Plan is an unfunded plan for incentive compensation. With respect to
any payments not yet made to a Recipient, the Recipient shall not have any
rights that are greater than those of a general creditor of the Company.
In its sole discretion, the Committee may
9
<PAGE>
authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan and to deliver Common Stock or payments
in lieu thereof with respect to any Awards.
11. General Provisions.
------------------
11.1 The Committee, in its sole discretion, may provide at the time of granting
any Award that the terms of the Award, including but not limited to, the
date on which an award vests or becomes exercisable, may be modified in the
event of a Change in Control.
11.2 Each Award may provide that the recipient shall deliver to the Committee,
upon demand by the Committee, at the time of delivery of any certificates
representing shares of Common Stock a written representation that the
shares are to be acquired for investment and not for resale or with a view
to the distribution thereof. Upon such demand, delivery of such
representation prior to delivery of any shares shall be a condition
precedent to the right of the Recipient (or any other person) to acquire
any shares.
11.3 Nothing contained in the Plan shall prevent the Board from adopting other
or additional compensation arrangements (subject to shareholder approval,
if such shareholder approval is required) of general applicability or
otherwise.
11.4 Neither the Plan nor any Award shall confer upon any Recipient any right to
continued employment or service with the Company or Subsidiary and shall
not interfere in any way with the right of the Company or Subsidiary to
terminate its relationship with any of its employees, directors or
independent contractors at any time.
11.5 No later than the date as of which an amount first becomes includible in
the gross income of a Recipient for applicable income tax purposes with
respect to any Award, the Recipient shall pay to the Company or make
arrangements satisfactory to the Committee regarding the payment of any
federal, state or local taxes of any kind required by law to be withheld
with respect to such amount. Unless otherwise determined by the Committee,
the minimum required withholding obligations may be settled with Common
Stock, including Common Stock that is subject to the Award that gives rise
to the withholding requirement. The obligations of the Company under the
Plan shall be conditioned upon such payment or arrangements and the Company
shall to the extent permitted by law have the right to deduct any such
taxes from any payment of any kind otherwise due to the Recipient.
11.6 The Committee shall establish such procedures as it deems appropriate for a
Recipient to designate a beneficiary to whom any amount payable in the
event of the Recipient's death are to be paid.
11.7 An Award shall be subject to the condition that any payment thereunder is
subject to any listing or registration of the shares of Common Stock
subject to the Award, any consent or approval of any governmental body, or
any other agreement or consent that the Committee determines is necessary
or desirable for such payment.
10
<PAGE>
11.8 The actions of the Committee (including without limitation the
determination of Recipients and the terms and conditions of any Awards)
need not be uniform and may be undertaken selectively whether or not the
Recipients are similarly situated.
11.9 The existence of Awards shall not effect in any way the right or the power
of the Company or its shareholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation
of the Company, or any issue of bonds, debentures, preferred or prior
preference stocks ahead of or effecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.
11.10 The Plan shall be governed by and subject to all applicable laws and to
the approvals by any governmental agency as may be required.
11.11 If any provision of the Plan shall be illegal or invalid for any reason,
such illegality or invalidity shall not affect the remaining provisions
of the Plan, but the Plan shall be construed and enforced as if such
illegal or invalid provision had never been included herein.
11.12 In addition to such other rights of indemnification as they may have as
directors or employees of the Company or Subsidiary, the members of the
Board and members of the Committee shall be indemnified by the Company
against the reasonable expense, including attorney's fees, actually and
necessarily incurred in connection with the defense of any action, suit
or proceeding, or in connection with any appeal thereof, to which they or
any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any Award, and against all
amounts paid by them in settlement therefor (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be
adjudicated in such action, suit or proceeding, that such member is
liable for negligence or misconduct in the performance of his duties;
provided that within sixty (60) days after institution of any such
action, suit or proceeding, a member shall in writing offer the Company
the opportunity, at its own expense, to handle and defend the same.
12. Effective Date and Term of the Plan.
-----------------------------------
The Plan shall become effective upon approval of the Plan by the Company's
shareholders. No Awards shall be granted pursuant to the Plan on or after
the tenth anniversary of the Plan's approval by shareholders, but Awards
granted prior to such date may extend beyond that date.
Date Approved by
Board of Directors: March 25, 1996
Date Approved by
Stockholders: March 25, 1996
11
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 28,646
<SECURITIES> 0
<RECEIVABLES> 35,387
<ALLOWANCES> 2,023
<INVENTORY> 1,466
<CURRENT-ASSETS> 69,357
<PP&E> 18,528
<DEPRECIATION> 7,152
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0
0
<COMMON> 50,375
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<SALES> 24,607
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