U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTER ENDED MARCH 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934, FOR
THE TRANSITION PERIOD FROM ___________ to ____________
Commission File No. 0-22947
HEALTHCORE MEDICAL SOLUTIONS, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1771999
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11904 BLUE RIDGE BOULEVARD, GRANDVIEW, MISSOURI 64030
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 763-4900
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
As of May 14, 1999, 3,183,000 shares of Class A Common Stock, $.01 par value,
and 216,000 shares of Class B Common Stock, $.01 par value, of the registrant
were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet as of March 31, 1999..... ..................3
Statement of Operations for the quarter and six months
ended March 31, 1999 and 1998.... ...................4
Statement of Cash Flows for the six months
ended March 31, 1999 and 1998.... ...................5
Notes to the Financial Statements.........................6
Item 2. Management's Discussion and Analysis ..............................9
PART II.
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........................12
Item 5. Other Information..................................................12
Item 6. Exhibits and Reports on Form 8-K ..................................13
SIGNATURES ................................................................14
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
ASSETS March 31, 1999
--------------
<S> <C>
Current Assets:
Cash & cash equivalents $ 2,932,175
Prepaid expenses and other current assets $ 194,129
------------
Total current assets $ 3,126,304
------------
Property and Equipment, net $ 188,265
Other assets $ 15,570
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$ 203,835
------------
TOTAL $ 3,330,139
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 142,414
Deferred income $ 53,062
Current portion-obligation under capital lease $ 57,871
------------
Total current liabilities $ 253,346
------------
Total liabilities $ 253,346
------------
Commitments and other matters
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000 shares
Common stock, $.01 par value:
Class A, authorized, 19,784,000 shares
Issued and outstanding 3,018,000 shares $ 30,180
Class B, authorized, 216,000 shares;
Issued and outstanding 216,000 shares $ 2,160
Additional paid In capital $ 10,761,557
Accumulated deficit ($ 7,717,104)
------------
Total shareholders equity $ 3,097,793
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TOTAL $ 3,330,139
============
</TABLE>
3
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HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Membership revenues $ 54,681 $ 22,417 $ 84,584 $ 36,333
Costs & Expenses:
Costs of memberships 42,686 16,486 66,196 25,724
Selling and marketing 253,696 176,401 471,835 259,567
General and administrative 381,515 328,787 740,687 606,773
Interest expense 2,437 7,138 7,611 56,780
----------- ----------- ----------- ----------
Total 680,334 528,812 1,286,326 948,844
----------- ----------- ----------- ----------
Loss before other income (625,653) (506,395) (1,201,745) (912,511)
----------- ----------- ----------- ----------
Other income - interest 36,716 71,229 81,731 133,783
Other expense (41,625) (41,625)
----------- ----------- ----------- ----------
Net other income/expense (4,909) 71,229 40,106 133,783
Net loss (630,562) (435,166) (1,161,639) (778,728)
Net loss per share:
(basic and dilutive) ($ 0.27) ($ 0.19) ($ 0.50) ($ 0.37)
=========== =========== =========== ==========
Weighted average number of common shares outstanding:
2,334,000 2,324,000 2,334,000 2,129,150
</TABLE>
SEE NOTES TO FINANICAL STATEMENTS
4
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HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Net loss ($1,161,639) ($ 778,728)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation & amortization 27,366 26,207
Amortization of discount on notes payable-bridge units 0 31,764
Changes in:
Prepaid expenses and other assets (30,676) (89,560)
Accounts payable and accrued expenses 27,527 (468,099)
Other liabilities 53,062 (708)
----------- -----------
Net cash used in operating activities (1,078,735) (1,279,124)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,790) (69,453)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash 85,000
Principal payments on notes payable-bridge units (2,300,000)
Net change in notes payable-banks (103,600)
Principal payments on obligation under capital lease (24,749) (22,945)
Net proceeds from initial public offering 8,747,714
----------- -----------
Net cash used in financing activities (24,749) 6,406,169
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,108,274) 5,057,592
Cash and cash equivalents - beginning of period 4,040,449 147,350
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,932,175 $ 5,204,942
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 57,611 $ 162,889
</TABLE>
SEE NOTES TO FINANICAL STATEMENTS
5
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
GENERAL
These financial statements have been prepared by HealthCore Medical Solutions,
Inc. ("HealthCore" or the "Company") in accordance with generally accepted
accounting principles for interim financial reporting and in accordance with
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position, the
results of operations and the statement of cash flows for the periods presented.
The unaudited financial statements presented herein were prepared using the
underlying accounting principles utilized in the Company's September 30, 1998
audited financial statements filed on Form 10-KSB with the Securities and
Exchange Commission on December 29, 1998. Operating results for the three months
ended December 31, 1998 are not necessarily indicative of the results that may
be expected for the year ending September 30, 1999.
HealthCore was organized as a Delaware corporation in February 1997 as a
business successor to MegaVision, L.C. ("MegaVision"). The Company is an early
stage enterprise organized to develop, market and administer a health care
benefit services program which is designed to enable participants ("Members") to
obtain discounts on purchases of ancillary health care products and services
through certain networks ("Networks") of health care providers ("Providers").
The Networks with which the Company currently maintains contracts comprise an
aggregate of approximately 78,000 participating Providers of eye care, dental,
hearing, pharmacy, physical and occupational therapy and chiropractic benefits
throughout the United States. Members can access the Networks through the use of
a discount membership card (the "HealthCare Solutions Card"). The HealthCare
Solutions Card is currently being marketed, directly and through independent
brokers, insurance agents and consumer marketing organizations, to individuals
and to employers, health maintenance organizations and businesses and other
associations who may either purchase the HealthCare Solutions Card for, or offer
it to, their employees or members.
In February 1997, MegaVision, L.C., a Missouri limited liability company in the
development stage, merged into HealthCore. In conjunction with the merger, 1,100
member units of MegaVision were exchanged for 708,000 shares of Class A common
stock of HealthCore and 600 member units of MegaVision were exchanged for
360,000 shares of Class B common stock of HealthCore. The business of the
Company was conducted by MegaVision from June 1, 1995 to February 19, 1997. The
merger described above has been accounted for in a manner similar to a pooling
of interests and, except as otherwise indicated or where the context otherwise
requires, the information set forth in these financial statements has been
adjusted to give retroactive effect to the reorganization.
HealthCore and MegaVision have been principally devoted to organizational
activities, raising capital, marketing, building a sales network and negotiating
provider agreements.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash on hand, demand deposits and all highly
liquid investments with a maturity of three months or less at the time of
purchase.
[2] MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] REVENUE AND COST OF SALES RECOGNITION:
All monthly and single annual payment sales and their corresponding expenses,
including the costs of issuance of HealthCare Solutions Cards, sales
commissions, provider fees and a provision for cancellations from potential
guarantee-related refunds incurred by the Company at the time of sale, are
recognized in the monthly period after the expiration of the guarantee period
which the card sale is billed. Annual card sales are recognized ratably over the
term of the membership.
The Company currently offers a money-back guarantee to Members who, during the
first 90 days of enrollment, are not satisfied with the HealthCare Solutions
Card.
[4] PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation and amortization are
being provided on the straight-line method over the estimated useful lives of
the assets. Equipment is depreciated over periods ranging from five to seven
years. Leasehold improvements are amortized over the shorter of the lease term
or their estimated useful life.
Equipment under capital leases is recorded at the lesser of the present value of
the lease payments or fair value of the equipment. Such equipment is amortized
on a straight-line basis over the shorter of the lease term or its estimated
useful life.
[5] NET LOSS PER SHARE:
Net loss per share was computed based upon the weighted average number of shares
of common stock outstanding during each year presented, excluding the 900,000
shares placed in escrow. Upon the Company exceeding certain income levels or the
common stock exceeding certain market prices per share, some or all of the
common shares held in escrow are to be released (see Note F).
NOTE C - NOTES PAYABLE - BRIDGE UNITS
In February and March 1997, the Company sold in a bridge financing 46 units,
each consisting of (i) a $50,000 10% subordinated note ("Bridge Note") and (ii)
warrants to purchase 25,000 shares of Class A common stock. The Bridge Notes,
aggregating $2.3 million in principal amount and $142,979 in accrued interest,
were repaid on October 17, 1997 from the proceeds of the Company's initial
public offering ("IPO"). Concurrently with the IPO, the warrants were converted
into IPO warrants. The Company received $1,964,154, net of offering costs, in
the bridge financing. One unit was purchased by the Chairman of the Board and
his wife and one-half of one unit was purchased by a director, on the same terms
as the other bridge financing units.
The Company valued the warrants at $310,500. Accordingly, additional paid-in
capital has been credited with $305,677 which represents the value of the
warrants less the allocable portion of the offering costs. The short-term notes
were discounted by the value of the warrants and the offering costs. The
discount was amortized as additional interest expense from the date of issuance
to October 17, 1997, when these notes were repaid.
NOTE D - CAPITAL STOCK
[1] STOCK OPTION PLAN:
In February 1997, the Company adopted a stock option plan, which was amended in
December 1998, under which 500,000 shares of Class A common stock are reserved
for issuance upon exercise of either incentive or non-incentive stock options
which may be granted from time to time by the board of directors to officers,
directors, employees and others. The Company has granted options to purchase
226,500 shares of Class A common stock at prices ranging from $.875 per share to
$5.00 per share. Of the options granted, 55,500 have been forfeited by
resignation of the grantees and are available for future grants. The remaining
171,000 options granted and outstanding will fully vest during the period from
August 1997 through June 2001 and will expire ten years from the date of grant.
7
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE D - CAPITAL STOCK (CONTINUED)
[2] SHARES RESERVED FOR ISSUANCE:
The Company has reserved 4,137,500 shares of its Class A common stock for
issuance upon exercise of the outstanding warrants and options.
[3] COMMON AND PREFERRED STOCK:
The shares authorized aggregate 19,784,000 shares of Class A common stock,
216,000 shares of Class B common stock and 5,000,000 shares of preferred stock,
all with $.01 par value. The Class A and Class B shares of common stock are
substantially identical except that the Class A common stockholders have the
right to cast one vote per share and the Class B common stockholder has the
right to cast five votes per share. Class B shares automatically convert to
Class A shares on a one-for-one basis upon (i) the sale, gift or transfer, (ii)
death of the original stockholder thereof, (iii) termination of employment of
the stockholder by the Company for any reason or (iv) if, for the year ended
September 30, 1999, the minimum pretax income, as defined, is less than
$1,000,000 or if, for any subsequent year through September 30, 2002, the
Company's minimum pretax income does not equal or exceed 110% of the prior
year's minimum pretax income.
NOTE E - INCOME TAXES
The Company's deferred tax asset as of September 30, 1998 represented a benefit
from net operating loss carry forwards of $1,504,500. This deferred tax asset
has been reduced by a valuation allowance of $1,504,500 since the future
realization of such tax benefit is not presently determinable. As of September
30, 1998, the Company had a net operating loss carry forward of approximately
$3,946,000 expiring in 2012 and 2018. As a result of the IPO, usage of
approximately $2,000,000 of this net operating loss carry forward is limited to
approximately $789,000 per year.
NOTE F - INITIAL PUBLIC OFFERING
On October 17, 1997, the Company, in its IPO, sold 1,760,000 units. Each
unit consists of one share of Class A common stock and one redeemable
warrant to purchase a share of Class A common stock at $6.50, expiring
October 2002. On November 10, 1997, the underwriter executed its option to
sell an additional 264,000 units of the Company's common stock. Proceeds
from the IPO, net of expenses of $1,745,000, approximated $8,355,000. In
connection with the IPO, the underwriter was granted an option to purchase
up to 176,000 units at $6.00 per unit and a director was granted a warrant
to purchase 15,000 shares at $5.00 per share.
Upon consummation of the Company's IPO, certain shareholders deposited
900,000 shares of common stock (the "Escrow Shares") into an escrow
account. Some or all of these shares are to be released upon the Company
meeting certain performance goals or the stock price exceeding certain
targets. If these goals are not met the shares will be canceled. However,
should the goals be met, the release of the shares owned by officers,
directors and consultants aggregating 396,500 shares of the 900,000 shares
in escrow will result in the Company recognizing an additional expense
equal to the market value of the shares released. A total of 400,000 shares
of common stock held in escrow are to be released if either (a) the
Company's minimum pretax income, as defined, equals or exceeds $5,500,000
for the year ending September 30, 1999 or $7,500,000 for the year ending
September 30, 2000 or (b) the average closing price of the common stock
equals or exceeds $12.50 per share for a 30 trading day period in the
18-month period beginning in October 1997 or $16.50 per share for 30
trading days in the period beginning after 18 months beginning in October
1997 and ending 36 months after October 1997. All shares of common stock
held in escrow are to be released if either (a) the Company's minimum
pretax income, as defined, equals or exceeds $4,600,000 for the year ending
September 30, 1998, $6,600,000 for the year ending September 30, 1999 or
$9,000,000 for the year ending September 30, 2000 or (b) the average
closing price of the common stock equals or exceeds $15.00 per share for a
30 trading day period in the 18-month period beginning in October 1997or
$18.00 per share for 30 trading days in the period beginning after 18
months after October 1997 and ending 36 months after October 1997. As of
March 31, 1999 the stock price did not meet or exceed the per share value
necessary for the release of the escrow shares.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-QSB contains forward-looking statements within the meaning of
the "safe harbor" provisions under Sectin 21E of the Securities and Exchange Act
of 1934 and the Private Securities Litigation Reform Act of 1995. The Company
uses forward-looking statements in our description of our plans and objectives
for future operations and assumptions underlying these plans and objectives.
Forward-looking terminology includes the words "may," "expects," "believes,"
"anticipates," "intends," "forecasts," "projects," or similar terms, variations
of such terms or the negative of such terms. These forward-looking statements
are based on management's current expectations and are subject to factors and
uncertainties which could cause actual results to differ materially from those
described in such forward-looking statements. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained in this Form 10-QSB to reflect any
change in our expectations or any changes in events, conditions or circumstances
on which any forward-looking statement is based.
Statements in this Form 10-QSB that are not descriptions of historical facts are
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth under "Risk Factors" in the Company's form
10-KSB for the year ended September 30, 1998, and including, in particular,
history of operating losses; anticipated future losses; limited operating
history; unproven commercial acceptance; need for market acceptance; limited
marketing capabilities, competition; government regulations; dependence on third
parties; and other risks.
RECENT DEVELOPMENTS
In March 1999, the Company discontinued the employment of six
employees, including its internal sales force. Salary and benefit expenses
related to employment for these individuals continued through March 31, 1999.
On April 27, 1999, the Company entered into a non-binding letter of
intent (the "Letter") with Adatom, a privately held California corporation
contemplating, among other things, the Merger of Adatom with and into the
Company. Adatom is in the business of developing Internet consumer shopping
sites, and has its own Internet superstore shopping site, www.adatom.com. The
Letter further provides that the Company will divest its current operating
business prior to consummation of the proposed merger.
The Letter provides that as part of the proposed Merger, the Company's
existing Class A common stock and warrants would remain outstanding, and Adatom
stockholders would receive shares of Class A common stock of the Company
representing approximately 77.5% percent of the Company's outstanding common
stock following the Merger, subject to adjustment. The Letter further provides
that as part of the divestiture of its existing business, the Company will
terminate its employment relationships with all of its employees, including its
key executives, Neal J. Polan , the Company's Chairman of the Board and Chief
Executive Officer, and David L. Mullikin, the Company's President and Chief
Operating Officer, and will settle any contractual obligations to such
employees.
The letter of intent is a mere statement of intention and the proposed
transaction is subject to various conditions to closing, including the
negotiation and execution of a definitive merger agreement related to such
transaction. Although the Company expects to complete this proposed transaction
in the near future, there can be no assurance that this transaction will be
completed in a timely manner or at all. In connection with the proposed
transaction with Adatom, the Company is currently seeking the sale, liquidation
or discontinuation of its existing business. In the event the proposed
transaction with Adatom is not consummated, the Company intends to seek other
merger candidates, seek the sale or discontinuation of its existing business
and/or curtail its current business operations.
GENERAL
The Company currently develops, markets and administers a health care
benefit services program designed to enable members to obtain discounts on
purchases of medical products and services through Networks of Providers with
which the Company has executed provider agreements. The Company currently offers
three products: The HealthCare Solutions card, offering discounts for ancillary
medical services; the Medical Solutions Card, providing discounts on major
medical expenses: and the Saving Solutions Card, offering discounts on ancillary
medical and consumer purchases.
The Company's revenues are derived from the receipt of annual or
monthly enrollment fees paid by or on behalf of Members for the right to obtain
discounts from providers in the Networks. The Company receives a significant
portion of its revenue in the form of monthly bank drafts and monthly payroll
deductions made by employees on behalf of their employees. Accordingly, all
monthly payment sales and their corresponding expenses, including sales
commissions and provider fees, are recognized in the monthly periods for which
they are billed. Since the initial cost of delivery of the cards to the
customers is incurred and expensed in the first month, the gross profit
associated with each new individual card issued is lower in the month of
issuance than in the remaining eleven months prior to the card's expiration
date. In addition, since all renewal cards are subject to the same costs of
issuance, this twelve month pattern of lower gross profits in the first month
continues for renewal periods.
In those instances when a sale of the Company's discount cards is
collected as a single annual fee, the Company recognizes all of its single
payment sales in the period in which the card is delivered, since all of the
expenses resulting from the purchase of an annual card, including the costs of
issuance, sales commission, provider fees, and a provision for cancellations
from potential guarantee-related refunds, are incurred by the Company at the
time of sale. The Company incurs only nominal additional direct costs associated
with each cardholder in the following eleven months due to the fact that under
all of its Network contracts, each Provider is obligated to continue to provide
discounts to all cardholders until the annual card expires, even if the Network
contract has been terminated. The Company also offers a money-back guarantee to
Members who, within ninety days or after twelve months (depending on the
product), are not satisfied with the discount card and the Company has
established reserves therefor.
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998. Operating revenue for the quarter ended March 31, 1999 (the "1999
9
<PAGE>
Quarter") increased from $22,000 for the quarter ended March 31, 1998 (the "1998
Quarter") to approximately $55,000. Operating revenue for the 1999 Quarter does
not include approximately $32,000 in annual membership fees received that were
deferred until after the expiration of the 90-day money back guarantee period.
The deferred revenue is being deferred as a result of a Securities and Exchange
Commission ("SEC") position that income cannot be recognized until after the
expiration of the guarantee period and income from annual contracts must be
recognized ratably over the life of the membership. The overall increase in
revenue is a result of increased sales and marketing efforts to promote the
Company's products.
Selling, general and administrative expenses increased by approximately
26% from approximately $505,000 in the 1998 Quarter to approximately $635,000 in
the 1999 Quarter. The increase was due primarily to management level staffing
increases in the sales, marketing and customer service departments and increased
expensed related to operating as a public company.
Interest expense decreased by approximately 71% from approximately
$7,000 for the 1998 Quarter to approximately $2,000 for the 1999 Quarter due to
decreased interest costs on a current equipment lease. Interest income decreased
approximately 48% from approximately $71,000 for the 1998 Quarter to
approximately $37,000 for the 1999 Quarter due to increased use of the IPO
proceeds for corporate needs.
Other expense in the 1999 Quarter reflects the settlement of a claim
relating to disputed software rights asserted by a former employee of the
Company. Net loss increased by approximately 44% from approximately $435,000 for
the 1998 Quarter to approximately $631,000 for the 1999 Quarter as a result of
the foregoing factors.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO THE SIX MONTHS ENDED MARCH
31, 1998.
Operating revenues for the six months ended March 31, 1999 (the "1999
Six Months") increased from $36,000 for the six months ended March 31, 1998 (the
"1998 Six Months") to approximately $85,000. Operating revenue for the 1999 Six
Months does not include approximately $53,000 (net) in annual membership fees
received that were deferred until after the expiration of the 90 day money back
guarantee period. The deferred revenue is being deferred as a result of an SEC
position that income cannot be recognized until after the expiration of the
guarantee period and income from annual contracts must be recognized ratably
over the life of the membership. The overall increase in revenue was a result of
increased sales and marketing efforts to promote the Company's products.
Selling, general and administrative expenses increased by approximately
40% from approximately $866,000 in the 1998 six Months to approximately
$1,213,000 in the 1999 Six Months. The increase was due primarily to management
level staffing increases in the sales, marketing and customer service
departments and expenses related to operating as a public company.
Interest expense decreased by approximately 86% from approximately
$57,000 for the 1998 Six Months to approximately $ 8,000 for the 1999 Six Months
due to the completion of the bridge financing in the 1998 Six Months and the
repayment of the notes issues in the bridge financing in October 1997. Interest
income decreased approximately 39% from approximately $134,000 for the 1998 Six
Months to approximately $82,000 for the 1999 Six Months due to increased use of
the IPO proceeds for corporate needs. A Net Loss increased 48% from
approximately $779,000 for the 1998 Six Months to approximately $1,161,000 for
the 1999 Six Months as a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had working capital of approximately
$2,873,000, including cash and cash equivalents of $2,832,000.
Net cash used in operating activities was approximately $1,079,000 for
the 1999 Six Months, compared to approximately $1,279,000 for the 1998 Six
Months. The 1999 Six Month net cash used in operating activities consisted
primarily of approximately $1,162,000 net loss from operations.
The Company realized net proceeds of approximately $8,748,000 in
connection with its IPO which was completed in November 1997 of which
approximately $2,300,000 was utilized to repay the Bridge Notes issued in the
Bridge Financing, approximately $104,000 was utilized in repayment of other
notes payables, and approximately $54,000 was used in principal payments under
capital lease obligations.
10
<PAGE>
The Company believes that its existing resources would provide the
necessary liquidity and capital resources to sustain its current operations
until January 2000. In connection with the proposed transaction with Adatom, the
Company is currently seeking the sale, liquidation or discontinuation of its
existing business. In the event the proposed transaction with Adatom is not
consummated, the Company intends to seek other merger candidates, seek the sale
or discontinuation of its current business and/or curtail its current business
operations. In the event any of these proposed transactions are consummated,
including the proposed transaction with Adatom, the Company anticipates that it
will likely require substantial additional financing, which financing could be
in the form of equity or debt financing, that may be entered into in the future.
Except for the Company's engagement of Jesup & Lamont relating to a proposed
financing in connection with the proposed transaction with Adatom, the Company
has no commitments for any future financing and there can be no assurance as to
the availability or terms of any required additional financing, when and if
needed. In the event that the Company fails to raise the funds it requires, it
may be necessary for the Company to significantly curtail its activities or
cease operations.
YEAR 2000 COMPLIANCE. Certain aspects of the Company's current
business, including its customer service capabilities, the Company's ability to
timely pay brokers their commissions and pay network providers their fees, are
dependent upon the ability to store, retrieve, process and manage data and to
maintain and upgrade the data processing system the Company currently relies on.
Although the Company believes that it has established appropriate safeguard
mechanisms, interruption of data processing capabilities for any extended period
of time, loss of stored data, programming errors or other computer problems may
affect its ability to attract and retain brokers and networks, which in turn may
negatively affect its current business. The Company cannot assure that it will
not experience problems, delays or unanticipated costs in the use of its current
system. For additional disclosure about Year 2000 issues related to the Company
see the Company's Annual Report on Form 10-KSB for the year ended September 30,
1998
11
<PAGE>
RELEASE OF ESCROW SHARES. In connection with the IPO, the pre-IPO
stockholders of the Company placed, on a pro rata basis, a portion of their
shares into escrow pending the Company's attainment of certain earnings
thresholds or per share stock price thresholds. The Commission has taken the
position with respect to the release of securities from escrow that in the event
the Escrow Shares are released from escrow to directors, officers, employees or
consultants of the Company, the release will be treated, for financial reporting
purposes, as compensation expense to the Company. Accordingly, in the event of
the release of the Escrow Shares, the Company will recognize during the period
in which the earnings or market price targets are met or become probable of
being met, a substantial non-cash charge which would substantially increase the
Company's loss or reduce or eliminate earnings, if any, at such time. The amount
of compensation expense recognized by the Company will not affect the Company's
total stockholders' equity. There can be no assurance that the Company will
attain the targets which would enable the Escrow Shares to be released from
escrow. In addition, a portion of the warrants issued to Neal J. Polan will
become exercisable only upon the attainment by the Company of certain earnings
or market price thresholds. In the event that such warrants become exercisable,
the Company will recognize during the period in which the earnings thresholds
are probable of being met or such stock levels achieved, an additional non-cash
charge to earnings equal to the fair market value of the portion of the warrants
subject to such earnings or market price thresholds, which could have the effect
of significantly increasing the Company's loss or reducing or eliminating
earnings, if any, at such time.
The recognition of the potential charges to income described above may
have a depressive effect on the market price of the Company's securities.
It is anticipated that in the event the proposed transaction with
Adatom is consummated, the Company expects to exchange the escrow shares for
shares of Class A common stock at an exchange rate of less than one share of
Class A common stock for each escrow share.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the 1999 quarter, the Company (i) granted an aggregate of 30,000
options to two directors of the Company at an exercise price of $1.09 per share
(the fair market value of the Class A Common Stock on the date of grant) under
the Company's 1997 Stock Option Plan, which options vested on the date of grant
and (ii) issued a warrant to purchase 12,500 shares of Class A common Stock at
an exercise price of $1.0625 per share (the fair market value of the Class A
common stock on the date of issuance) to a former employee of the Company.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933 under Sectom 4(2) or Regulation D of the Securities Act. The sale of
such securities was without the use of an underwriter, and the certificates for
the shares contain a restrictive legend permitting the transfer of such
securities only upon registration of the shares or an exemption under the
Securities Act.
The 2,024,000 units of the Company and the underlying securities
consisting of one share of Class A Common Stock and one warrant to purchase one
share of Class A Common Stock per unit issued in the IPO were registered under a
registration statement on Forms SB-2 (File No. 333-28233) which was declared
effective by the Securities and Exchange Commission on October 14, 1997. During
the 1999 quarter, a portion of the net proceeds from the IPO were used (I) to
make principal and interest payments in the amount of approximately $19,000 on a
capital lease entered into in April 1997; (ii) to purchase equipment in the
amount of approximately $3,000 and (iii) for working capital purposes in the
amount of approximately $535,000. The remaining portion of the net proceeds from
the IPO and other available cash in the amount of approximately $3,487 has been
invested in short-term, interest-bearing , investment grade securities.
ITEM 5. OTHER INFORMATION
In March 1999, the Company discontinued the employment of six
employees, including its internal sales force. Salary and benefit expenses
related to employment for these individuals continued through March 31, 1999.
On April 27, 1999, the Company entered into a non-binding letter of
intent with Adatom, a privately held California corporation contemplating, among
other things, the merger of Adatom with and into the Company. Adatom is in the
business of developing Internet consumer shopping sites, and has its own
Internet superstore shopping site, www.adatom.com. The Letter further provides
that the Company will divest its current operating business prior to
consummation of the proposed merger.
The Letter provides that as part of the proposed Merger, the Company's
existing Class A common stock and warrants would remain outstanding, and Adatom
stockholders would receive shares of Class A common stock of the Company
representing approximately 77.5% percent of the company's outstanding common
stock following the Merger, subject to adjustment. The Letter further provides
that as part of the divestiture of its existing business, the Company will
terminate its employment relationships with all of its employees, including its
key executives, Neal J. Polan , the Company's Chairman of the Board and Chief
Executive Officer, and David L. Mullikin, the Company's President and Chief
Operating Officer, and will settle any contractual obligations to such
employees. The letter of intent is a mere statement of intention and the
proposed transaction is subject to various conditions to closing, including the
negotiation and execution of a definitive merger agreement related to such
transaction. Although the Company expects to complete this proposed transaction
in the near future, there can be no assurance that this transaction will be
completed in a timely manner or at all.
Prior to the execution of the Letter, the Company employed Polan under
an employment agreement (the "Employment Agreement") expiring on November 30,
2000, providing for an annual base salary of two hundred thousand ($200,000)
dollars, together with other compensation and benefits. The Employment Agreement
made no provisions for the termination thereof without cause. In furtherance of
the transactions comtemplated by the Letter, by letter amendment dated April 27,
1999, the Employment Agreement was amended to provide the Company with the right
to terminate the Employment Agreement at any time, without cause, upon the
expiration of one hundred twenty (120) days following the date of the execution
of the letter amendment, whereupon the Company will pay to Polan the lesser of
(a) one hundred fifty thousand ($150,000) dollars, or (b) sixty (60%) percent of
the present value of the remaining compensation and benefits due under the terms
of the Employment Agreement on the data of its termination. In consideration for
this amendment, the Company issued Polan 165,000 shares of Class A Common Stock
of the Company.
13
<PAGE>
On April 27, 1999, the Company engaged Jesup & Lamont as exclusive
financial adviser to the Company in connection with the Merger, and as the
Company's exclusive placement agent with respect to a contemplated private
placement (the "Placement") of approximately six million ($6,000,000) dollars
inequity securities of the Company following the consummation of the Merger,
pursuant to the terms of an engagement letter (the "Engagement Letter"), among
the Company, Adatom, and Jesup & Lamont. As partial consideration for such
services, the Company has agreed to issue to Jesup & Lamont (a) upon the signing
of the Engagement Letter, five-year warrants to purchase two hundred thousand
(200,000) shares of the Class A Common Stock of the Company at an exercise price
of one ($1.00) dollar per share (one hundred thousand (100,000), of which vested
upon the execution of the Engagement Letter, and the remaining one hundred
thousand (100,000) to vest only upon the closing of the Merger), and (b)
five-year warrants to purchase up to ten (10%) percent of the securities sold in
the Placement at an exercise price equal to the price at which the securities
are sold in the Placement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10(a) 1997 Stock Option Plan, as amended
10.10 Letter Amendment dated April 27, 1999 between the
Registrant and Neal J. Polan (1)
10.11 Engagement Letter dated April 27, 1999 among the
Registrant, Adatom, and Jessup & Lamont(1)
27.1 Financial Data Schedule
-------------
(1) Incorporated by reference to the Company's Current Report on
Form 8-K as filed on May 3, 1999.
(b) Reports on Form 8-K. A report on Form 8-K was filed on May 3, 1999
reporting information under Item 5.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HEALTHCORE MEDICAL SOLUTIONS, INC.
By: /s/ NEAL J. POLAN
----------------------------------------------
Neal J. Polan
Chairman and Chief Executive Officer
By: /s/ DAVID L. MULLIKIN
----------------------------------------------
David L. Mullikin
President, Chief Operating Officer
Acting Chief Financial Officer
Date: May 14, 1999
15
HEALTHCORE MEDICAL SOLUTIONS, INC.
1997 STOCK OPTION PLAN, AS AMENDED
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for
HealthCore Medical Solutions, Inc. (the "Company") and its shareholders the
benefits arising from capital stock ownership by employees, officers and
directors of, and consultants or advisors to, the Company who are expected to
contribute to the Company's future growth and success. Except where the context
otherwise requires, the term "Company" shall include all present and future
subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the
Internal Revenue Code of 1986, as amended or replaced from time to time (the
"Code"). Those provisions of the Plan which make express reference to Section
422 shall apply only to Incentive Stock Options (as that term is defined in the
Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) TYPES OF OPTIONS. Options granted pursuant to the Plan
shall be authorized by action of the Board of Directors of the Company (or a
Committee designated by the Board of Directors) and may be either incentive
stock options ("Incentive Stock Options") meeting the requirements of Section
422 of the Code or non-statutory options which are not intended to meet the
requirements of Section 422 of the Code.
(b) ADMINISTRATION. The Plan will be administered by a
committee (the "Committee") appointed by the Board of Directors of the Company,
whose construction and interpretation of the terms and provisions of the Plan
shall be final and conclusive. The delegation of powers to the Committee shall
be consistent with applicable laws or regulations (including, without
limitation, applicable state law and Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule
16b-3")). The Committee may in its sole discretion grant options to purchase
shares of the Company's Class A Common Stock, $.01 par value per share ("Common
Stock"), and issue shares upon exercise of such options as provided in the Plan.
The Committee shall have authority, subject to the express provisions of the
Plan, to construe the respective option agreements and the Plan, to prescribe,
amend and rescind rules and regulations relating to the Plan, to determine the
terms and provisions of the respective option agreements, which need not be
identical, and to make all other determinations in the judgment of the Committee
necessary or desirable for the administration of the Plan. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in the
Plan or in any option agreement in the manner and to the extent it shall deem
expedient to carry the Plan into effect and it shall be the sole and final judge
of such expediency. No director or person acting pursuant to authority delegated
by the Board of
<PAGE>
Directors shall be liable for any action or determination under the Plan made in
good faith. Subject to adjustment as provided in Section 15 below, the aggregate
number of shares of Common Stock that may be subject to Options granted to any
person in a calendar year shall not exceed 35% of the maximum number of shares
which may be issued and sold under the Plan, as set forth in Section 4 hereof,
as such section may be amended from time to time.
(c) APPLICABILITY OF RULE 16B-3. Those provisions of the Plan
which make express reference to Rule 16b-3 shall apply to the Company only at
such time as the Company's Common Stock is registered under the Exchange Act,
subject to the last sentence of Section 3(b), and then only to such persons as
are required to file reports under Section 16(a) of the Exchange Act (a
"Reporting Person").
3. ELIGIBILITY.
(a) GENERAL. Options may be granted to persons who are, at the
time of grant, employees, officers or directors of, or consultants or advisors
to, the Company or any subsidiaries of the Company as defined in Sections 424(e)
and 424(f) of the Code ("Participants") PROVIDED, that Incentive Stock Options
may only be granted to individuals who are employees of the Company (within the
meaning of Section 3401(c) of the Code). A person who has been granted an option
may, if he or she is otherwise eligible, be granted additional options if the
Committee shall so determine.
(b) GRANT OF OPTIONS TO REPORTING PERSONS. The selection of a
director or an officer who is a Reporting Person (as the terms "director" and
"officer" are defined for purposes of Rule 16b-3) as a recipient of an option,
the timing of the option grant, the exercise price of the option and the number
of shares subject to the option shall be determined either (i) by the Board of
Directors, (ii) by a committee consisting of two or more directors having full
authority to act in the matter, each of whom shall be an "Independent Director"
as defined by Rule 1.62-27 of the Code or (iii) pursuant to provisions for
automatic grants set forth in Section 3(c) below.
4. STOCK SUBJECT TO PLAN.
The stock subject to options granted under the Plan shall be
shares of authorized but unissued or reacquired Common Stock. Subject to
adjustment as provided in Section 15 below, the maximum number of shares of
Common Stock of the Company which may be issued and sold under the Plan is
500,000 shares. If an option granted under the Plan shall expire, terminate or
is cancelled for any reason without having been exercised in full, the
unpurchased shares subject to such option shall again be available for
subsequent option grants under the Plan.
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<PAGE>
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each
recipient of an option shall execute an option agreement in such form not
inconsistent with the Plan as may be approved by the Board of Directors. Such
option agreements may differ among recipients.
6. PURCHASE PRICE.
(a) GENERAL. The purchase price per share of stock deliverable
upon the exercise of an option shall be determined by the Board of Directors at
the time of grant of such option; PROVIDED, HOWEVER, that in the case of an
Incentive Stock Option, the exercise price shall not be less than 100% of the
Fair Market Value (as hereinafter defined) of such stock, at the time of grant
of such option, or less than 110% of such Fair Market Value in the case of
options described in Section 11(b). "Fair Market Value" of a share of Common
Stock of the Company as of a specified date for the purposes of the Plan shall
mean the closing price of a share of the Common Stock on the principal
securities exchange (including the Nasdaq National Market) on which such shares
are traded on the day immediately preceding the date as of which Fair Market
Value is being determined, or on the next preceding date on which such shares
are traded if no shares were traded on such immediately preceding day, or if the
shares are not traded on a securities exchange, Fair Market Value shall be
deemed to be the average of the high bid and low asked prices of the shares in
the over-the-counter market on the day immediately preceding the date as of
which Fair Market Value is being determined or on the next preceding date on
which such high bid and low asked prices were recorded. If the shares are not
publicly traded, Fair Market Value of a share of Common Stock (including, in the
case of any repurchase of shares, any distributions with respect thereto which
would be repurchased with the shares) shall be determined in good faith by the
Board of Directors. In no case shall Fair Market Value be determined with regard
to restrictions other than restrictions which, by their terms, will never lapse.
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan
may provide for the payment of the exercise price by delivery of cash or a check
to the order of the Company in an amount equal to the exercise price of such
options, or by any other means which the Board of Directors determines are
consistent with the purpose of the Plan and with applicable laws and regulations
(including, without limitation, the provisions of Rule 16b-3 and Regulation T
promulgated by the Federal Reserve Board).
7. OPTION PERIOD.
Subject to earlier termination as provided in the Plan, each
option and all rights thereunder shall expire on such date as determined by the
Board of Directors and set forth in the applicable option agreement, PROVIDED,
that such date shall not be later than (10) ten years after the date on which
the option is granted.
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<PAGE>
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either
in full or in installments at such time or times and during such period as shall
be set forth in the option agreement evidencing such option, subject to the
provisions of the Plan. Subject to the requirements in the immediately preceding
sentence, if an option is not at the time of grant immediately exercisable, the
Board of Directors may (i) in the agreement evidencing such option, provide for
the acceleration of the exercise date or dates of the subject option upon the
occurrence of specified events, and/or (ii) at any time prior to the complete
termination of an option, accelerate the exercise date or dates of such option.
9. TRANSFERABILITY OF OPTIONS
No incentive stock option granted under this Plan shall be
assignable or otherwise transferable by the optionee except by will or by the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined in the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder. The Board of Directors or any committee
thereof may, in its discretion, authorize all or a portion of any non-statutory
options to be granted to an optionee to be on terms which permit transfer by
such optionee to (i) the spouse, children or grandchildren of the optionee
("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit
of such Immediate Family Members, (iii) a partnership in which such Immediate
Family Members are the only partners or (iv) any non-profit charitable
organization; provided that (w) the options must be held by the optionee for a
period of at least one month prior to transfer, (x) there may be no
consideration for any such transfer, (y) the stock option agreement pursuant to
which such options are granted must be approved by the Committee; and must
expressly provide for transferability in a manner consistent with this Section,
and (z) subsequent transfers of transferred options shall be prohibited except
by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined in the Code or Title I of the Employee
Retirement Income Security Act, or the rules thereunder. Following transfer, any
such options shall continue to be subject to the same terms and conditions as
were applicable immediately prior to transfer, provided that for purposes of the
Plan the term "optionee" shall be deemed to refer to the transferee. The events
of termination of employment of Section 10 hereof shall continue to be applied
with respect to the original optionee. In the event an optionee dies during his
employment by the Company or any of its subsidiaries, or during the three-month
period following the date of termination of such employment, his option shall
thereafter be exercisable, during the period specified in the option agreement,
by his executors or administrators to the full extent to which such option was
exercisable by the optionee at the time of his death during the periods set
forth in Section 10 or 11(d).
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<PAGE>
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11(d) with respect to Incentive
Stock Options and except as otherwise determined by the Committee at the date of
grant of an Option, and subject to the provisions of the Plan, an optionee may
exercise an option at any time within three months following the termination of
the optionee's employment or other relationship with the Company or within one
(1) year if such termination was due to the death or disability of the optionee
but, except in the case of the optionee's death, in no event later than the
expiration date of the Option. If the termination of the optionee's employment
is for cause or is otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the option shall
expire immediately upon such termination. The Board of Directors shall have the
power to determine what constitutes a termination for cause or a breach of an
employment or confidentiality or non-disclosure agreement, whether an optionee
has been terminated for cause or has breached such an agreement, and the date
upon which such termination for cause or breach occurs. Any such determinations
shall be final and conclusive and binding upon the optionee.
11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following additional terms and
conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted
under the Plan shall, at the time of grant, be specifically designated as such
in the option agreement covering such Incentive Stock Options.
(b) 10% SHAREHOLDER. If any employee to whom an Incentive
Stock Option is to be granted under the Plan is, at the time of the grant of
such option, the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company (after taking into account
the attribution of stock ownership rules of Section 424(d) of the Code), then
the following special provisions shall be applicable to the Incentive Stock
Option granted to such individual:
(i) The purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be less than
110% of the Fair Market Value of one share of Common Stock at
the time of grant; and
(ii) The option exercise period shall not exceed five
years from the date of grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so
provide, options granted to any employee under the Plan (and any other incentive
stock option plans of the Company) which are intended to constitute Incentive
Stock Options shall not constitute Incentive Stock Options to the extent that
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<PAGE>
such options, in the aggregate, become exercisable for the first time in any one
calendar year for shares of Common Stock with an aggregate Fair Market Value, as
of the respective date or dates of grant, of more than $100,000.
(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No
Incentive Stock Option may be exercised unless, at the time of such exercise,
the optionee is, and has been continuously since the date of grant of his or her
option, employed by the Company, except that:
(i) an Incentive Stock Option may be exercised within
the period of three months after the date the optionee ceases
to be an employee of the Company (or within such lesser period
as may be specified in the applicable option agreement),
PROVIDED, that the agreement with respect to such option may
designate a longer exercise period and that the exercise after
such three-month period shall be treated as the exercise of a
non-statutory option under the Plan;
(ii) if the optionee dies while in the employ of the
Company, or within three months after the optionee ceases to
be such an employee, the Incentive Stock Option may be
exercised by the person to whom it is transferred by will or
the laws of descent and distribution within the period of one
year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the
meaning of Section 22(e)(3) of the Code or any successor
provisions thereto) while in the employ of the Company, the
Incentive Stock Option may be exercised within the period of
one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser
period as may be specified in the applicable option
agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. ADDITIONAL PROVISIONS.
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may,
in its sole discretion, include additional provisions in option agreements
covering options granted under the Plan, including without limitation
restrictions on transfer, repurchase rights, rights of first refusal,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors; PROVIDED, that such
additional provisions shall not be
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<PAGE>
inconsistent with any other term or condition of the Plan and such additional
provisions shall not cause any Incentive Stock Option granted under the Plan to
fail to qualify as an Incentive Stock Option within the meaning of Section 422
of the Code.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may,
in its sole discretion, (i) accelerate the date or dates on which all or any
particular option or options granted under the Plan may be exercised or (ii)
extend the dates during which all, or any particular, option or options granted
under the Plan may be exercised; PROVIDED, HOWEVER, that no such extension shall
be permitted if it would cause the Plan to fail to comply with Section 422 of
the Code or with Rule 16b-3 (if applicable).
13. GENERAL RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. The Company may require any
person to whom an Option is granted, as a condition of exercising such option,
to give written assurances in substance and form satisfactory to the Company to
the effect that such person is acquiring the Common Stock subject to the option
or award, for his or her own account for investment and not with any present
intention of selling or otherwise distributing the same, and to such other
effects as the Company deems necessary or appropriate in order to comply with
federal and applicable state securities laws, or with covenants or
representations made by the Company in connection with any public offering of
its Common Stock, including any "lock-up" or other restriction on
transferability.
(b) COMPLIANCE WITH SECURITIES LAW. Each Option shall be
subject to the requirement that if, at any time, counsel to the Company shall
determine that the listing, registration or qualification of the shares subject
to such option upon any securities exchange or automated quotation system or
under any state or federal law, or the consent or approval of any governmental
or regulatory body, or that the disclosure of non-public information or the
satisfaction of any other condition is necessary as a condition of, or in
connection with the issuance or purchase of shares thereunder, such option may
not be exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification, or to satisfy such condition.
14. RIGHTS AS A STOCKHOLDER.
The holder of an option shall have no rights as a stockholder
with respect to any shares covered by the option (including, without limitation,
any rights to receive dividends or non-cash distributions with respect to such
shares) until the date of issue of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends or other rights for which the
record date is prior to the date such stock certificate is issued.
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<PAGE>
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS, REORGANIZATIONS
AND RELATED TRANSACTIONS.
(a) RECAPITALIZATIONS AND RELATED TRANSACTIONS. If, through or
as a result of any recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar transaction, (i) the outstanding
shares of Common Stock are increased, decreased or exchanged for a different
number or kind of shares or other securities of the Company, or (ii) additional
shares or new or different shares or other non-cash assets are distributed with
respect to such shares of Common Stock or other securities, an appropriate and
proportionate adjustment shall be made in (x) the maximum number and kind of
shares reserved for issuance under or otherwise referred to in the Plan, (y) the
number and kind of shares or other securities subject to any then outstanding
options under the Plan, and (z) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable. Notwithstanding the
foregoing, no adjustment shall be made pursuant to this Section 15 if such
adjustment (i) would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3 or (ii) would be considered as the adoption of a new
plan requiring stockholder approval.
(b) REORGANIZATION, MERGER AND RELATED TRANSACTIONS. All
outstanding Options under the Plan shall become fully exercisable for a period
of sixty (60) days following the occurrence of any Trigger Event, whether or not
such Options are then exercisable under the provisions of the applicable
agreements relating thereto. For purposes of the Plan, a "Trigger Event" is any
one of the following events:
(i) the date on which shares of Common Stock are first
purchased pursuant to a tender offer or exchange offer (other
than such an offer by the Company, any Subsidiary, any
employee benefit plan of the Company or of any Subsidiary or
any entity holding shares or other securities of the Company
for or pursuant to the terms of such plan), whether or not
such offer is approved or opposed by the Company and
regardless of the number of shares purchased pursuant to such
offer;
(ii) the date the Company acquires knowledge that any
person or group deemed a person under Section 13(d)-3 of the
Exchange Act (other than the Company, any Subsidiary, any
employee benefit plan of the Company or of any Subsidiary or
any entity holding shares of Common Stock or other securities
of the Company for or pursuant to the terms of any such plan
or any individual or entity or group or affiliate thereof
which acquired its beneficial ownership interest prior to the
date the Plan was adopted by the Board), in a transaction or
series of transactions, has become the beneficial owner,
directly or indirectly (with beneficial ownership determined
as provided in Rule 13d-3, or any successor rule, under the
Exchange Act), of securities of the Company entitling the
person or
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<PAGE>
group to 30% or more of all votes (without consideration of
the rights of any class or stock to elect directors by a
separate class vote) to which all shareholders of the Company
would be entitled in the election of the Board of Directors
were an election held on such date;
(iii) the date, during any period of two consecutive years,
when individuals who at the beginning of such period
constitute the Board of Directors of the Company cease for any
reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the stockholders
of the Company, of each new director was approved by a vote of
at least two-thirds of the directors then still in office who
were directors at the beginning of such period; and
(iv) the date of approval by the stockholders of the
Company of an agreement (a "reorganization agreement")
providing for:
(A) The merger of consolidation of the Company with another
corporation where the stockholders of the Company, immediately
prior to the merger or consolidation, do not beneficially own,
immediately after the merger or consolidation, shares of the
corporation issuing cash or securities in the merger or
consolidation entitling such shareholders to 80% or more of
all votes (without consideration of the rights of any class of
stock to elect directors by a separate class vote) to which
all stockholders of such corporation would be entitled in the
election of directors or where the members of the Board of
Directors of the Company, immediately prior to the merger or
consolidation, do not, immediately after the merger or
consolidation, constitute a majority of the Board of Directors
of the corporation issuing cash or securities in the merger or
consolidation; or
(B) The sale or other disposition of all or substantially
all the assets of the Company.
(c) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under
this Section 15 will be made by the Board of Directors, whose determination as
to what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) GENERAL. In the event of any sale, merger, transfer or
acquisition of the Company or substantially all of the assets of the Company in
which the Company is not the surviving corporation, and provided that after the
Company shall have requested the acquiring or succeeding corporation (or an
affiliate thereof), that equivalent options shall be substituted and
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such successor corporation shall have refused or failed to assume all options
outstanding under the Plan or issue substantially equivalent options, then any
or all outstanding options under the Plan shall accelerate and become
exercisable in full immediately prior to such event. The Committee will notify
holders of options under the Plan that any such options shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the options will terminate upon expiration of such notice.
(b) SUBSTITUTE OPTIONS. The Company may grant options under
the Plan in substitution for options held by employees of another corporation
who become employees of the Company, or a subsidiary of the Company, as the
result of a merger or consolidation of the employing corporation with the
Company or a subsidiary of the Company, or as a result of the acquisition by the
Company, or one of its subsidiaries, of property or stock of the employing
corporation. The Company may direct that substitute options be granted on such
terms and conditions as the Board of Directors considers appropriate in the
circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer
upon any optionee any right with respect to the continuation of his or her
employment by the Company or interfere in any way with the right of the Company
at any time to terminate such employment or to increase or decrease the
compensation of the optionee.
18. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts
as compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to
time, modify or amend the Plan in any respect; provided, however, that if at any
time the approval of the stockholders of the Company is required under Section
422 of the Code or any successor provision with respect to Incentive Stock
Options, the Board of Directors may not effect such modification or amendment
without such approval; and provided, further, that the provisions of Section
3(c) hereof shall not be amended more than once every six months, other than to
comport with changes in the Code, the Employer Retirement Income Security Act of
1974, as amended, or the rules thereunder.
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(b) The modification or amendment of the Plan shall not,
without the consent of an optionee, affect his or her rights under an option
previously granted to him or her. With the consent of the optionee affected, the
Board of Directors may amend outstanding option agreements in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to amend
or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option to the extent necessary to ensure the
qualification of the Plan under Rule 16b-3.
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments
of any kind otherwise due to the optionee any federal, state or local taxes of
any kind required by law to be withheld with respect to any shares issued upon
exercise of options under the Plan. Subject to the prior approval of the
Company, which may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an option or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee. The shares so delivered or
withheld shall have a Fair Market Value equal to such withholding obligation as
of the date that the amount of tax to be withheld is to be determined. An
optionee who has made an election pursuant to this Section 20(a) may only
satisfy his or her withholding obligation with shares of Common Stock which are
not subject to any repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
(b) The acceptance of shares of Common Stock upon exercise of
an Incentive Stock Option shall constitute an agreement by the optionee (i) to
notify the Company if any or all of such shares are disposed of by the optionee
within two years from the date the option was granted or within one year from
the date the shares were issued to the optionee pursuant to the exercise of the
option, and (ii) if required by law, to remit to the Company, at the time of and
in the case of any such disposition, an amount sufficient to satisfy the
Company's federal, state and local withholding tax obligations with respect to
such disposition, whether or not, as to both (i) and (ii), the optionee is in
the employ of the Company at the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting
Person whose options have been granted in accordance with the provisions of
Section 3(b) herein, no election to use shares for the payment of withholding
taxes shall be effective unless made in compliance with any applicable
requirements of Rule 16b-3.
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21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.
The Board of Directors shall have the authority to effect, at
any time and from time to time, with the consent of the affected optionees, (i)
the cancellation of any or all outstanding options under the Plan and the grant
in substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when
adopted by the Board of Directors, but no Incentive Stock Option granted under
the Plan shall become exercisable unless and until the Plan shall have been
approved by the Company's stockholders. If such stockholder approval is not
obtained within twelve months after the date of the Board's adoption of the
Plan, no options previously granted under the Plan shall be deemed to be
Incentive Stock Options and no Incentive Stock Options shall be granted
thereafter. Amendments to the Plan not requiring stockholder approval shall
become effective when adopted by the Board of Directors; amendments requiring
shareholder approval (as provided in Section 21) shall become effective when
adopted by the Board of Directors, but no Incentive Stock Option granted after
the date of such amendment shall become exercisable (to the extent that such
amendment to the Plan was required to enable the Company to grant such Incentive
Stock Option to a particular optionee) unless and until such amendment shall
have been approved by the Company's stockholders. If such stockholder approval
is not obtained within twelve months of the Board's adoption of such amendment,
any Incentive Stock Options granted on or after the date of such amendment shall
terminate to the extent that such amendment to the Plan was required to enable
the Company to grant such option to a particular optionee. Subject to this
limitation, options may be granted under the Plan at any time after the
effective date and before the date fixed for termination of the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with
Section 16, the Plan shall terminate upon the earlier of (i) the close of
business on the day next preceding the tenth anniversary of the date of its
adoption by the Board of Directors, or (ii) the date on which all shares
available for issuance under the Plan shall have been issued pursuant to the
exercise or cancellation of options granted under the Plan. If the date of
termination is determined under (i) above, then options outstanding on such date
shall continue to have force and effect in accordance with the provisions of the
instruments evidencing such options.
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23. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify
awards or options granted to participants who are foreign nationals or employed
outside the United States to recognize differences in laws, rules, regulations
or customs of such foreign jurisdictions with respect to tax, securities,
currency, employee benefit or other matters.
24. GOVERNING LAW.
The provisions of this Plan shall be governed and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflicts of laws.
Adopted by the Board of Directors on February 20, 1997 and
most recently amended on December 28, 1998.
