UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from............TO............
Commission file number 0-15454
TANGRAM ENTERPRISE SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2214726
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11000 REGENCY PARKWAY - SUITE 401
CARY, NC 27511
(Address of Principal Executive Offices)
(919) 851-6000 WWW.TESI.COM
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
The number of outstanding shares of Common Stock, $0.01 par value per
share, as of July 31, 1997 was 15,610,079.
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS:
Balance Sheets - June 30, 1997 (Unaudited) and December 31, 1996....................................3
Statements of Operations - Three Months Ended
June 30, 1997 and 1996 (Unaudited).............................................................4
Statements of Operations - Six Months Ended
June 30, 1997 and 1996 (Unaudited)..............................................................5
Statements of Cash Flows - Six Months Ended
June 30, 1997 and 1996 (Unaudited)...............................................................6
Notes to the Financial Statements...................................................................7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................10
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...............................................................16
Signatures..............................................................................................17
</TABLE>
<PAGE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
-----------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 264 $ 176
Accounts receivable, net of allowance of $259 and $244 in
1997 and 1996 2,714 2,991
Other 284 267
-----------------------------------------
Total current assets 3,262 3,434
PROPERTY AND EQUIPMENT:
Computer equipment and software 992 595
Office equipment and furniture 422 83
Leasehold improvements 76 15
-----------------------------------------
1,490 693
Less accumulated depreciation and amortization 397 205
-----------------------------------------
Total property and equipment 1,093 488
OTHER ASSETS:
Notes receivable - officers 1,284 784
Deferred software costs, net 3,086 3,022
Costs in excess of net assets of business acquired, net 4,765 5,145
Other 46 73
-----------------------------------------
Total assets $ 13,536 $ 12,946
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 220 $ 356
Accounts payable 854 590
Accrued expenses 895 723
Deferred revenue 1,979 2,620
-----------------------------------------
Total current liabilities 3,948 4,289
LONG-TERM DEBT - SHAREHOLDER 3,650 400
SHAREHOLDERS' EQUITY
Common stock, par value $0.01, authorized 48,000,000 shares,
15,692,922 and 15,665,363 issued in 1997 and 1996 157 157
Additional paid-in capital 44,609 44,729
Accumulated deficit (38,328) (36,427)
Treasury stock, at cost, 86,018 shares and 32,311 shares in 1997
and 1996 (500) (202)
-----------------------------------------
Total shareholders' equity 5,938 8,257
-----------------------------------------
Total liabilities and shareholders' equity $ 13,536 $ 12,946
=========================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1997 1996
--------------------------------------
(UNAUDITED)
<S> <C> <C>
NET REVENUES:
Product $ 1,645 $ 2,434
Services 1,576 1,036
--------------------------------------
Total net revenues 3,221 3,470
Cost of revenues 939 889
--------------------------------------
Gross profit 2,282 2,581
OPERATING EXPENSES:
Sales and marketing 1,565 1,170
General and administrative 858 680
Research and development 794 264
--------------------------------------
Total operating expenses 3,217 2,114
--------------------------------------
(LOSS) INCOME FROM OPERATIONS (935) 467
Other (expense) income (40) 12
--------------------------------------
(Loss) income before income taxes (975) 479
Provision for income taxes - -
--------------------------------------
NET (LOSS) INCOME $ (975) $ 479
======================================
(LOSS) EARNINGS PER COMMON SHARE $ (0.06) $ 0.03
======================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,599 17,362
======================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1996
-------------------------------------
(UNAUDITED)
<S> <C> <C>
NET REVENUES:
Product $ 2,726 $ 3,574
Services 3,098 2,380
--------------------------------------
Total net revenues 5,824 5,954
Cost of revenues 1,770 1,694
--------------------------------------
Gross profit 4,054 4,260
OPERATING EXPENSES:
Sales and marketing 2,795 2,229
General and administrative 1,665 1,241
Research and development 1,443 656
--------------------------------------
Total operating expenses 5,903 4,126
--------------------------------------
(LOSS) INCOME FROM OPERATIONS (1,849) 134
Other (expense) income (52) 12
--------------------------------------
(Loss) income before income taxes (1,901) 146
Provision for income taxes - -
--------------------------------------
NET (LOSS) INCOME $ (1,901) $ 146
======================================
(LOSS) EARNINGS PER COMMON SHARE $ (0.12) $ 0.01
======================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,618 16,996
======================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1996
------------------------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (1,901) $ 146
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 207 117
Amortization 1,132 919
Cash provided by changes in working capital items:
Accounts receivable 277 (475)
Other current assets (17) (82)
Other assets 27 (6)
Accounts payable 264 3
Accrued expenses 172 526
Deferred revenue (641) (224)
------------------------------------
Net cash (used in) provided by operating activities (480) 924
INVESTING ACTIVITIES
Deferred software costs (816) (730)
Expenditures for property and equipment (812) (250)
Repayment of liabilities in connection with sale of Knozall Systems - (213)
Increase in notes receivables-officers (500) -
------------------------------------
Net cash used in investing activities (2,128) (1,193)
FINANCING ACTIVITIES
Net borrowings from shareholder 3,250 450
Net repayments on notes payable (136) (139)
Acquisition of treasury stock (500) -
Proceeds from exercise of stock options 82 60
------------------------------------
Net cash provided by financing activities 2,696 371
------------------------------------
Net increase in cash 88 102
Cash and cash equivalents, beginning of period 176 92
====================================
Cash and cash equivalents, end of period $ 264 $ 194
====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 91 $ 37
====================================
Cash paid during the period for income taxes $ - $ -
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation of the statements have been included. The interim operating results
are not necessarily indicative of the results that may be expected for a full
fiscal year. For further information, refer to the financial statements and
accompanying footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1996.
EARNINGS PER COMMON SHARE
The earnings per common share calculations for 1996 are computed based on
the weighted average number of common shares actually outstanding during each
period plus the shares that would be outstanding assuming the exercise of
dilutive stock options. The number of shares that would be issued from the
exercise of stock options has been reduced by the number of shares that could
have been purchased from the proceeds at the average market price of the
Company's stock. The loss per common share for 1997 does not include the
exercise of stock options because the effect of such inclusion would be to
reduce the loss per common share.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS
128"). This pronouncement supercedes Accounting Principles Board Opinion No. 15,
"Earnings per Share" ("APB 15"), and specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. SFAS 128 replaces the
presentation of primary EPS and fully diluted EPS with a presentation of basic
EPS and fully diluted EPS, respectively. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The calculations of EPS under APB 15 and SFAS 128 for the three and six months
ended June 30, 1997 were the same.
Also during 1997, The FASB issued pronouncements relating to the
presentation and disclosure of information related to the Company's capital
structure, comprehensive income and segment data. The Company is required to
adopt the provisions of these pronouncements, if applicable, for the year ending
December 31, 1998. The adoption of these pronouncements will not have an impact
on the Company's financial position and results of operation but may change the
presentation of certain of the Company's financial statements and related notes
and data thereto.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform to 1997 presentation. These reclassifications had no effect on net loss
or shareholders' equity as previously reported.
7
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. RESEARCH AND DEVELOPMENT COSTS
The Company capitalizes certain software development costs incurred to
enhance the Company's existing software or to develop new software. Certain
software development costs incurred after technological feasibility of the
product has been established are capitalized. Such capitalized costs are
amortized on an individual product basis commencing when a product is available
for release. Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense.
Research and development costs are comprised of the following as of June 30 (in
thousands):
1997 1996
------------- ---------------
Research and development costs $ 2,259 $ 1,386
2,259
Less - capitalized software development costs (816) (730)
============= ===============
Research and development costs, net $ 1,443 $ 656
============= ===============
Included in cost of revenues is amortization of software development costs
of $752,000 and $540,000 in 1997 and 1996, respectively.
NOTE 3. LONG-TERM DEBT - SHAREHOLDER
The Company has a $6 million unsecured revolving line of credit with
Safeguard Scientifics, Inc. ("Safeguard"), a majority shareholder of the
Company, holding approximately 67% of the Company's outstanding shares. The
amount of this line of credit was increased from $1 million to $5 million in
April 1997 and to $6 million in July 1997 to finance the cost of introducing and
marketing the new Asset Insight product. Terms of the line of credit require
monthly interest payments at the prime rate plus 1%. Principal is due thirteen
months after date of demand by Safeguard or earlier in the case of a sale of
substantially all of the assets of the Company, a business combination or upon
the closing of a debt or equity offering. Due in part to the sale-leaseback
agreement (see Note 5. Subsequent Event), as of August 8, 1997, borrowings under
the Safeguard line of credit have been reduced to $3.1 million.
NOTE 4. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 1997 and 1996, the Company has
incurred administrative service fees to Safeguard totaling approximately
$128,000 and $118,000, respectively. The Company also incurred $76,000 of
interest costs under the Safeguard revolving line of credit in 1997.
In April 1997, the Company made non-recourse, non-interest bearing loans to
certain officers of the Company in the aggregate amount of $500,000 and
repurchased from these officers a total of 86,018 shares of the Company's common
stock for a purchase price of $500,000. The stock was acquired at its current
market price as reflected by the average of the day's best bid and asked prices.
The stock is held in treasury. The loans are secured by shares of the Company's
common stock and mature at the end of three years or termination of employment,
whichever occurs first.
8
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. SUBSEQUENT EVENT
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company will sell up to $1,000,000 of computer equipment
and furniture and lease it back for a period of up to 48 months. In August, the
Company sold computer equipment and furniture with a net book value of $689,000
for approximately $826,000 under the sale-leaseback agreement. The leaseback
will be accounted for as an operating lease. The minimum monthly rental payment
under this transaction is approximately $19,900. The gain to be recognized in
this transaction will be deferred and amortized to income in proportion to
rental expense over the term of the lease.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Tangram Enterprise Solutions, Inc. (the "Company") provides
state-of-the-art enterprise-wide solutions, including asset tracking and
electronic software distribution for large heterogeneous computing environments,
encompassing mainframe, UNIX-based mini and LAN server platforms. Asset
Insight(TM), an information technology asset tracking product launched in
mid-1996, allows businesses to track changes in their information technology
asset base (including hardware and software), forward plan technology
requirements, optimize end-user productivity, and calculates the cost of
software and hardware upgrades. AM:PM(R) is the Company's industry leading
solution for automated software distribution, data distribution and collection,
and remote resource management. AM:PM, along with expert consulting services,
provides businesses with solutions to manage an enterprise's heterogeneous and
remote information technology systems. The Company is a member of the Safeguard
Scientifics, Inc. ("Safeguard") partnership of companies. Safeguard supports
technology-driven growth companies with an emphasis on information system
markets. Safeguard owns approximately 67% of the Company.
The Company believes that businesses are moving toward an enterprise-wide
computing environment where more desktop personal computers will be
interconnected into large local-area and wide-area networks, as well as the
Internet, and administered by corporate MIS departments. The Company believes
that the continued expansion of heterogeneous computer networks and current
downsizing and rightsizing trends are forcing businesses to seek automated
solutions for tracking and managing their enterprise-wide information technology
("IT") assets. The Company believes this trend will continue and that its new
product, Asset Insight will enable the Company to attain a leading position in
the asset tracking market. While the Company expects the market's shift toward
enterprise and Internet products to continue, there can be no assurance that the
Company's Asset Insight products will be successful or will gain customer
acceptance.
The Company has historically experienced a certain degree of variability in
its quarterly revenue and earnings patterns. This variability is typically
driven by significant events that impact the recognition of product and
implementation service revenues. Examples of such events include the timing of
major enterprise-wide sales of the new Asset Insight product, "one-time" payment
from existing customers for license expansion rights (required to install on a
larger or an additional computer base), completion and customer acceptance of
significant implementation roll outs and the related revenue recognition.
Fluctuations in the timing and amounts of additional sales and marketing and
general and administrative expenses may also cause profitability to fluctuate
from one quarter to another. Also, during a significant product launching, such
as the Asset Insight product, increase in sales and marketing and general and
administrative expenses will occur prior to the realization of incremental
revenues.
Since early 1996, the Company has refocused its business on the asset
tracking market and the launch of its new Asset Insight product. The results of
the Company hereafter, and the forward-looking statements contained in the
following discussion, are therefore subject to various risks and uncertainties
relating to the development of the asset tracking business, which may cause the
Company's actual results to differ materially from the results contemplated.
Such uncertainties include the ability of the Company to sell its new Asset
Insight product to major accounts with full enterprise-wide deployment, the
reliability of the Asset Insight product to work in major corporate enterprises,
the possibility of the introduction of superior competitive products, the length
of time required for the Company to realize sufficient revenue from sales of the
product through the reseller sales channel, the ability of the Company to absorb
the increase in sales and marketing expenses and other operational expenses of
launching the Asset Insight product, the length of time required to develop a
sustainable stream of revenue from the sale of the Asset Insight product, the
ability to recruit key technical, sales and marketing personnel and the ability
of the Company to secure adequate financing on reasonable terms or at all.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The Company reported a net loss of $975,000, or $0.06 per share, on
revenues of $3.2 million for the three month period ended June 30, 1997 as
compared to net income of $479,000, or $0.03 per share on revenue of $3.5
million for the comparable period in 1996. These results reflect the Company's
strategy to establish a leadership position in the asset tracking market.
Accordingly, the Company has more than tripled its net investment in research
and development and increased its investment in sales and marketing 34%
during the three months ended June 30, 1997 when compared to the same period
in 1996. For the six months ended June 30, 1997, the Company reported a net
loss of $1.9 million, or $0.12 per share, on revenues of $5.8 million compared
to net income of $146,000, or $0.01 per share (assuming full dilution), on
revenue of $6.0 million for the comparable period in 1996. The net losses in
1997 when compared to 1996 are primarily as a result of the Company's
substantial investment in promoting its Asset Insight product and the personnel
increases to develop and support the Asset Insight rollout. The increased
operating expenses and the resulting net losses reflect the substantial
expenditures for research and development, the marketing campaign, staffing, and
infrastructure development to support the Asset Insight product rollout. In
cooperation with channel partners, the Company's marketing efforts to date have
been directed towards defining the market and creating product awareness. The
Company expects to continue devoting substantial resources to developing sales
and to product research and development.
NET REVENUES
Total net revenues for the three months ended June 30, 1997 decreased
$249,000, or 7%, to $3.2 million from $3.5 million for the comparable period in
1996. For the six-month period ended June 30, 1997, total net revenues decreased
$130,000, or 2%, to $5.8 million in 1997 from $6.0 million in 1996. The
variability of the quarterly revenue is driven by significant events that impact
the recognition of product and service revenues. Examples of such events include
the timing of major enterprise-wide sales of the new Asset Insight product,
"one-time" payment from existing customers for license expansion rights
(required to install on a larger or an additional computer base), completion and
customer acceptance of significant implementation roll outs and the related
revenue recognition.
Product revenues include Asset Insight sales; AM:PM and related product
revenue; and traditional mainframe product sales of Arbiter and gateways
including product upgrades and add-ons. For the three and six months ended June
30, 1997, product revenues decreased to $1.6 million and $2.7 million,
respectively, from $2.4 million and $3.6 million, respectively, for the same
period in 1996. The 1996 revenues reflect a $1.7 million combined sale of Asset
Insight and AM:PM to a single customer in June 1996. Revenues for the six months
ended June 30, 1996 include LAN product revenues of $292,000. The LAN product
division was sold by the Company in March 1996.
Service revenues include software and hardware maintenance contracts,
implementation services, and training and support services not otherwise covered
under maintenance agreements. Service revenues for the quarter increased by 52%
to $1.6 million in 1997 from $1.0 million in 1996, due principally to higher
revenues from implementation services of $213,000 and increased maintenance fees
of $334,000. For the six months ended June 30, 1997 and 1996, respectively,
service revenues increased 30% to 3.1 million from $2.4 million for the reasons
stated above.
COST OF REVENUES
Cost of revenues includes costs principally related to the distribution of
licensed software and hardware products and the amortization of capitalized
software development costs. Cost of revenues also reflects the cost of the
direct labor force, including the associated personnel, travel and subsistence,
and occupancy costs incurred in connection with providing implementation and
maintenance services. As a percentage of total net revenues, cost of revenues
for the three and six months ended June 30, 1997 increased to 29% and 30%,
respectively, from 26% and 28%, respectively, in 1996. These
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
COST OF REVENUES
increases are due primarily to higher amortization of deferred development costs
associated with the development of the Asset Insight product, which became
generally available to customers in mid-1996.
SALES AND MARKETING EXPENSES
With the introduction of Asset Insight, the Company converted from a direct
sales channel to an indirect sales organization for the distribution of this
product. By developing relationships with resellers, systems integrators and
other third-party vendors that provide consulting and integration services and
delivers products developed for this market, the Company seeks to acquire an
early presence in the market, cover the expected demand for the product, manage
the geographically dispersed nature of the target market, and build a large
number of salespeople in the field. As such, sales and marketing expenses
increased 34% to $1.6 million for the three months ended June 30, 1997 from $1.2
million for the comparable period in 1996. For the six months ended June 30,
1997 and 1996, sales and marketing expenses were $2.8 million and $2.2 million,
respectively, representing a 25% increase in 1997. Selling and marketing
expenses also increased as a percentage of net revenues for the three and six
month periods to 49% and 48%, respectively, in 1997 from 34% and 37%,
respectively, in 1996. These increases were primarily due to the Company's
investment in sales and marketing staff; increased travel costs; and marketing
related to the launching of the new Asset Insight product. The number of sales
and marketing personnel has increased two-fold during the first six months of
1997 enabling the Company to develop an indirect sales network and to focus on
defining the market for the new Asset Insight product. During the first six
months of 1997, the Company has developed relationships with ten additional
resellers for the marketing of Asset Insight. The Company expects to continue to
expand its indirect sales and marketing force and to increase its product
marketing expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended June 30, 1997, general and administrative
expenses increased to $858,000 from $680,000 for the same period in 1996. As a
percentage of total net revenues, general and administrative expenses increased
to 27% in 1997 from 20% in 1996. General and administrative expenses increased
for the six months ended June 1997 to $1.7 million from $1.2 million for the
comparable period in 1996. The general and administrative expenses as a
percentage of net revenues for the six month period increased to 29% in 1997
from 21% in 1996. These increases are the result of increased expenses for
payroll-related costs, facility and other expenses related to building the
infrastructure to support the Asset Insight product rollout. In March 1997, the
Company relocated and increased its leased headquarters' square footage from
23,000 square feet to 49,600 square feet to accommodate the company-wide
staffing increases. As of June 30, 1997 the general and administrative staffing
level had increased to 22 personnel, an increase of 6 employees from the
beginning of the year. The Company expects the current administrative staffing
level to be sufficient for the remainder of the year.
RESEARCH AND DEVELOPMENT
Gross research and development costs increased 72% to $1.3 million from
$753,000 for the three months ended June 30, 1997 and 1996, respectively.
Comparing the six months ended June 30, 1997 and 1996; gross research and
development costs increased 63% to $2.3 million from $1.4 million, respectively.
Gross research and development costs for the three months and six months ended
June 30 increased as a percentage of net revenues to 40% and 39%, respectively,
in 1997 from 22% and 23%, respectively, in 1996. These increases reflect a 37%
increase in the number of personnel during the first six months of 1997 and the
related higher staffing costs associated with the Company's continuing
commitment to developing enhancements and improvements of the new Asset Insight
product and its other product lines.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT
Net research and development expenses increased to $794,000 in the three
months ended June 30, 1997 from $264,000 for the same period in 1996. Net
research and development expenses for the six months ended June 30, 1997 and
1996 increased to $1.4 million from $656,000,respectively. The increases are due
primarily to higher staffing costs and lower deferral of development costs. As a
percentage of gross research and development expenditures, deferred development
costs for the three and six months ended June 30, 1997 were 39% and 36%,
respectively, as compared to 53% and 65%, respectively, in 1996. The Company
will continue to commit substantial resources to research and development
efforts in the future.
PROVISION FOR INCOME TAXES
There was no provision for income taxes in 1997 and 1996 as a result of
losses reported in 1997 and the net operating loss carryforwards available for
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations through borrowings and cash flow from
operations. At June 30, 1997, the Company had cash of $264,000 and a working
capital deficit in the amount of $686,000 compared to a deficit of $855,000 at
December 31, 1996. To fund the Company's growth plan, the Company has arranged a
$6 million unsecured revolving line of credit with Safeguard. The amount of this
line of credit was increased from $1 million to $5 million in April 1997 and
increased to $6 million in July 1997 to finance the cost of rolling out the new
Asset Insight product. Terms of the line of credit require monthly interest
payments at the prime rate plus 1%. Principal is due thirteen months after date
of demand by Safeguard or earlier in the case of a sale of substantially all of
the assets of the Company, a business combination or upon the closing of a sale
of a debt or equity offering. Due in part to the sale-leaseback agreement
discussed below, as of August 8, 1997, borrowings under the Safeguard line of
credit have been reduced to $3.1 million.
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company will sell up to $1,000,000 of computer equipment
and furniture and lease it back for a period of up to 48 months. In August, the
Company sold computer equipment and furniture with a net book value of $689,000
for approximately $826,000 under the sale-leaseback agreement. The leaseback
will be accounted for as an operating lease. The minimum monthly rental payment
under this transaction is approximately $19,900. The gain to be recognized in
this transaction will be deferred and amortized to income in proportion to
rental expense over the term of the lease.
At June 30, 1997, notes payable included a promissory note with an
outstanding balance of $112,500. Principal and interest payments are due monthly
with interest at 6%. The note matures in March 1998. In addition, the Company
has a loan with a bank with an outstanding balance of $108,000 at June 30, 1997.
Interest and principal payments are due monthly with interest at the prime rate
plus 1/4%. The loan is collateralized by certain assets of the Company and
matures in November 1997.
Net cash used in operating activities was $480,000 for the six months ended
June 30, 1997 primarily as a result of the reported net loss. Net cash used in
investing activities was $2.1 million for the six months ended June 30, 1997.
The primary use of these funds included $816,000 for deferred software costs and
$812,000 for the purchase of furniture, equipment, and leasehold improvements
for the additional staff hired to support the anticipated growth of the
business. The
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Company also made non-recourse; non-interest-bearing loans to certain officers
of the Company in the aggregate amount of $500,000. Net cash provided by
financing activities reflects $3.3 million of borrowings under the Safeguard
line of credit and proceeds from exercising of stock options of $82,000 offset
by payments of $136,000 towards debt principal repayment and $500,000 for the
repurchase of 86,018 shares of common stock from officers as described below.
In April 1997, the Company made non-recourse, non-interest-bearing loans to
certain officers of the Company in the aggregate amount of $500,000 and
repurchased from these officers a total of 86,018 shares of the Company's common
stock for a purchase price of $500,000. The stock was acquired at its current
market price as reflected by the average of the day's best bid and asked prices.
The loans are secured by shares of the Company's common stock and mature at the
end of three years or termination of employment, whichever occurs first. The
loans and stock buyback were made for the purpose of assisting the
aforementioned officers in satisfying their 1996 tax obligation arising from the
exercise of stock options in 1996. The Company and the officers are in the
process of finalizing the documentation evidencing the terms and conditions of
the loan and stock repurchase transaction.
In the past, the Company has generated cash from operating activities to
fund development and finance activities despite its net losses due to
significant levels of depreciation and amortization. However, cash requirements
are forecasted to continue to increase through 1997 due to the planned
expenditures for the launching, marketing and the increase staffing required to
enhance, support and market the Asset Insight product. As stated above,
Safeguard has agreed to assist the Company's launching of the Asset Insight
product by providing a $6 million line of credit to fund cash requirements, of
which $2.9 million is available for future borrowings as of August 8, 1997. The
Company can also borrow up to $1.0 million under a sale-leaseback agreement of
its furniture and equipment, of which $174,000 is available for future
borrowings as of August 8, 1997. However, the Company anticipates that these
credit facilities may not be adequate to meet the new product rollout expenses.
As a result, the Company is pursuing other sources of funds including, but not
limited to, debt or equity financing. However, the Company has no present
understanding, commitment, or agreement with respect to any such transaction.
Accordingly, there can be no assurance that the Company will have access to
adequate debt or equity financing or that, if available, it will be under terms
and conditions satisfactory to the Company.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1997, the Annual Meeting of Shareholders of the Company was
held at which the following matters were submitted to and the requisite number
of shares of Common Stock of the Company were voted on by the stockholders, with
the results set forth below:
a) The following persons were elected to the Board of Directors to serve
as directors until the next annual meeting of shareholders in 1998 and
until their respective successors are duly elected and qualified. Each
person received the number of votes set forth next to their names
below:
PROPOSAL I - ELECTION OF DIRECTORS
FOR WITHHELD
W. Christopher Jesse 13,980,236 18,305
Steven F. Kuekes 13,980,236 18,305
John F. Owens 13,980,236 18,305
Charles A. Root 13,980,236 18,305
Carl G. Sempier 13,980,204 18,337
Harry Wallaesa 13,978,236 20,305
Carl Wilson 13,980,236 18,305
PROPOSAL II - PROPOSAL TO ADOPT THE COMPANY'S 1997 EQUITY
COMPENSATION PLAN
b) The shareholders approved and adopted the Tangram Enterprise Solutions,
Inc. 1997 Equity Compensation Plan (the "1997 Plan") and as a result of
the adoption of the 1997 Plan, the Board authorized an aggregate of up
to 2,000,000 shares of authorized, unissued shares of Common Stock of
the Company, $0.01 par value be reserved for issuance. The votes cast
for and against and the number of abstentions are set forth below:
FOR AGAINST ABSTAINING
Votes to Approve the 1997
Equity Compensation Plan 12,193,782 35,590 31,746
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
Number Exhibit Description
4.1* The Company's 1997 Equity Compensation Plan
10.1 First Amended Revolving Note dated April 2, 1997,
between the Company and Safeguard Scientifics, Inc.
(1)
27* Financial Data Schedule
* Filed herewith.
(1) Incorporated by reference from Registrant's Form 10-Q for the
quarter ended March 31, 1997 dated May 13, 1997 and made a
part hereof by such reference.
b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the
quarter ended June 30, 1997.
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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.
TANGRAM ENTERPRISE SOLUTIONS, INC.
DATE AUGUST 13, 1997 /s/ John N. Nelli
-------------- -----------------
John N. Nelli
Chief Financial Officer and Senior Vice President
(Principal Financial Officer)
/s/ Diane K. Murdock
--------------------
Diane K. Murdock
Chief Accounting Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Except as indicated by footnote, all of the following exhibits were filed
with the Company's Current Report on Form 10-Q, dated June 30, 1997. For
exhibits incorporated by reference, the location of the exhibit in the previous
filing is indicated in parentheses.
Exhibit
Number Exhibit Description
4.1* The Company's 1997 Equity Compensation Plan
10.1 First Amended Revolving Note dated April 2, 1997,
between the Company and Safeguard Scientifics, Inc.
(1)
27* Financial Data Schedule
* Filed herewith.
(1) Incorporated by reference from Registrant's Form 10-Q for the
quarter ended March 31, 1997 dated May 13, 1997 and made a
part hereof by such reference.
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EXHIBIT 4.1
TANGRAM ENTERPRISE SOLUTIONS, INC.
1997 EQUITY COMPENSATION PLAN
The purpose of the Tangram Enterprise Solutions, Inc. 1997 Equity
Compensation Plan (the "Plan") is to provide (i) designated employees of Tangram
Enterprise Solutions, Inc. (the "Company") and its subsidiaries, (ii) certain
Key Advisors and advisors who perform services for the Company or its
subsidiaries and (iii) non-employee members of the Board of Directors of the
Company (the "Board") with the opportunity to receive grants of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted stock
and performance units. The Company believes that the Plan will encourage the
participants to contribute materially to the growth of the Company, thereby
benefiting the Company's shareholders, and will align the economic interests of
the participants with those of the shareholders.
1. Administration
(a) Committee. The Plan shall be administered and interpreted by a
committee appointed by the Board (the "Committee") consisting of two or more
persons appointed by the Board, all of whom shall be "non-employee directors" as
defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and also may be "outside directors" as defined under
section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and
related Treasury regulations. References in the Plan to the "Committee" shall be
deemed to include the Board, with respect to ratification or approval of grants
made to Non-Employee Directors.
(b) Committee Authority. The Committee shall have the sole authority to
(i) determine the individuals to whom grants shall be made under the Plan, (ii)
determine the type, size and terms of the grants to be made to each such
individual, (iii) determine the time when the grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability and (iv) deal
with any other matters arising under the Plan.
(c) Committee Determinations. The Committee shall have full power and
authority to administer and interpret the Plan, to make factual determinations
and to adopt or amend such rules, regulations, agreements and instruments for
implementing the Plan and for the conduct of its business as it deems necessary
or advisable, in its sole discretion. The Committee's interpretations of the
Plan and all determinations made by the Committee pursuant to the powers vested
in it hereunder shall be conclusive and binding on all persons having any
interest in the Plan or in any awards granted hereunder. All powers of the
Committee shall be executed in its sole discretion, in the best interest of the
Company, not as a fiduciary, and in keeping with the objectives of the Plan and
need not be uniform as to similarly situated individuals.
2. Grants
Awards under the Plan may consist of grants of incentive stock options
as described in Section 5 ("Incentive Stock Options"), nonqualified stock
options as described in Section 5 ("Nonqualified Stock Options") (Incentive
Stock Options and Nonqualified Stock Options are collectively referred to as
"Options"), restricted stock as described in Section 6 (Restricted Stock"),
stock appreciation rights as described in Section 7 ("SARs"), and performance
units as described in Section 8 ("Performance Units") (hereinafter collectively
referred to as "Grants"). All Grants shall be subject to the terms and
conditions set forth herein and to such other terms and conditions consistent
with this Plan as the Committee deems appropriate and as are specified in
writing by the Committee to the individual in a grant instrument (the "Grant
Instrument") or an amendment to the Grant Instrument. The Committee shall
approve the form and provisions of each Grant Instrument. Grants under a
particular Section of the Plan need not be uniform as among the grantees.
3. Shares Subject to the Plan
(a) Shares Authorized. Subject to the adjustment specified below, the
aggregate number of shares of common stock of the Company ("Company Stock") that
may be issued or transferred under the Plan is 2,000,000 shares. The maximum
aggregate number of shares of Company Stock that shall be subject to Grants made
under the Plan to any individual during any calendar year shall be 500,000
shares. The shares may be authorized but unissued shares of
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Company Stock or reacquired shares of Company Stock, including shares purchased
by the Company on the open market for purposes of the Plan. If and to the extent
Options or SARs granted under the Plan terminate, expire, or are canceled,
forfeited, exchanged or surrendered without having been exercised, or if any
shares of Restricted Stock or Performance Units are forfeited, the shares
subject to such Grants shall again be available for purposes of the Plan.
(b) Adjustments. If there is any change in the number or kind of shares
of Company Stock outstanding (i) by reason of a stock dividend, spin-off,
recapitalization, stock split or combination or exchange of shares, (ii) by
reason of a merger, reorganization or consolidation in which the Company is the
surviving corporation, (iii) by reason of a reclassification or change in par
value, or (iv) by reason of any other extraordinary or unusual event affecting
the outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spin-off or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Grants, the maximum number of shares of Company Stock that
any individual participating in the Plan may be granted in any year, the number
of shares covered by outstanding Grants, the kind of shares issued under the
Plan, and the price per share or the applicable market value of such Grants
shall be appropriately adjusted by the Committee to reflect any increase or
decrease in the number of, or change in the kind or value of, issued shares of
Company Stock to preclude, to the extent practicable, the enlargement or
dilution of rights and benefits under such Grants; provided, however, that any
fractional shares resulting from such adjustment shall be eliminated. Any
adjustments determined by the Committee shall be final, binding and conclusive.
4. Eligibility for Participation
(a) Eligible Persons. All employees of the Company and its subsidiaries
("Employees"), including Employees who are officers or members of the Board, and
members of the Board who are not Employees ("Non-Employee Directors") shall be
eligible to participate in the Plan. Key Advisors and advisors who perform
services to the Company or any of its subsidiaries ("Key Advisors") shall be
eligible to participate in the Plan if the Key Advisors render bona fide
services and such services are not in connection with the offer or sale of
securities in a capital-raising transaction.
(b) Selection of Grantees. The Committee shall select the Employees,
Non-Employee Directors and Key Advisors to receive Grants and shall determine
the number of shares of Company Stock subject to a particular Grant in such
manner as the Committee determines. Employees, Key Advisors and Non-Employee
Directors who receive Grants under this Plan shall hereinafter be referred to as
"Grantees".
5. Granting of Options
(a) Number of Shares. The Committee shall determine the number of
shares of Company Stock that will be subject to each Grant of Options to
Employees, Non-Employee Directors and Key Advisors.
(b) Type of Option and Price.
(i) The Committee may grant Incentive Stock Options that are
intended to qualify as "incentive stock options" within the meaning of section
422 of the Code or Nonqualified Stock Options that are not intended so to
qualify or any combination of Incentive Stock Options and Nonqualified Stock
Options, all in accordance with the terms and conditions set forth herein.
Incentive Stock Options may be granted only to Employees. Nonqualified Stock
Options may be granted to Employees, Non-Employee Directors and Key Advisors.
(ii) The purchase price (the "Exercise Price") of Company
Stock subject to an Option shall be determined by the Committee and may be equal
to, greater than, or less than the Fair Market Value (as defined below) of a
share of Company Stock on the date the Option is granted; provided, however,
that (x) the Exercise Price of an Incentive Stock Option shall be equal to, or
greater than, the Fair Market Value of a share of Company Stock on the date the
Incentive Stock Option is granted and (y) an Incentive Stock Option may not be
granted to an Employee who, at the time of grant, owns stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary of the Company, unless the Exercise
Price per share is not less than 110% of the Fair Market Value of Company Stock
on the date of grant.
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(iii) The Fair Market Value per share shall be determined as
follows: (x) if the principal trading market for the Company Stock is a national
securities exchange or the NASDAQ National Market, the last reported sale price
thereof on the relevant date or (if there were no trades on that date) the
latest preceding date upon which a sale was reported, or (y) if the Company
Stock is not principally traded on such exchange or market, the mean between the
last reported "bid" and "asked" prices of Company Stock on the relevant date, as
reported on NASDAQ or, if not so reported, as reported by the National Daily
Quotation Bureau, Inc. or as reported in a customary financial reporting
service, as applicable and as the Committee determines. If the Company Stock is
not publicly traded or, if publicly traded, is not subject to reported
transactions or "bid" or "asked" quotations as set forth above, the Fair Market
Value per share shall be as determined by the Committee.
(c) Option Term. The Committee shall determine the term of each Option.
The term of any Option shall not exceed ten years from the date of grant.
However, an Incentive Stock Option that is granted to an Employee who, at the
time of grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company, or any parent or subsidiary
of the Company, may not have a term that exceeds five years from the date of
grant.
(d) Exercisability of Options. Options shall become exercisable in
accordance with such terms and conditions, consistent with the Plan, as may be
determined by the Committee and specified in the Grant Instrument or an
amendment to the Grant Instrument. The Committee may accelerate the
exercisability of any or all-outstanding Options at any time for any reason.
(e) Termination of Employment, Disability or Death.
(i) Except as provided below, and unless otherwise determined
by the Committee at or after grant, an Option may only be exercised while the
Grantee is employed by the Company as an Employee, Key Advisor or member of the
Board. In the event that a Grantee ceases to be employed by the Company for any
reason other than a "disability", death or "termination for cause", any Option
which is otherwise exercisable by the Grantee shall terminate unless exercised
within 90 days after the date on which the Grantee ceases to be employed by the
Company (or within such other period of time as may be specified by the
Committee), but in any event no later than the date of expiration of the Option
term. Any of the Grantee's Options that are not otherwise exercisable as of the
date on which the Grantee ceases to be employed by the Company shall terminate
as of such date.
(ii) In the event the Grantee ceases to be employed by the
Company on account of a "termination for cause" by the Company, any Option held
by the Grantee shall terminate as of the date the Grantee ceases to be employed
by the Company.
(iii) In the event the Grantee ceases to be employed by the
Company because the Grantee is "disabled", any Option which is otherwise
exercisable by the Grantee shall terminate unless exercised within one year
after the date on which the Grantee ceases to be employed by the Company (or
within such other period of time as may be specified by the Committee), but in
any event no later than the date of expiration of the Option term. Any of the
Grantee's Options which are not otherwise exercisable as of the date on which
the Grantee ceases to be employed by the Company shall terminate as of such
date.
(iv) If the Grantee dies while employed by the Company or
within 90 days after the date on which the Grantee ceases to be employed on
account of a termination of employment specified in Section 5(e)(i) above (or
within such other period of time as may be specified by the Committee), any
Option that is otherwise exercisable by the Grantee shall terminate unless
exercised within one year after the date on which the Grantee ceases to be
employed by the Company (or within such other period of time as may be specified
by the Committee), but in any event no later than the date of expiration of the
Option term. Any of the Grantee's Options that are not otherwise exercisable as
of the date on which the Grantee ceases to be employed by the Company shall
terminate as of such date.
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(v) For purposes of this Section 5(e) and Sections 6, 7
and 8:
(A) The term "Company" shall mean the Company and its parent
and subsidiary corporations.
(B) "Employed by the Company" shall mean employment or service
as an Employee, Key Advisor or member of the Board (so that, for
purposes of exercising Options and SARs and satisfying conditions with
respect to Restricted Stock and Performance Units, a Grantee shall not
be considered to have terminated employment or service until the
Grantee ceases to be an Employee, Key Advisor and member of the Board),
unless the Committee determines otherwise.
(C) "Disability" shall mean a Grantee's becoming disabled
within the meaning of section 22(e)(3) of the Code.
(D) "Termination for cause" shall mean, except to the extent
specified otherwise by the Committee, a finding by the Committee that
the Grantee has breached his or her employment, service,
noncompetition, nonsolicitation or other similar contract with the
Company, or has been engaged in disloyalty to the Company, including,
without limitation, fraud, embezzlement, theft, commission of a felony
or dishonesty in the course of his or her employment or service, or has
disclosed trade secrets or confidential information of the Company to
persons not entitled to receive such information. In the event a
Grantee's employment is terminated for cause, in addition to the
immediate termination of all Grants, the Grantee shall automatically
forfeit all shares underlying any exercised portion of an Option for
which the Company has not yet delivered the share certificates, upon
refund by the Company of the Exercise Price paid by the Grantee for
such shares.
(f) Exercise of Options. A Grantee may exercise an Option that has
become exercisable, in whole or in part, by delivering a notice of exercise to
the Company with payment of the Exercise Price. The Grantee shall pay the
Exercise Price for an Option as specified by the Committee (x) in cash, (y) with
the approval of the Committee, by delivering shares of Company Stock owned by
the Grantee for the period necessary to avoid a charge to the Company's earnings
for financial reporting purposes (including Company Stock acquired in connection
with the exercise of an Option, subject to such restrictions as the Committee
deems appropriate) and having a Fair Market Value on the date of exercise equal
to the Exercise Price, or (z) by such other method as the Committee may approve,
including, but not limited to, payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. Shares of
Company Stock used to exercise an Option shall have been held by the Grantee for
the requisite period of time to avoid adverse accounting consequences to the
Company with respect to the Option. The Grantee shall pay the Exercise Price and
the amount of any withholding tax due (pursuant to Section 9) at the time of
exercise.
(g) Limits on Incentive Stock Options. Each Incentive Stock Option
shall provide that if the aggregate Fair Market Value of the stock on the date
of the grant with respect to which Incentive Stock Options are exercisable for
the first time by a Grantee during any calendar year, under the Plan or any
other stock option plan of the Company or a parent or subsidiary, exceeds
$100,000, then the option, as to the excess, shall be treated as a Nonqualified
Stock Option. An Incentive Stock Option shall not be granted to any person who
is not an Employee of the Company or a parent or subsidiary (within the meaning
of section 424(f) of the Code).
6. Restricted Stock Grants
The Committee may issue or transfer shares of Company Stock to an
Employee or Key Advisor under a Grant of Restricted Stock, upon such terms, as
the Committee deems appropriate. The following provisions are applicable to
Restricted Stock:
(a) General Requirements. Shares of Company Stock issued or transferred
pursuant to Restricted Stock Grants may be issued or transferred for
consideration or for no consideration, as determined by the Committee. The
Committee may establish conditions under which restrictions on shares of
Restricted Stock shall lapse over a period of time or according to such other
criteria as the Committee deems appropriate. The period of time during which the
Restricted Stock will remain subject to restrictions will be designated in the
Grant Instrument as the "Restriction Period."
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(b) Number of Shares. The Committee shall determine the number of
shares of Company Stock to be issued or transferred pursuant to a Restricted
Stock Grant and the restrictions applicable to such shares.
(c) Requirement of Employment. If the Grantee ceases to be employed by
the Company (as defined in Section 5(e)) during a period designated in the Grant
Instrument as the Restriction Period, or if other specified conditions are not
met, the Restricted Stock Grant shall terminate as to all shares covered by the
Grant as to which the restrictions have not lapsed, and those shares of Company
Stock must be immediately returned to the Company. The Committee may, however,
provide for complete or partial exceptions to this requirement, as it deems
appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate. During
the Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Restricted Stock except to a Successor
Grantee under Section 11(a). Each certificate for a share of Restricted Stock
shall contain a legend giving appropriate notice of the restrictions in the
Grant. The Grantee shall be entitled to have the legend removed from the stock
certificate covering the shares subject to restrictions when all restrictions on
such shares have lapsed. The Committee may determine that the Company will not
issue certificates for shares of Restricted Stock until all restrictions on such
shares have lapsed, or that the Company will retain possession of certificates
for shares of Restricted Stock until all restrictions on such shares have
lapsed.
(e) Right to Vote and to Receive Dividends. Unless the Committee
determines otherwise, during the Restriction Period, the Grantee shall have the
right to vote shares of Restricted Stock and to receive any dividends or other
distributions paid on such shares, subject to any restrictions deemed
appropriate by the Committee.
(f) Lapse of Restrictions. All restrictions imposed on Restricted Stock
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Committee. The Committee may
determine, as to any or all Restricted Stock Grants, that the restrictions shall
lapse without regard to any Restriction Period.
7. Stock Appreciation Rights
(a) General Requirements. The Committee may grant stock appreciation
rights ("SARs") to an Employee or Key Advisor separately or in tandem with any
Option (for all or a portion of the applicable Option). Tandem SARs may be
granted either at the time the Option is granted or at any time thereafter while
the Option remains outstanding; provided, however, that, in the case of an
Incentive Stock Option, SARs may be granted only at the time of the Grant of the
Incentive Stock Option. The Committee shall establish the base amount of the SAR
at the time the SAR is granted. Unless the Committee determines otherwise, the
base amount of each SAR shall be equal to the per share Exercise Price of the
related Option or, if there is no related Option, the Fair Market Value of a
share of Company Stock as of the date of Grant of the SAR.
(b) Tandem SARs. In the case of tandem SARs, the number of SARs granted
to a Grantee that shall be exercisable during a specified period shall not
exceed the number of shares of Company Stock that the Grantee may purchase upon
the exercise of the related Option during such period. Upon the exercise of an
Option, the SARs relating to the Company Stock covered by such Option shall
terminate. Upon the exercise of SARs, the related Option shall terminate to the
extent of an equal number of shares of Company Stock.
(c) Exercisability. A SAR shall be exercisable during the period
specified by the Committee in the Grant Instrument and shall be subject to such
vesting and other restrictions as may be specified in the Grant Instrument. The
Committee may accelerate the exercisability of any or all outstanding SARs at
any time for any reason. SARs may only be exercised while the Grantee is
employed by the Company or during the applicable period after termination of
employment as described in Section 5(e). A tandem SAR shall be exercisable only
during the period when the Option to which it is related is also exercisable. No
SAR may be exercised for cash by an officer or director of the Company who is
subject to Section 16 of the Exchange Act, except in accordance with Rule 16b-3
under the Exchange Act.
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(d) Value of SARs. When a Grantee exercises SARs, the Grantee shall
receive in settlement of such SARs an amount equal to the value of the stock
appreciation for the number of SARs exercised, payable in cash, Company Stock or
a combination thereof. The stock appreciation for a SAR is the amount by which
the Fair Market Value of the underlying Company Stock on the date of exercise of
the SAR exceeds the base amount of the SAR as described in Subsection (a).
(e) Form of Payment. The Committee shall determine whether the
appreciation in a SAR shall be paid in the form of cash, shares of Company
Stock, or a combination of the two, in such proportion, as the Committee deems
appropriate. For purposes of calculating the number of shares of Company Stock
to be received, shares of Company Stock shall be valued at their Fair Market
Value on the date of exercise of the SAR. If shares of Company Stock are to be
received upon exercise of a SAR, cash shall be delivered in lieu of any
fractional share.
8. Performance Units
(a) General Requirements. The Committee may grant performance units
("Performance Units") to an Employee or Key Advisor. Each Performance Unit shall
represent the right of the Grantee to receive an amount based on the value of
the Performance Unit, if performance goals established by the Committee are met.
A Performance Unit shall be based on the Fair Market Value of a share of Company
Stock or on such other measurement base, as the Committee deems appropriate. The
Committee shall determine the number of Performance Units to be granted and the
requirements applicable to such Units.
(b) Performance Period and Performance Goals. When Performance Units
are granted, the Committee shall establish the performance period during which
performance shall be measured (the "Performance Period"), performance goals
applicable to the Units ("Performance Goals") and such other conditions of the
Grant as the Committee deems appropriate. Performance Goals may relate to the
financial performance of the Company or its operating units, the performance of
Company Stock, individual performance, or such other criteria as the Committee
deems appropriate.
(c) Payment with respect to Performance Units. At the end of each
Performance Period, the Committee shall determine to what extent the Performance
Goals and other conditions of the Performance Units are met and the amount, if
any, to be paid with respect to the Performance Units. Payments with respect to
Performance Units shall be made in cash, in Company Stock, or in a combination
of the two, as determined by the Committee.
(d) Requirement of Employment. If the Grantee ceases to be employed by
the Company (as defined in Section 5(e)) during a Performance Period, or if
other conditions established by the Committee are not met, the Grantee's
Performance Units shall be forfeited. The Committee may, however, provide for
complete or partial exceptions to this requirement, as it deems appropriate.
9. Withholding of Taxes
(a) Required Withholding. All Grants under the Plan shall be subject to
applicable federal (including FICA), state and local tax withholding
requirements. The Company shall have the right to deduct from all Grants paid in
cash, or from other wages paid to the Grantee, any federal, state or local taxes
required by law to be withheld with respect to such Grants. In the case of
Options and other Grants paid in Company Stock, the Company may require the
Grantee or other person receiving such shares to pay to the Company the amount
of any such taxes that the Company is required to withhold with respect to such
Grants, or the Company may deduct from other wages paid by the Company the
amount of any withholding taxes due with respect to such Grants.
(b) Election to Withhold Shares. If the Committee so permits, a Grantee
may elect to satisfy the Company's income tax withholding obligation with
respect to an Option, SAR, Restricted Stock or Performance Units paid in Company
Stock by having shares withheld up to an amount that does not exceed the
Grantee's maximum marginal tax rate for federal (including FICA), state and
local tax liabilities. The election must be in a form and manner prescribed by
the Committee and shall be subject to the prior approval of the Committee.
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10. Qualified Performance-Based Compensation.
(a) Designation as Qualified Performance-Based Compensation. The
Committee may determine that Performance Units or Restricted Stock granted to a
Grantee shall be considered "qualified performance-based compensation" under
section 162(m) of the Code. The provisions of this Section 10 shall apply to
Grants of Performance Units and Restricted Stock that are to be considered
"qualified performance-based compensation" under section 162(m) of the Code.
(b) Performance Goals. When Performance Units or Restricted Stock that
are to be considered "qualified performance-based compensation" are granted, the
Committee shall establish in writing (i) the objective performance goals that
must be met in order for restrictions on the Restricted Stock to lapse or
amounts to be paid under the Performance Units, (ii) the Performance Period
during which the performance goals must be met, (iii) the threshold, target and
maximum amounts that may be paid if the performance goals are met, and (iv) any
other conditions, including without limitation provisions relating to death,
disability, other termination of employment or Change of Control, that the
Committee deems appropriate and consistent with the Plan and section 162(m) of
the Code. The performance goals may relate to the Grantee's business unit or the
performance of the Company and its subsidiaries as a whole, or any combination
of the foregoing. The Committee shall use objectively determinable performance
goals based on one or more of the following criteria: stock price, earnings per
share, net earnings, operating earnings, return on assets, shareholder return,
return on equity, growth in assets, unit volume, sales, market share, or
strategic business criteria consisting of one or more objectives based on
meeting specific revenue goals, market penetration goals, geographic business
expansion goals, cost targets or goals relating to acquisitions or divestitures.
(c) Establishment of Goals. The Committee shall establish the
performance goals in writing either before the beginning of the Performance
Period or during a period ending no later than the earlier of (i) 90 days after
the beginning of the Performance Period or (ii) the date on which 25% of the
Performance Period has been completed, or such other date as may be required or
permitted under applicable regulations under section 162(m) of the Code. The
performance goals shall satisfy the requirements for "qualified
performance-based compensation," including the requirement that the achievement
of the goals be substantially uncertain at the time they are established and
that the goals be established in such a way that a third party with knowledge of
the relevant facts could determine whether and to what extent the performance
goals have been met. The Committee shall not have discretion to increase the
amount of compensation that is payable upon achievement of the designated
performance goals.
(d) Maximum Payment. If Restricted Stock, or Performance Units measured
with respect to the fair market value of the Company Stock, is granted, not more
than 500,000 shares of the Company Stock may be granted to a Grantee under the
Performance Units or Restricted Stock for any Performance Period. If Performance
Units are measured with respect to other criteria, the maximum amount that may
be paid to a Grantee with respect to a Performance Period is $1,000,000.
(e) Announcement of Grants. The Committee shall certify and announce
the results for each Performance Period to all Grantees immediately following
the announcement of the Company's financial results for the Performance Period.
If and to the extent that the Committee does not certify that the performance
goals have been met, the grants of Restricted Stock or Performance Units for the
Performance Period shall be forfeited.
11. Transferability of Grants
(a) Nontransferability of Grants. Except as provided below, only the
Grantee may exercise rights under a Grant during the Grantee's lifetime. A
Grantee may not transfer those rights except by will or by the laws of descent
and distribution or, with respect to Grants other than Incentive Stock Options,
if permitted in any specific case by the Committee, pursuant to a domestic
relations order (as defined under the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the regulations thereunder). When a
Grantee dies, the personal representative or other person entitled to succeed to
the rights of the Grantee ("Successor Grantee") may exercise such rights. A
Successor Grantee must furnish proof satisfactory to the Company of his or her
right to receive the Grant under the Grantee's will or under the applicable laws
of descent and distribution.
25
<PAGE>
(b) Transfer of Nonqualified Stock Options. Notwithstanding the
foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may
transfer Nonqualified Stock Options to family members or other persons or
entities according to such terms as the Committee may determine; provided that
the Grantee receives no consideration for the transfer of an Option and the
transferred Option shall continue to be subject to the same terms and conditions
as were applicable to the Option immediately before the transfer.
12. Change of Control of the Company
As used herein, a "Change of Control" shall be deemed to have occurred
if the shareholders of the Company approve (or, if shareholder approval is not
required, the Board approves) an agreement providing for (i) the merger or
consolidation of the Company with another corporation where the shareholders of
the Company, immediately prior to the merger or consolidation, will not
beneficially own, immediately after the merger or consolidation, shares
entitling such shareholders to more than 50% of all votes to which all
shareholders of the surviving corporation would be entitled in the election of
directors (without consideration of the rights of any class of stock to elect
directors by a separate class vote), (ii) the sale or other disposition of all
or substantially all of the assets of the Company, or (iii) a liquidation or
dissolution of the Company.
13. Consequences of a Change of Control
(a) Assumption of Grants. Upon a Change of Control where the Company is
not the surviving corporation (or survives only as a subsidiary of another
corporation), unless the Committee determines otherwise, all outstanding Options
and SARs that are not exercised shall be assumed by, or replaced with comparable
options or rights by, the surviving corporation.
(b) Other Alternatives. Notwithstanding the foregoing, in the event of
a Change of Control, the Committee may take one or both of the following
actions: the Committee may (i) require that Grantees surrender their outstanding
Options and SARs in exchange for a payment by the Company, in cash or Company
Stock as determined by the Committee, in an amount equal to the amount by which
the then Fair Market Value of the shares of Company Stock subject to the
Grantee's unexercised Options and SARs exceeds the Exercise Price of the Options
or the base amount of the SARs, as applicable, or (ii) after giving Grantees an
opportunity to exercise their outstanding Options and SARs, terminate any or all
unexercised Options and SARs at such time as the Committee deems appropriate.
Such surrender or termination shall take place as of the date of the Change of
Control or such other date as the Committee may specify.
(c) Limitations. Notwithstanding anything in the Plan to the contrary,
in the event of a Change of Control, the Committee shall not have the right to
take any actions described in the Plan (including without limitation actions
described in Subsection (b) above) that would make the Change of Control
ineligible for pooling of interests accounting treatment or that would make the
Change of Control ineligible for desired tax treatment if, in the absence of
such right, the Change of Control would qualify for such treatment and the
Company intends to use such treatment with respect to the Change of Control.
14. Requirements for Issuance or Transfer of Shares
(a) Shareholder's Agreement. The Committee may require that a Grantee
execute a shareholder's agreement, with such terms, as the Committee deems
appropriate, with respect to any Company Stock distributed pursuant to this
Plan.
26
<PAGE>
(b) Limitations on Issuance or Transfer of Shares. No Company Stock
shall be issued or transferred in connection with any Grant hereunder unless and
until all legal requirements applicable to the issuance or transfer of such
Company Stock have been complied with to the satisfaction of the Committee. The
Committee shall have the right to condition any Grant made to any Grantee
hereunder on such Grantee's undertaking in writing to comply with such
restrictions on his or her subsequent disposition of such shares of Company
Stock as the Committee shall deem necessary or advisable as a result of any
applicable law, regulation or official interpretation thereof, and certificates
representing such shares may be legended to reflect any such restrictions.
Certificates representing shares of Company Stock issued or transferred under
the Plan will be subject to such stop-transfer orders and other restrictions as
may be required by applicable laws, regulations and interpretations, including
any requirement that a legend be placed thereon.
15. Amendment and Termination of the Plan
(a) Amendment. The Board may amend or terminate the Plan at any time or
from time to time, provided, however, the Board shall not amend the Plan without
shareholder approval if such approval is required pursuant to the Code or the
rules of any national securities exchange or over-the-counter market on which
the Company's Shares are then listed or included.
(b) Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date, unless the
Plan is terminated earlier by the Board or is extended by the Board with the
approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under Section 16(b). The termination of the Plan shall not impair
the power and authority of the Committee with respect to an outstanding Grant.
Whether or not the Plan has terminated, an outstanding Grant may be terminated
or amended under Section 16(b) or may be amended by agreement of the Company and
the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling document. No
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.
16. Funding of the Plan
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.
17. Rights of Participants
Nothing in this Plan shall entitle any Employee, Non-Employee Director,
Key Advisor or other person to any claim or right to be granted a Grant under
this Plan. Neither this Plan nor any action taken hereunder shall be construed
as giving any individual any rights to be retained by or in the employ of the
Company or any other employment rights.
18. No Fractional Shares
No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether cash,
other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.
27
<PAGE>
19. Headings
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
20. Effective Date of the Plan.
Subject to the approval of the Company's shareholders, the Plan shall
be effective as of April 2, 1997.
21. Miscellaneous
(a) Grants in Connection with Corporate Transactions and Otherwise.
Nothing contained in this Plan shall be construed to (i) limit the right of the
Committee to make Grants under this Plan in connection with the acquisition, by
purchase, lease, merger, consolidation or otherwise, of the business or assets
of any corporation, firm or association, including Grants to employees thereof
who become Employees of the Company, or for other proper corporate purposes, or
(ii) limit the right of the Company to grant stock options or make other awards
outside of this Plan. Without limiting the foregoing, the Committee may make a
Grant to an employee of another corporation who becomes an Employee by reason of
a corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company or any of its subsidiaries
in substitution for a stock option or restricted stock grant made by such
corporation. The terms and conditions of the substitute grants may vary from the
terms and conditions required by the Plan and from those of the substituted
stock incentives. The Committee shall prescribe the provisions of the substitute
grants.
(b) Compliance with Law. The Plan, the exercise of Options and SARs and
the obligations of the Company to issue or transfer shares of Company Stock
under Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency as may be required. With respect to persons
subject to section 16 of the Exchange Act, it is the intent of the Company that
the Plan and all transactions under the Plan comply with all applicable
provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee
may revoke any Grant if it is contrary to law or modify a Grant to bring it into
compliance with any valid and mandatory government regulation. The Committee may
also adopt rules regarding the withholding of taxes on payments to Grantees. The
Committee may, in its sole discretion, agree to limit its authority under this
Section.
(c) Governing Law. The validity, construction, interpretation and
effect of the Plan and Grant Instruments issued under the Plan shall exclusively
be governed by and determined in accordance with the law of the Commonwealth of
Pennsylvania.
28
<PAGE>
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