SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NO. 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1595629
(state or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3905 ANNAPOLIS LANE, SUITE 105 55447
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 553-7736
Former name, if changed since last report: N/A
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 shares outstanding of each of the registrant's classes of
common stock as of August 1, 1997 was:
Common Stock $.01 par value 17,562,231 shares
<PAGE>
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
June 30, 1997 (unaudited) and
December 31, 1996
Statements of Operations - 4
Three Months and Six Months Ended
June 30, 1997 and 1996 (unaudited)
Statements of Cash Flows - 5
Six Months Ended June 30, 1997 and
1996 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 10
Market Risk
PART II. OTHER INFORMATION 11
Signatures 13
<PAGE>
Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
ASSETS ------------ ------------
(Unaudited) (Note)
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents $ 4,163,750 $ 2,320,010
Marketable securities 24,647,466 7,867,619
------------ ------------
28,811,216 10,187,629
Accounts receivable, less allowance of $230,000
in 1997 and $200,000 in 1996 4,030,820 3,139,559
Inventory 19,702,932 18,242,066
Prepaid expenses 278,761 468,249
------------ ------------
TOTAL CURRENT ASSETS 52,823,729 32,037,503
FURNITURE, MACHINERY & EQUIPMENT 2,068,564 2,014,439
Less accumulated depreciation 1,240,896 1,119,875
------------ ------------
827,668 894,564
OTHER ASSETS 429,803 388,233
------------ ------------
TOTAL ASSETS $ 54,081,200 $ 33,320,300
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,247,491 $ 1,190,958
Accrued payroll and expenses 195,437 202,603
------------ ------------
TOTAL CURRENT LIABILITIES 1,442,928 1,393,561
LONG-TERM DEBT 0 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 17,562,231 & 15,288,042 at
June 30, 1997 and Dec 31, 1996, respectively 175,622 152,880
Additional paid-in capital 71,777,566 52,313,315
Other 41,796 54,465
Retained earnings (deficit) (19,356,712) (20,593,921)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 52,638,272 31,926,739
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 54,081,200 $ 33,320,300
============ ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed financial statements.
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 3,695,230 $ 3,069,820 $ 7,139,880 $ 5,666,700
Less cost of goods sold 2,297,583 1,880,751 4,469,671 3,555,036
----------- ----------- ----------- -----------
GROSS PROFIT 1,397,647 1,189,069 2,670,209 2,111,664
OPERATING EXPENSES
Research, development and engineering 261,266 166,628 496,760 329,014
Selling, general and administrative 801,909 815,185 1,521,328 1,566,832
----------- ----------- ----------- -----------
TOTAL EXPENSES 1,063,175 981,813 2,018,088 1,895,846
Interest income 325,699 146,365 585,089 329,974
----------- ----------- ----------- -----------
NET INCOME $ 660,171 $ 353,621 $ 1,237,210 $ 545,792
=========== =========== =========== ===========
Net income per share:
Basic $ 0.04 $ 0.02 $ 0.07 $ 0.04
=========== =========== =========== ===========
Fully Diluted $ 0.04 $ 0.02 $ 0.07 $ 0.03
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period:
Basic 17,559,084 15,121,894 16,992,428 15,111,773
=========== =========== =========== ===========
Fully Diluted 18,139,842 16,661,302 17,610,370 16,707,101
=========== =========== =========== ===========
</TABLE>
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
------------ -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,237,210 $ 545,792
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 122,151 113,384
Loss on disposal of equipment 1,242 0
Changes in operating assets and liabilities:
Accounts receivable (891,261) (159,904)
Prepaid expenses 189,488 298,182
Other assets (41,570) (6,485)
Inventory (1,460,866) (1,985,577)
Accounts payable and accrued expenses 49,367 (925,409)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (794,239) (2,120,017)
INVESTING ACTIVITIES
Purchase of marketable securities (23,531,358) (3,739,207)
Sale of marketable securities 6,745,920 6,639,438
Purchases of property, plant and equipment (56,497) (99,441)
------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (16,841,935) 2,800,790
FINANCING ACTIVITIES
Notes payable 0 0
Net proceeds from sale of common stock 19,486,993 1,089,387
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,486,993 1,089,387
Effect of exchange rate changes on cash (7,079) (2,590)
INCREASE IN CASH AND CASH EQUIVALENTS 1,843,740 1,767,570
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,320,010 2,213,632
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,163,750 $ 3,981,202
============ ===========
</TABLE>
<PAGE>
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997
Note A - BASIS OF PRESENTATION
The accompanying unaudited 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 of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month and six month periods ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
Note B - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares outstanding and dilutive common stock equivalents, if applicable. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "EARNINGS PER SHARE." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal year ended
December 31, 1997. For the quarter ended June 30, 1997, the basic net income per
share under Statement 128 is $.04 per share on 17,559,084 weighted average
shares outstanding for the period. For the six months ended June 30, 1997, the
basic net income per share under Statement 128 is $.07 per share on 16,992,428
weighted average shares outstanding for the period.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ATS Medical, Inc. (the "Company") is engaged in the manufacturing and marketing
of a pyrolytic carbon bileaflet mechanical heart valve. The Company sells the
ATS Open Pivot TM valve (the "ATS Valve" or the "Valve") in international
markets and has recently initiated a clinical study in the United States for the
purpose of obtaining regulatory approval.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1997 increased 20% to $3,695,230
compared to $3,069,820 for the quarter ended June 30, 1996. Unit sales increased
21% in the second quarter 1997 compared to 1996. Sales growth can be attributed
to continued implant growth in Europe and other Asia Pacific countries as well
as strong purchases by the Company's Japanese distributor. The Shonin (Japanese
regulatory approval) for the ATS Medical, Inc. heart valve was received late in
the second quarter of 1996.
Net sales for six months ended June 30, 1997 totaled $7,139,880 compared to
$5,666,700 for six months ended June 30, 1996. Revenue increased about 26% and
unit sales increased about 27% for the six months ended June 30, 1997 as
compared to the six months ended June 30, 1996. Although revenues and unit sales
increased in each of the first two quarters of 1997 as compared to the
corresponding quarters in 1996, the rate of increase in the second quarter of
1997 was less than the ratio of increase in the first quarter of 1997. This is
due to two principal factors. First, as mentioned previously, sales in Japan
began in June of 1996, which increased the sales in the second quarter of 1996
and so reduced the rate of increase in 1997. Second, pricing pressures from
competitors and the strong dollar in 1997 negatively impacted revenue and unit
sales increases in 1997. While the Company invoices its customers in dollars,
the customers must use local currencies to purchase dollars to pay for Valves,
and in many cases it now takes much more local currency to buy dollars. The
quarter which ends September 30 is usually the weakest quarter each year, not
only for the Company but also for other implantable medical device companies, as
European surgical activity slows during vacation season.
Cost of sales for the second quarter of 1997 totaled $2,297,583 or 62% of sales
compared to $1,880,751 or 61% of sales for the second quarter of 1996. Cost of
sales for the six months ended June 30, 1997 totaled $4,469,671 or 63% of sales
compared to $3,555,036 or 63% of sales for the six months ended June 30, 1996.
The price of the carbon components contained in the Valves sold in the six
months ended June 30, 1997 increased 3% as compared to the cost of carbon
components contained in the Valves sold in the six months ended June 30, 1996.
Based upon the Company's internal sales projections, the price of the carbon
contained in Valves sold during the remainder of 1997 is expected to be 3%
higher than in 1996.
Gross profit totaled $1,397,647 for the quarter ended June 30, 1997 or 38% of
sales, compared to gross profit of $1,189,069 or 39% of sales for the quarter
ended June 30, 1996. Gross profit
<PAGE>
totaled $2,670,209 or 37% of sales for the six months ended June 30, 1997
compared to $2,111,664 or 37% of sales for the six months ended June 30, 1996.
The Company achieved manufacturing efficiencies in the six months ended June 30,
1997 sufficient to offset a slight decline in the average selling prices and the
increase in the cost of carbon components compared to the six months ended June
30, 1996.
Research, development and engineering expenses totaled $261,266 for the quarter
ended June 30, 1997 versus $166,628 for the quarter ended June 30, 1996. For six
months ended June 30, 1997 research, development and engineering expenses
totaled $496,760 compared to $329,014 for six months ended June 30, 1996.
Approximately 47% and 39% of research and development expenses for the quarters
ended June 30, 1997 and 1996, respectively, were for testing and outside
consulting services related to the Valve. A large component of the year to year
increase is development work on an aortic valved graft ("AVG"). The AVG is a
standard ATS Medical, Inc. replacement aortic heart valve sutured at the end of
a dacron tube. This product extension is used in surgeries where the patient's
aorta is damaged or degenerated. Most other valve manufacturers provide a
similar product.
The Company began human implants in the United States under an Investigational
Device Exemption ("IDE") in January 1997. The Company sells the Valves to the
hospitals involved in the study and is eligible for reimbursement by Medicare
and most private pay insurance companies. The Company is responsible for
reimbursing the hospital for certain additional tests and procedures required by
the clinical protocol and accrues the estimated total cost of follow-up at the
time the sale is recorded as research and development expense.
Selling, general and administrative expenses totaled $801,909 for the quarter
ended June 30, 1997, a decrease from the $815,185 reported for the quarter ended
June 30, 1996. The Company held the Second Symposium on the ATS Valve in the
fourth quarter of 1996. Commitments and deposits were required throughout 1996
for this meeting so the Company accrued $150,000 in the quarter ended June 30,
1996 and $200,000 for the first six months of 1996. There is no symposium or
comparable expense expected in 1997. Salaries, wages and benefits increased
nearly $160,000 or approximately 12% during the first six months of 1997. The
Company had 50 employees at June 30, 1996 compared to 58 employees at June 30,
1997.
There was no interest expense incurred in the quarters or six month periods
ended June 30, 1997 and 1996.
Interest income totaled $325,699 for the quarter ended June 30, 1997 compared to
$146,365 for the quarter ended June 30, 1996. For the first half of 1997
interest income totaled $585,089 compared to $329,974 for the first six months
of 1996. The increase in interest income for the first half of 1997 was the
result of more cash on hand to invest than the first six months of 1996. Cash on
hand at June 30, 1997 is significantly greater than the amount on hand during
1996, due primarily to the sale of equity and exercise of warrants in the first
quarter of 1997. Interest income for the remainder of 1997 is expected to be
greater than the last two quarters of 1996.
<PAGE>
Net income totaled $660,171 for the quarter ended June 30, 1997 versus net
income of $353,621 for the quarter ended June 30, 1996. Net income totaled
$1,237,210 for the six months ended June 30, 1997 compared to $545,792 for the
six months ended June 30, 1996. The $558,545 increase in gross profit in the
first half of 1997 as compared to the first half of 1996 was greater than the
$122,242 increase in operating expenses, which resulted in $652,121 operating
income for the six months ended June 30, 1997 and increased net income compared
to the first six months of 1996.
Earnings per share totaled $.04 for the quarter ended June 30, 1997 compared to
$.02 for the quarter ended June 30, 1996. Earnings per share for the first six
months of 1997 totaled $.07 compared to $.03 for the first six months of 1996.
The weighted average number of shares outstanding increased 5% for the six
months ended June 30, 1997 over 1996 primarily due to the issuance of shares in
the February, 1997 private sale of common stock .
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased by $18,623,587 from
$10,187,629 at December 31, 1996 to $28,811,216 at June 30, 1997. Inventory
purchases and accounts receivable growth caused the company to have negative
cashflow from operations. On February 10, 1997 the Company announced the sale of
1,568,940 shares of common stock to ITOCHU Corporation of Japan raising $14.75
million in new cash. The Company also collected $5,203,818 during the first
quarter of 1997 from the exercise of warrants.
During 1997 the Company is required to purchase $11.4 million of heart valve
components in accordance with the terms of its long term supply agreement with
CarboMedics, Inc. (the "Supply Agreement"). During the three contract years
after 1997 the Company is obligated to purchase an aggregate of approximately
$50 million of components. The minimum purchases under the Suppy Agreement are
not tied to sales of the Company's Valve and the Company does not expect sales
of the Valve to exceed the minimum purchase requirements under the Supply
Agreement until the Valve is approved for sale in the United States by the Food
and Drug Administration. Deliveries under the terms of the Supply Agreement are
expected to increase during the second half of 1997 which will cause cash, cash
equivalents and marketable securities to decline.
Accounts receivable increased from $3,139,559 at December 31, 1996 to $4,030,820
at June 30, 1997. Most of the Company's sales have been to customers in
international markets and while the Company attempts to set standard 60 day
terms for receivables, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
Accounts payable increased from $1,190,958 at December 31, 1996 to $1,247,491 at
June 30, 1997. The majority of the increase in accounts payable is related to
the amount owing to CarboMedics, Inc. under the Supply Agreement.
<PAGE>
Based upon the Company's current rate of sales, its expected obligations under
the Supply Agreement and its expected expenses, the Company anticipates that
existing cash, cash equivalents and short-term investments will be sufficient to
satisfy its capital requirements through 2000. Beyond 2000 the Company must
continue to substantially increase revenues to meet its capital requirements.
Should revenues not increase sufficiently, the Company may be required to raise
additional equity capital. There can be no assurance that equity would be
available to the Company at favorable terms, if at all.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their business, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. ATS Medical, Inc.
desires to take advantage of the safe harbor provisions with respect to any
forward-looking statements it may make in this filing, other filings with the
Securities and Exchange Commission and any public oral statements or written
releases. The words or phrases "will likely," "is expected," "will continue,"
"is anticipated," "estimate," "projected," "forecast," or similar expressions
are intended to identify forward-looking statements within the meaning of the
Act. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
In accordance with the Act, the Company identifies the following important
general factors which if altered from the current status could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart Valve in
international markets, the acceptance by the U.S. FDA of the Company's
regulatory submissions, the continued performance of the Company's mechanical
heart valve without structural failure, the actions of the Company's competitors
including pricing changes and new product introductions, the continued
performance of the Company's independent distributors in selling the Valve, and
the actions of the Company's supplier of pyrolytic carbon components for the
Valve. This list is not exhaustive, and the Company may supplement this list in
any future filing or in connection with the making of any specific
forward-looking statement.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Shareholders of the Company was held on May 1,
1997 at which time (i) five nominees were elected to the Board of Directors for
one-year terms, (ii) the appointment of Ernst & Young LLP as the independent
auditors of the Company was approved and (iii) the amendments to the ATS
Medical, Inc. 1987 Stock Option and Stock Award Plan (the "Plan") increasing the
number of shares of the Company's Common Stock subject to the Plan from 2.4
million to 3.4 million shares and to satisfy the requirements of section 162(m)
of the Internal Revenue Code of 1986, as amended, were approved. Proxies for the
Company were solicited pursuant to Section 14(a) of the Securities Exchange Act
of 1934, as amended, and there was no solicitation in opposition to management's
solicitations. All nominees for directors as listed in the proxy statement were
elected. The voting results were as follows:
<TABLE>
<CAPTION>
Broker
For Against Withheld Non-Votes
--- ------- -------- ---------
<S> <C> <C> <C> <C>
Election of Directors:
Manual A. Villafana 14,594,654 0 312,475 0
Richard W. Kramp 14,595,304 0 311,825 0
Charles F. Cuddihy, Jr. 14,590,429 0 316,700 0
James F. Lyons 14,593,554 0 313,575 0
A. Jay Graf 14,594,754 0 312,375 0
Approval of Independent
Auditors 14,877,129 12,525 17,475 0
Amendment to the Plan 7,809,609 1,322,211 56,077 5,719,232
</TABLE>
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.1 ATS Medical, Inc. 1987 Stock Option and Stock Award Plan, as
amended to date
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1997 ATS Medical, Inc.
By: /s/ John H. Jungbauer
-------------------------------------
John H. Jungbauer, Vice President/CFO
(Principal Financial Officer and
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
10.1 ATS Medical, Inc. 1987 Stock Option and Stock Award Plan, as
amended to date
27.1 Financial Data Schedule
EXHIBIT 10.1 Restated 2/28/91
As Amended 5/1/97
ATS MEDICAL, INC.
1987 STOCK OPTION AND STOCK AWARD PLAN
(1991 RESTATEMENT)
1. Purpose of Plan
This Plan shall be known as the "ATS Medical, Inc. 1987 Stock Option
and Stock Award Plan" and is hereinafter referred to as the "Plan". The Plan
shall provide for the issuance of shares of common stock, par value $.01 (the
"Common Stock"), of ATS Medical, Inc. (the "Corporation"). The purpose of the
Plan is to aid in maintaining and developing a mutually beneficial relationship
with employees and non-employees of the Corporation who perform valuable
services for or on behalf of the Corporation, to offer such persons additional
incentives to put forth maximum efforts for the success of the business, and to
afford them an opportunity to acquire a proprietary interest in the Corporation.
It is intended that this purpose be effected through the granting of stock
options, the awarding of Common Stock subject to restrictions (the "Restricted
Shares") and the awarding of stock appreciation rights to such persons as
hereinafter provided. Options granted under the Plan may be either incentive
stock options ("Incentive Stock Options") within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code"), or options which do not qualify
as Incentive Stock Options.
2. Stock Subject to Plan
Subject to the provisions of Section 12 hereof, the stock to be subject
to options and which may be awarded as Restricted Shares under the Plan shall be
shares of the Corporation's authorized Common Stock. Such shares may be either
authorized but unissued shares or issued shares which have been reacquired by
the Corporation. Subject to the adjustment as provided in Section 11 hereof, the
maximum number of shares on which options may be exercised or which may be
awarded as Restricted Shares under this Plan shall be 3,400,000. Any shares
subject to an option under the Plan which, for any reason, expires or is
terminated unexercised, shall be available for options or awards thereafter
granted during the term of the Plan. If any award of Restricted Shares is
forfeited in accordance with the terms and conditions of such award, the
Restricted Shares so forfeited shall also become available for further grants or
awards under the Plan.
3. Administration of Plan
(a) The Plan shall be administered by the Board of Directors of the
Corporation. The Board of Directors may authorize, at any time, the formation of
a
<PAGE>
Stock Option Committee (the "Committee"), consisting of two or more members who
shall be appointed from time to time by the Board of Directors. The Stock Option
Committee will, if formed, have authority to exercise the powers conferred on
the Board of Directors under the Plan, other than the power under Section 12
herein to terminate or amend the Plan or to accelerate the exercisability of any
option or lift the restrictions on any Restricted Shares granted or awarded
under the Plan. The granting of stock options or the award of Restricted Shares
to members of the Board of Directors shall be made only by the Committee, all of
the members of which shall be "disinterested persons" with respect to the Plan
within the meaning of Rule 16b-3(d)(3) under the Securities Exchange Act of 1934
and "outside directors" within the meaning of Section 162(m) of the Code. -
(b) The Board of Directors shall have plenary authority in its
discretion, subject to the express provisions of this Plan, to: (i) determine
the purchase price of the Common Stock covered by each option and the terms of
exercise of each such option, (ii) determine the persons to whom and the time or
times at which options (a person receiving an option is hereinafter referred to
as an "Optionee") or awards of Restricted Shares (a person receiving an award of
Restricted Shares is hereinafter referred to as a "Grantee") shall be granted or
made and the number of shares to be subject to each such option or award (iii)
determine the period during which Restricted Shares shall remain subject to
restrictions and the nature and type of restrictions that may be imposed on
Restricted Shares (iv) interpret the Plan, (v) prescribe, amend and rescind
rules and regulations relating to the Plan, (vi) determine the terms and
provisions (and amendments thereof) of each option and Restricted Share
agreement under this Plan (which agreements need not be identical), including
the designation of those options intended to be Incentive Stock Options, (vii)
the form of payment to be made upon the exercise of an SAR (as hereinafter
defined) as provided in Section 17, which payment may be either cash, common
stock of the Corporation or a combination thereof, and (viii) make all other
determinations necessary or advisable for the administration of the Plan.
(c) The Committee shall select one of its members as its Chairman and
shall hold its meetings at such times and places as it may determine. A majority
of its members shall constitute a quorum. All determinations of the Committee
shall be made by not less than a majority of its members. Any decision or
determination reduced to writing and signed by a majority of the members of the
Committee shall be fully effective as if it had been made by a majority vote at
a meeting duly called and held.
(d) The granting of an option or an award pursuant to the Plan shall be
effective only if a written agreement shall have been duly executed and
delivered by and on behalf of the Corporation and the Optionee or Grantee to
whom such right is granted.
<PAGE>
4. Eligibility and Award Limitations Under the Plan
(a) Incentive Stock Options (as determined pursuant to Section 15
herein) may be granted only to employees of the Corporation and its future
subsidiary corporations, if any. Options which do not qualify as Incentive Stock
Options and awards of Restricted Shares may be granted or made to both employees
and to individuals or other entities (including but not limited to consultants)
who perform services for the Corporation but who are not employed by the
Corporation, when granting an option or award to such person would be of benefit
to the Corporation. Except as provided in Section 9 herein, options and
Restricted Shares may not be granted or awarded to members of the Board of
Directors of the Corporation who are neither employed by the Corporation nor a
consultant to the Corporation.
(b) No person may be granted stock options or stock appreciation rights
("Awards"), the value of which Awards are based solely on an increase in the
value of the Common Stock after the date of grant of such Award, for more than
300,000 shares of Common Stock, subject to adjustment as provided in the Plan,
in the aggregate, during any calendar year. The foregoing limitation
specifically includes the grant of any "performance-based" Awards within the
meaning of Section 162(m) of the Code.
(c) Notwithstanding any other provision in the Plan, if at the time an
option is otherwise to be granted pursuant to the Plan the Optionee owns
directly or indirectly (within the meaning of Section 425(d) of the Code (as
hereinafter defined) Common Stock of the Corporation possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Corporation or its parent or subsidiary corporations, if any, (within the
meaning of Section 422(b)(6) of the Code) then any Incentive Stock Option to be
granted to such Optionee pursuant to the Plan shall satisfy the requirements of
Section 422A(c)(6) of the Code, and the option price shall not be less than 110%
of the fair market value of the Common Stock of the Corporation, determined as
described in Section 5, and such option by its terms shall not be exercisable
after the expiration of five (5) years from the date such option is granted.
5. Price
The option price for all Incentive Stock Options granted under the Plan
shall be determined by the Board of Directors but shall not be less than 100% of
the fair market value of the Common Stock at the date of granting of such
option, as determined in good faith by such Board. The option price for options
granted under the Plan that do not qualify as Incentive Stock Options shall also
be determined by the Board of Directors but shall not be less than 50% of the
fair market value of the Common Stock at the date of granting of the option. The
option price shall be payable at the time written notice of exercise is given to
the Corporation. An
<PAGE>
Optionee shall be entitled to pay the exercise price in cash, by tendering to
the Corporation shares of Common Stock, previously owned by the Optionee, having
a fair market value on the date of exercise equal to the option price, or, with
the consent of the Board of Directors, by the issuance of a promissory note to
the Corporation. The fair market value of such shares shall be (i) the closing
price of the Common Stock as reported for composite transactions if the Common
Stock is then traded on a national securities exchange, (ii) the last sales
price if the Common Stock is then traded on the NASDAQ National Market System,
or (iii) the average of the closing representative bid and asked prices as
reported on NASDAQ if the Common Stock is then traded on NASDAQ. If the Common
Stock is not so traded, the Board of Directors shall determine in good faith the
fair market value.
6. Term
Each option and each Restricted Share award and all rights and
obligations thereunder shall (subject to the provisions of Section 8) expire on
the date determined by the Board of Directors and specified in the option
agreement or agreement relating to the award of the Restricted Shares. The Board
of- Directors shall be under no duty to provide terms of like duration for
options or awards granted under the Plan; provided, however, that the term of
any Incentive Stock Option shall not extend more than ten (10) years from the
date of granting of the option.
7. Exercise of Options and Awards
(a) The Board of Directors shall have full and complete authority
(subject to the provisions of Section 8) to determine, at the time of granting
or making, whether an option or Restricted Share award will be exercisable in
full at any time or from time to time during the term of the option or award, or
to provide for the exercise or receipt thereof in such installments and at such
times during the term of the option or award as Board may determine.
Notwithstanding any provision of the Plan or the terms of any option granted or
award of Restricted Shares made under the Plan, no option granted or Restricted
Share awarded under the Plan may be exercised until at least six months from the
date of grant or award.
(b) Notwithstanding any provision of the Plan or the terms of any
option granted or award of Restricted Shares made under the Plan, the exercise
of any option or the transferring of any shares of Common Stock on the books and
records of the Corporation pursuant to a Restricted Share award may be made
contingent upon receipt from the Optionee or Grantee (or other person rightfully
exercising the option or receiving certificates for the shares granted pursuant
to a Restricted Share award) of a representation that, at the time of such
exercise or receipt, it is their then intention to acquire the shares so
received thereunder for investment and not with a view to distribution thereof
Certificates for shares issued or transferred pursuant
<PAGE>
to the exercise of any option or the granting of any Restricted Share award may
be restricted as to further transfers upon advice of legal counsel that such
restriction is appropriate to comply with applicable securities laws.
(c) Notwithstanding any provision of the Plan or the terms of any
option granted or award of Restricted Shares made under the Plan, the Company
shall not be required to issue any shares of Common Stock, deliver any
certificates for shares of Common Stock or transfer on its books and records any
shares of Common Stock if such issuance, delivery or transfer would, in the
judgment of the Board of Directors, constitute a violation of any state or
Federal law, or of the rules and regulations of any governmental regulatory body
or any securities exchange.
(d) An Optionee electing to exercise an option shall give written
notice to the Corporation of such election and of the number of shares subject
to such exercise. The full purchase price of such shares shall be tendered, in
accordance with the provisions of Section 5, with such notice of exercise. Until
such person has been issued a certificate or certificates for the shares subject
to such exercise, he shall possess no rights as a stockholder with respect to
such shares.
(e) Nothing in the Plan or in any agreement thereunder shall confer on
any employee any right to continue in the employ of the Corporation or any of
its subsidiaries or affect, in any way, the right of the Corporation or any of
its subsidiaries to terminate his or her employment at any time.
8. Effect of Termination of Employment or Death
Unless otherwise stated in the option agreement, the following
provisions shall govern the treatment of an option upon termination of
employment:
(a) In the event that the optionee shall cease to be employed by the
Corporation or its subsidiaries, if any, for any reason other than such holder's
gross and willful misconduct or death or disability, such optionee shall have
the right to exercise the option at any time within three months after such
termination of employment to the extent of the full number of shares such holder
was entitled to purchase under the option on the date of termination, subject to
the condition that no option shall be exercisable after the expiration of the
term of the option.
(b) In the event that an optionee shall cease to be employed by the
Corporation or its subsidiaries, if any, by reason of such holder's gross and
willful misconduct during the course of employment, including but not limited to
wrongful appropriation of funds of the Corporation or the commission of a gross
misdemeanor or felony, the option shall be terminated as of the date of the
misconduct.
<PAGE>
(c) If the optionee shall die while in the employ of the Corporation or
any subsidiary, if any, or within three (3) months after termination of
employment for any reason other than gross and willful misconduct, or become
disabled (within the meaning of Section 105(d)(4) of the Code) while in the
employ of the Corporation or a subsidiary, if any, and such optionee shall not
have fully exercised the option, such option may be exercised at any time within
twelve months after such holder's death or such disability by the personal
representatives, administrators, or, if applicable, guardian, of the optionee or
by any person or persons to whom the option is transferred by will or the
applicable laws of descent and distribution to the extent of the full number of
shares such holder was entitled to purchase under the option on the date of
death, disability or termination of employment, if earlier, and subject to the
condition that no option shall be exercisable after the expiration of the term
of the option.
9. Automatic Grants to Non-Employee Directors
Upon such person's initial election to the Corporation's Board of
Directors, each director who is not an employee or consultant to the Corporation
shall receive a non-Incentive Stock Option to purchase 5,000 shares of Common
Stock. Thereafter, upon each re-election to the Board of Directors, such
director shall receive a non-Incentive Stock Option to purchase 2,500 shares of
Common Stock. The options shall have an exercise price equal to the fair market
value of the Common Stock on the day of election. The options shall have a ten
year term and shall vest in full six months following the date of grant.
Directors who are not employees or consultants to the Corporation shall not be
entitled to receive option grants under the Plan other than as specified in this
paragraph. This Section 9 may not be amended more than once every six months,
other than to comport with changes in the Code or the rules thereunder.
10. Nontransferability of Options
No option granted under the Plan shall be transferable by an Optionee,
otherwise than by will or the laws of descent or distribution or pursuant to a
qualified domestic relations order as defined by the Code.
11. Dilution or Other Adjustments
If the number of outstanding shares of the Common Stock of the
Corporation shall, at any time, be increased or decreased as a result of a
subdivision or consolidation of shares, stock dividend, stock split, spin-off or
other distribution of assets to shareholders, recapitalization, merger,
consolidation or other corporate reorganization in which the Corporation is the
surviving corporation, the number and kind of shares subject to the Plan and to
any option, SAR or Restricted Share award previously granted or made, as well as
the option price or amount payable
<PAGE>
upon the exercise of any previously granted option or SAR, shall be
appropriately adjusted in order to prevent the dilution or enlargement of rights
of holders of outstanding options, SARs or Restricted Share awards. Any
fractional shares resulting from any such adjustment shall be eliminated.
12. Amendment or Discontinuance of Plan
The Board of Directors may amend or discontinue the Plan at any time;
however, no amendment of the Plan shall, without shareholder approval, amend the
Plan in a way which would cause the Plan to no longer comply with Rule 16b-3
under the Securities Exchange Act of 1934 or any successor rule or other
regulatory requirements. Except as provided in Section 11, the Board of
Directors shall not alter or impair any option, SAR or Restricted Share award
thereto granted or made under the Plan without the consent of the holder of the
option, SAR or award; provided, however, that the Board of Directors may
accelerate the exercisability of options (and any related SARs) or lift any
restrictions imposed on Restricted Shares at any time during the term of such
options or awards without the consent of the holder thereof.
13. Time of Granting
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholders of the Corporation, and
no action taken by the Board of Directors (other than the execution and delivery
of an option or the making of an Award Agreement (as hereinafter defined)),
shall constitute the granting of an option or the making of a Restricted Share
award hereunder. The granting of an option or the making of a Restricted Share
award pursuant to the Plan shall take place only when a written option or Award
Agreement shall have been duly executed and delivered by or on behalf of the
Corporation to the Optionee or Grantee to whom such option or award is granted
or made.
14. Termination of Plan
Unless the Plan shall have been discontinued as provided in Section 12
hereof, the Plan shall terminate on December 31, 2000. No option or Restricted
Share award may be granted or made after such termination, but termination of
the Plan shall not, without the consent of the Optionee or Grantee, alter or
impair any rights or obligations under any option, SAR or Restricted Share award
theretofore granted or made.
<PAGE>
15. Determination of Incentive Stock Option
The Board shall determine, upon the granting of each option, whether
such option shall be an Incentive Stock Option or an option that does not
qualify as an Incentive Stock Option.
16. Restricted Share Awards
Each award of Restricted Shares under the Plan shall be evidenced by an
instrument (an "Award Agreement"). Each Award Agreement shall be subject to the
terms and conditions of the Plan but may contain additional terms and conditions
(which terms and conditions may vary from Grantee to Grantee) that are not
inconsistent with the Plan as the Board of Directors may deem necessary and
desirable. Each Award Agreement shall comply with the following terms and
conditions:
(a) The Board of Directors shall determine the number of Restricted
Shares to be awarded to a Grantee.
(b) At the time of the award of Restricted Shares, a certificate
representing the appropriate number of shares of Common Stock awarded to a
Grantee shall be registered in the name of such Grantee but shall be held by the
Corporation or any custodian appointed by the Corporation for the account of the
Grantee subject to the terms and conditions of the Plan. The Grantee shall have
all rights of a stockholder as to such shares of Common Stock, including the
right to receive dividends and the right to vote such Common Stock, subject to
the following restrictions: (i) the Grantee shall not be entitled to delivery of
the stock certificate until the expiration of the Restricted Period (as
hereinafter defined); (ii) the Restricted Shares may not be sold, transferred,
assigned, pledged, or otherwise encumbered or disposed of during the Restricted
Period; and (iii) all or a specified portion of the Restricted Shares shall be
forfeited and all rights of the Grantee to any forfeited Restricted Shares shall
terminate without further obligation on the part of the Corporation unless the
Grantee remains in the continuous employment of the Corporation for the period
in relation to which all or such portion of the Restricted Shares were granted
(the "Restricted Period"). No Restricted Shares shall have a Restricted Period
of less than six (6) months from the date of award. The Board of Directors shall
have the power to determine which portion of an award of Restricted Shares shall
be forfeited in the event of a Grantee's failure to remain in the continuous
employment of the Corporation during the Restricted Period relating to such
award. In addition, the Board of Directors may specify additional restrictions
or events which must occur during the Restricted Period or the Restricted
Shares, or a portion thereof, shall be forfeited as stated in the award thereof.
Any shares of Common Stock received as a result of a stock distribution to
holders of Restricted Shares shall be subject to the same restrictions as such
Restricted Shares.
<PAGE>
(c) At the end of each applicable Restricted Period or at such earlier
time as otherwise provided by the Board of Directors, all restrictions contained
in an Award Agreement and in the Plan shall lapse as to such portion of the
Restricted Shares granted in relation to such Restricted Period, and a stock
certificate for the appropriate number of shares of Common Stock, free of
restrictions, shall be delivered to the Grantee or the Grantee's beneficiary or
estate, as the case may be.
(d) There shall be no limitation on the number of shares of Common
Stock which a Grantee may be awarded except that no Grantee may be awarded
shares of Common Stock in excess of the number of shares remaining available for
option grants and awards of Restricted Shares under the Plan.
17. Alternative Stock Appreciation Rights
(a) Grant. At the time of grant of an option under the Plan (or at any
time thereafter as to options which are not Incentive Stock Options), the Board
of Directors, in its discretion, may grant to the holder of such option an
alternative Stock Appreciation Right ("SAR") for all or any part of the number
of shares covered by the holder's option. Any such SAR may be exercised as an
alternative, but not in addition to, an option granted hereunder, and any
exercise of an SAR shall reduce an option by the same number of shares as to
which the SAR is exercised. An SAR granted to an Optionee shall provide that
such SAR, if exercised, must be exercised within the time period specified
therein. Such specified time period may be less than (but may not be greater
than) the time period during which the corresponding option may be exercised. An
SAR may be exercised only when the corresponding option is eligible to be
exercised. The failure of the holder of an SAR to exercise such SAR within the
time period specified shall not reduce such holder's option rights. If an SAR is
granted for a number of shares less than the total number of shares covered by
the corresponding option, the Board of Directors may later (as to options which
are not Incentive Stock Options) grant to the Optionee an additional SAR
covering additional shares; provided, however, that the aggregate amount of all
SARs held by any Optionee shall at no time exceed the total number of shares
covered by such Optionee's unexercised options.
(b) Exercise. The holder of any option which by its terms is
exercisable who also holds an SAR may, in lieu of exercising their option, elect
to exercise their SAR, subject, however, to the limitation on time of exercise
hereinafter set forth. Such SAR shall be exercised by the delivery to the
Corporation of a written notice which shall state that the Optionee elects to
exercise their SAR as to the number of shares specified in the notice and which
shall further state what portion, if any, of the SAR exercise amount
(hereinafter defined) the holder thereof requests be paid in cash and what
portion, if any, such holder requests be paid in Common Stock of the
Corporation. The Board of Directors shall promptly cause to be paid to such
holder
<PAGE>
the SAR exercise amount either in cash, in Common Stock of the Corporation, or
any combination of cash and stock as the Board of Directors may determine. Such
determination may be either in accordance with the request made by the holder of
the SAR or in the sole and absolute discretion of the Board of Directors. The
SAR exercise amount is the excess of the fair market value of one share of the
Corporation's Common Stock on the date of exercise over the per share option
price for the option in respect of which the SAR was granted multiplied by the
number of shares as to which the SAR is exercised. For the purposes hereof, the
fair market value of the Corporation's shares shall be determined as provided in
Section 5 herein. An SAR may be exercised only when the SAR exercise amount is
positive.
(c) Limitation on Date of Exercise. A cash settlement of an SAR by an
officer or director of the Corporation may only be accomplished in compliance
with Rule 16b-3 (e) of the Securities Exchange Act of 1934 as presently in
effect or as subsequently modified by amendment.
(d) Other Provisions of Plan Applicable. All provisions of this Plan
applicable to options granted hereunder shall apply with equal effect to an SAR.
No SAR shall be transferable otherwise than by will or the laws of descent and
distribution and an SAR may be exercised during the lifetime of the holder
thereof, only by such holder.
18. Tax Indemnification Payments
The Board shall have the authority, at the time of the grant of an
option or the making of a Restricted Share award under the Plan or at any time
thereafter, to approve tax indemnification payments to designated Optionees and
Grantees to be paid upon their exercise of stock options which do not qualify as
incentive stock options or recognition of a taxable gain by reason of their
receipt of an award of Restricted Shares, as the case may be. The amount of any
such payments shall not exceed the amount of tax generally payable by an
Optionee or Grantee by reason of such exercise or recognition, and shall not, in
any case, exceed sixty percent of the amount imputed as taxable income to a
particular Optionee or Grantee by reason of either of the above-described
events. The Board of Directors shall have full authority, in its discretion, to
determine the amount of any such payment, the terms and conditions affecting the
exercise, vesting and payment of any payment, and whether any payment shall be
payable in cash or other property.
19. Income Tax Withholding
In order to assist an Optionee or Grantee in paying federal and state
income taxes required to be withheld upon the exercise of an option or receipt
of a Restricted Share award granted or made hereunder, the Board of Directors,
in its discretion and subject to such additional terms and conditions as it may
adopt, may permit the
<PAGE>
Grantee or Optionee to elect to satisfy such income tax withholding obligation
by delivering previously owned shares or by having the Corporation withhold a
portion of the shares otherwise to be delivered upon exercise of such option or
award with a fair market value, determined in accordance with the provisions of
Section 5 hereof, in an amount up to the Optionee's maximum marginal tax rate.
Any such election by an officer or director of the Corporation must comply with
the provisions of Rule 16b-3 under the Securities Exchange Act of 1934 or any
successor rule.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,163,750
<SECURITIES> 24,467,466
<RECEIVABLES> 4,260,820
<ALLOWANCES> 230,000
<INVENTORY> 19,702,932
<CURRENT-ASSETS> 52,823,729
<PP&E> 2,068,564
<DEPRECIATION> 1,240,896
<TOTAL-ASSETS> 54,081,200
<CURRENT-LIABILITIES> 1,442,928
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0
0
<COMMON> 175,622
<OTHER-SE> 52,462,650
<TOTAL-LIABILITY-AND-EQUITY> 54,081,200
<SALES> 7,139,880
<TOTAL-REVENUES> 7,139,880
<CGS> 4,469,671
<TOTAL-COSTS> 4,469,671
<OTHER-EXPENSES> 1,432,999
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<INCOME-PRETAX> 1,237,210
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