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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 SEPTEMBER 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 0-19371
PHARMCHEM LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0187280
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1505-A O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 328-6200
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of October 31, 1997, the registrant had outstanding 5,747,707 shares
of Common Stock, no par value.
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PHARMCHEM LABORATORIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements ...............................3
Condensed Consolidated Interim Balance Sheets at
September 30, 1997 (unaudited) and December 31, 1996 (audited).............4
Condensed Consolidated Interim Statements of Operations
(unaudited) for the Three and Nine Months ended
September 30, 1997 and 1996................................................5
Condensed Consolidated Interim Statements of
Cash Flows (unaudited) for the Nine Months ended
September 30, 1997 and 1996 ..............................................6
Notes to Condensed Consolidated Interim Financial Statements (Unaudited)...7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................................12
SIGNATURE ..........................................................................13
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The condensed consolidated interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated interim financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto for the year ended December 31, 1996 included in the Company's
Annual Report on Form 10-K.
These financial statements have been prepared in all material respects
in conformity with the standards of accounting measurements set forth in
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," and
the rules and regulations as specified in the Securities and Exchange Act of
1934 and reflect all adjustments, consisting only of normal recurring
adjustments which, in the opinion of management, are necessary to summarize
fairly the Company's consolidated financial position, the results of its
operations and its cash flows for the periods presented. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
3
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited) (Audited)
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 490 $ 240
Accounts receivable, net 8,022 8,168
Inventory 1,420 1,014
Other current assets 797 1,122
-------- --------
TOTAL CURRENT ASSETS 10,729 10,544
-------- --------
PROPERTY AND EQUIPMENT, net 7,212 6,578
OTHER ASSETS 1,000 986
GOODWILL, net 3,222 3,360
======== ========
TOTAL ASSETS $ 22,163 $ 21,468
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 4,636 $ 2,335
Accounts payable 3,071 3,238
Accrued compensation 597 998
Accrued collectors and other liabilities 2,780 2,266
-------- --------
TOTAL CURRENT LIABILITIES 11,084 8,837
-------- --------
LONG TERM DEBT, net of current portion 844 1,205
DEFERRED CREDITS 148 139
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000 shares
authorized, 5,748 and 5,695 shares issued and
outstanding at September 30, 1997 and
December 31, 1996, respectively 19,021 18,915
Accumulated deficit (8,934) (7,628)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 10,087 11,287
======== ========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,163 $ 21,468
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
4
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
NET SALES $ 10,037 $ 10,631 $ 29,098 $ 31,269
COST OF SALES 8,402 8,006 23,572 23,872
-------- -------- -------- --------
GROSS PROFIT 1,635 2,625 5,526 7,397
OPERATING EXPENSES
Selling, general and administrative 2,142 2,030 6,234 5,709
Research and development 10 284 177 1,198
Amortization of goodwill 47 54 139 146
-------- -------- -------- --------
Total operating expenses 2,199 2,368 6,550 7,053
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (564) 257 (1,024) 344
Interest expense 105 105 289 350
Other (income) expense, net (7) (3) (6) (65)
-------- -------- -------- --------
Total other expenses 98 102 283 285
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (662) 155 (1,307) 59
PROVISION FOR INCOME TAXES -- -- -- --
-------- -------- -------- --------
NET INCOME (LOSS) $ (662) $ 155 $ (1,307) $ 59
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE $ (0.12) $ 0.03 $ (0.23) $ 0.01
======== ======== ======== ========
Weighted average number of common shares outstanding 5,726 5,763 5,729 5,769
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
5
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
-------- -------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,307) $ 59
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 1,431 1,365
Loss (gain) on disposition of property and equipment 2 (50)
Changes in operating assets and liabilities:
Accounts receivable, net 146 388
Inventory (406) 614
Other current assets 325 (173)
Accounts payable and other accrued liabilities (63) 400
Deferred credits 9 --
-------- -------
Net cash provided by operating activities 137 2,603
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,932) (2,439)
Proceeds from sale of property and equipment -- 230
Payments for marketing rights -- (716)
Increase in other assets (10) --
-------- -------
Net cash used in investing activities (1,942) (2,925)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit and
long-term debt 12,572 7,712
Principal payments on revolving line of credit and
long-term debt (10,623) (7,781)
Proceeds from exercise of stock options 106 32
-------- -------
Net cash provided by (used in) financing
activities 2,055 (37)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 250 (359)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 240 647
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 490 $ 288
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
6
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PHARMCHEM LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. Net Income (Loss) per Share
Net income per share data has been computed using the weighted average
number of common shares outstanding and dilutive common equivalent shares, which
represent shares issuable upon the exercise of outstanding options, during the
period (using the treasury method). For periods with a net loss, the common
equivalent shares were excluded from the calculation of the loss per share
because the effect of including such shares in the computation would be
anti-dilutive.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." SFAS No.
128 requires the presentation of basic earnings per share ("EPS") and, for
companies with complex capital structures, diluted EPS. SFAS No. 128 is
effective for annual and interim periods ending after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The Company expects
basic and diluted EPS will not be materially different from primary EPS as
presented in the accompanying condensed consolidated financial statements.
2. Debt
PharmChem maintains a revolver and term loan credit agreement ("Credit
Agreement") with a bank. On October 21, 1997, PharmChem amended the Credit
Agreement to extend the maturity date of the revolver to December 5, 1997,
increase borrowings under the revolver to 85% of qualified account receivables
and set interest to the bank reference rate plus 2.0% (10.25% at September 30,
1997). Further, the Company obtained waivers for noncompliance with several
financial covenants at September 30, 1997. PharmChem previously amended its
revolver and term loan credit agreement with a bank with respect to certain
financial covenants in February and March 1997.
The Company reached a tentative agreement to secure a new revolving
credit line to replace its existing facility. The new agreement will provide an
increased line of credit and, subject to certain conditions, is expected to
close in late November.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, which are subject to the "safe harbor" created by these Sections. The
Company's actual future results could differ materially from those projected in
the forward-looking statements. Some factors which could cause future actual
results to differ materially from the Company's recent results and those
projected in the forward-looking statements are described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. The Company
assumes no obligation to update the forward-looking statements or such factors.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------ ------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- ------- ----- ----- -------- ------- ----- -----
(As a % of net sales) (As a % of net sales)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Public and private employers $ 4,324 $ 5,033 43.1% 47.3% $ 12,686 $14,538 43.6% 46.5%
Criminal justice agencies 3,645 4,315 36.3 40.6 11,108 12,459 38.2 39.8
Drug rehabilitation programs 340 413 3.4 3.9 1,089 1,465 3.7 4.7
Domestic product sales 681 48 6.8 0.5 1,099 209 3.8 0.7
Medscreen 1,047 822 10.4 7.7 3,116 2,598 10.7 8.3
-------- ------- ----- ----- -------- ------- ----- -----
Total net sales 10,037 10,631 100.0 100.0 29,098 31,269 100.0 100.0
COST OF SALES 8,402 8,006 83.7 75.3 23,572 23,872 81.0 76.3
-------- ------- ----- ----- -------- ------- ----- -----
GROSS PROFIT 1,635 2,625 16.3 24.7 5,526 7,397 19.0 23.7
-------- ------- ----- ----- -------- ------- ----- -----
OPERATING EXPENSES:
Selling, general and
administrative 2,142 2,030 21.3 19.1 6,234 5,709 21.4 18.3
Research and development 10 284 0.1 2.7 177 1,198 0.6 3.8
Amortization of goodwill 47 54 0.5 0.5 139 146 0.5 0.5
-------- ------- ----- ----- -------- ------- ----- -----
Total operating expenses 2,199 2,368 21.9 22.3 6,550 7,053 22.5 22.6
-------- ------- ----- ----- -------- ------- ----- -----
INCOME (LOSS) FROM OPERATIONS (564) 257 (5.6) 2.4 (1,024) 344 (3.5) 1.1
-------- ------- ----- ----- -------- ------- ----- -----
OTHER EXPENSE, net 98 102 1.0 1.0 283 285 1.0 0.9
-------- ------- ----- ----- -------- ------- ----- -----
NET INCOME (LOSS) $ (662) $ 155 (6.6)% 1.4% $ (1,307) $ 59 (4.5)% 0.2%
======== ======= ===== ===== ======== ======= ===== =====
</TABLE>
8
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Net sales for the three months ended September 30, 1997 decreased
$594,000 (5.6%) to $10,037,000 in 1997 from $10,631,000 in 1996. Medscreen, the
Company's U.K. operation, reported an increase of $225,000 (27.4%), which was
more than offset by a decrease in domestic urinalysis revenues of $1,452,000
(14.9%) principally from criminal justice agencies. The Company's domestic
specimen volume decreased 141,000 (17.8%) units from comparable 1996 levels.
This decrease in volume is principally attributed to prior year's sales to the
U.S. Army and lower criminal justice revenues. Average domestic specimen pricing
increased approximately 4.2%. Product sales of PharmScreen(TM) and PharmChek(R)
increased $633,000 over the prior year.
Net sales for the nine months ended September 30, 1997 decreased
$2,171,000 (6.9%) to $29,098,000 in 1997 from $31,269,000 in 1996. Medscreen
reported an increase of $518,000 (19.9%), which was more than offset by a
decrease in domestic urinalysis revenues of $3,579,000 (12.6%) principally from
criminal justice agencies and the U.S. Army. The Company's domestic specimen
volume decreased 16.9% from comparable 1996 levels. The volume reduction
reflects the August 1996 loss of the U.S. Army contract and continued lower
urinalysis revenues from criminal justice agencies. Average domestic specimen
pricing increased approximately 5.0%. Product sales of PharmScreenTM and
PharmChek(R) increased $890,000 over the prior year, reflecting the successful
August 1996 launch of PharmScreen(TM).
Cost of sales for the three months ended September 30, 1997 increased
$396,000 (4.9%) to $8,402,000 in 1997 from $8,006,000 in 1996. Cost of sales as
a percentage of net sales increased to 83.7% in 1997 from 75.3% in 1996. Gross
profit as a percentage of net sales decreased to 16.3% in 1997 from 24.7% in
1996.
Cost of sales for the nine months ended September 30, 1997 decreased
$300,000 (1.3%) to $23,572,000 in 1997 from $23,872,000 in 1996, and cost of
sales as a percentage of net sales increased to 81.0% in 1997 from 76.3% in
1996. Gross profit as a percentage of net sales decreased to 19.0% in 1997 from
23.7% in 1996. The deterioration in the gross profit margin in 1997 reflects the
continued underabsorption of fixed costs resulting from lower domestic specimen
volume.
Selling, general and administrative (SG&A) expenses for the three months
ended September 30, 1997 increased $112,000 (5.5%) to $2,142,000 in 1997 from
$2,030,000 in 1996. SG&A expenses as a percentage of net sales increased to
21.3% in 1997 from 19.1% in 1996.
SG&A expenses for the nine months ended September 30, 1997 increased
$525,000 (9.2%) to $6,234,000 in 1997 from $5,709,000 in 1996. SG&A expenses as
a percentage of net sales increased to 21.4% in 1997 from 18.3% in 1996. These
increases reflect the Company's continued investment in the sales, marketing,
information systems and administrative infrastructure.
Research and Development (R&D) costs for the three months ended
September 30, 1997 decreased $272,000 (96.5%) to $10,000 in 1997 from $282,000
in 1996. R&D costs as a percentage of net sales decreased to 0.1% in 1997 from
2.7% in 1996.
9
<PAGE> 10
R&D costs for the nine months ended September 30, 1997 decreased
$1,021,000 (85.2%) to $177,000 in 1997 from $1,198,000 in 1996. R&D costs as a
percentage of net sales decreased to 0.6% in 1997 from 3.8% in 1996. These
expenses include the cost associated with the development and commercialization
of new laboratory methods and other drug testing systems. The decreases from the
prior year are due primarily to significant expenditures in the prior year for
PharmChek(R).
Loss from operations for the three months ended September 30, 1997 was
$564,000 compared to income of $257,000 in 1996. Loss from operations for the
nine months ended September 30, 1997 was $1,024,000 compared to income from
operations of $344,000 in 1996.
Net loss for the three months ended September 30, 1997 was $662,000 or
$0.12 per share in 1997 compared to net income of $155,000 or $0.03 per share in
1996. Net loss for the nine months ended September 30, 1997 was $1,307,000 or
$0.23 per share in 1997 compared to net income of $59,000 or $0.01 per share in
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the nine months ended September 30, 1997
and 1996 provided cash of approximately $137,000 and $2,603,000, respectively.
The deterioration in cash flow from operations between 1997 and 1996 principally
reflects the increased net loss and higher inventory levels. As of September 30,
1997, the Company had $490,000 in cash and cash equivalents. During 1997, the
Company used approximately $1,932,000 in cash to acquire property and equipment,
principally for information systems.
The Company maintains a Credit Agreement with a bank. All borrowings are
secured by a lien on all assets of the Company. The Credit Agreement provides
for borrowings under the revolver limited to 75% of qualified account
receivables through September 1997. As of September 30, 1997, approximately
$3,988,000 and $111,000 were outstanding under the $5,000,000 revolver and term
loan, respectively. Year-to-date net borrowings on the revolver and long-term
debt were approximately $1,949,000 as of September 30, 1997. The Credit
Agreement contains certain financial covenants which, among others, require the
Company to maintain certain levels of net worth, cash flow and profitability,
and restricts the payment of dividends. In February and May 1997, PharmChem
amended its Credit Agreement with respect to certain financial covenants.
On October 21, 1997, PharmChem amended its Credit Agreement to extend
the maturity date of the revolver to December 5, 1997, increase borrowings under
the revolver to 85% of qualified account receivables and set interest to the
bank reference rate plus 2.0% (10.25% at September 30, 1997). Further, the
Company obtained waivers for noncompliance with several financial covenants at
September 30, 1997.
The Company reached a tentative agreement to secure a new revolving
credit line to replace its existing facility. The new agreement will provide an
increased line of credit and, subject to certain conditions, is expected to
close in late November.
10
<PAGE> 11
The Company anticipates that existing cash balances, amounts available
under existing and future credit agreements and funds to be generated from
future operations will be sufficient to fund operations and forecasted capital
expenditures through 1997.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share."
SFAS No. 128 requires the presentation of basic earnings per share (EPS) and,
for companies with complex capital structures, diluted EPS. SFAS No. 128 is
effective for annual and interim periods ending after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The Company expects
basic and diluted EPS will not be materially different from primary EPS as
presented in the accompanying condensed consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of a Business Enterprise." SFAS No. 131 establishes standards for disclosures
about segments of an enterprise and is effective for annual periods beginning
after December 15, 1997. The Company expects to include the SFAS No. 131
disclosures in its consolidated financial statements for the year ended December
31, 1998.
11
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.35 1997 Equity Incentive Plan.
10.36 Form of Stock Option Agreement (Nonstatutory Stock
Option) in connection with the 1997 Equity Incentive
Plan.
10.37 Stock Option Agreement (Incentive Stock Option) in
connection with the 1997 Equity Incentive Plan.
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K:
None.
12
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SIGNATURE
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.
PharmChem Laboratories, Inc.
(Registrant)
Date: November 12, 1997 By: /s/ David A. Lattanzio
----------------------------------------
David A. Lattanzio
Chief Financial Officer and Vice President,
Finance and Administration
(Principal Financial and Accounting Officer)
13
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.35 1997 Equity Incentive Plan.
10.36 Form of Stock Option Agreement (Nonstatutory Stock
Option) in connection with the 1997 Equity Incentive Plan.
10.37 Stock Option Agreement (Incentive Stock Option) in
connection with the 1997 Equity Incentive Plan.
Exhibit 27 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.35
PHARMCHEM LABORATORIES, INC.
1997 EQUITY INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. PURPOSE................................................................................ 1
2. DEFINITIONS............................................................................ 1
3. SCOPE OF THE PLAN...................................................................... 4
4. ADMINISTRATION......................................................................... 4
5. ELIGIBILITY............................................................................ 6
6. CONDITIONS TO GRANTS................................................................... 6
7. NON-TRANSFERABILITY.................................................................... 11
8. EXERCISE............................................................................... 11
9. LOANS AND GUARANTEES................................................................... 13
10. NOTIFICATION UNDER SECTION 83(B)...................................................... 14
11. MANDATORY TAX WITHHOLDING............................................................. 14
12. ELECTIVE SHARE WITHHOLDING............................................................ 14
13. TERMINATION OF EMPLOYMENT............................................................. 15
14. PLANS OF FOREIGN SUBSIDIARIES......................................................... 18
15. SUBSTITUTED AWARDS.................................................................... 18
16. SECURITIES LAW MATTERS................................................................ 18
17. NO EMPLOYMENT RIGHTS.................................................................. 18
18. NO RIGHTS AS A SHAREHOLDER............................................................ 18
19. NATURE OF PAYMENTS.................................................................... 18
20. NON-UNIFORM DETERMINATIONS............................................................ 19
21. ADJUSTMENTS........................................................................... 19
22. AMENDMENT OF THE PLAN................................................................. 20
23. TERMINATION OF THE PLAN............................................................... 20
24. NO ILLEGAL TRANSACTIONS............................................................... 20
25. CONTROLLING LAW....................................................................... 20
26. SEVERABILITY.......................................................................... 20
</TABLE>
<PAGE> 3
INTRODUCTION. This Equity Incentive Plan (the "Plan") of PharmChem
Laboratories, Inc., a California corporation (the "Company") is hereby adopted
effective as of March 4, 1997 subject to shareholder approval.
The Plan is intended to allow employees, consultants and directors to
acquire or increase equity ownership in the Company, thereby strengthening their
commitment to the success of the Company and stimulating their efforts on behalf
of the Company, and to assist the Company in attracting new, and retaining
existing, employees, consultants and directors.
2. DEFINITIONS
The terms set forth below have the following meanings (such meanings to be
applicable to both the singular and plural forms):
(a) "Award" means options, including incentive stock options and reload
options, Restricted Shares, Bonus Shares, stock appreciation rights (SARs), or
Performance Shares granted under the Plan.
(b) "Award Agreement" means the written agreement by which an Award shall
be evidenced.
(c) "Board" means the Board of Directors of the Company.
(d) "Bonus Shares" means Shares that are awarded to a Grantee without
cost and without restrictions in recognition of past performance (whether
determined by reference to another employee benefit plan of the Company or
otherwise) or as an incentive to become an employee, Consultant or director of
the Company or a Subsidiary.
(e) "Code" means the Internal Revenue Code of 1986, as amended, and
regulations and rulings thereunder. References to a particular section of the
Code include references to successor provisions.
(f) "Committee" means the committee of the Board appointed pursuant to
Section 4(a)
(g) "Common Stock" means the common stock of the Company.
(h) "Company" -- see the introductory paragraph.
(i) "Consultant" means any person who is engaged by the Company or any
Subsidiary to render consulting services and is compensated for such consulting
services.
(j) "Disability" means, for purposes of the exercise of an incentive
stock option after termination of employment, a disability within the meaning of
Section 22(e)(3) of the Code, and for all other purposes, a mental or physical
condition which renders a Grantee unable to perform any of the essential job
responsibilities which such Grantee held or the tasks to which such Grantee was
assigned at the time the disability was incurred, and which condition is
expected to be permanent or for an indefinite duration exceeding two years.
(k) "Disqualifying Disposition" -- see Section 6(c)(vi).
(l) "Effective Date" means March 4, 1997.
(m) "Fair Market Value" of a Share on any relevant date shall be
determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the
closing selling price per Share on the date in question, as such price is
reported on the Nasdaq National Market or any successor system.
(ii) If the Common Stock is at the time listed on any national
exchange, then the Fair Market Value shall be deemed equal to the closing
selling price of a Share on the date in question on the securities
exchange determined by the Committee to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange.
1
<PAGE> 4
If there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(n) "Grant Date" -- see Section 6(a)(i).
(o) "Grantee" means an individual who has been granted an Award.
(p) "Immediate Family" means, with respect to a particular Grantee, such
Grantee's spouse, children and grandchildren.
(q) "including" or "includes" means "including, without limitation," or
"includes, without limitation," respectively.
(r) "Mature Shares" means Shares for which the holder thereof has good
title, free and clear of all liens and encumbrances, and which such holder
either (i) has held for at least six months or (ii) has purchased on the open
market.
(s) "1934 Act" means the Securities Exchange Act of 1934, as amended from
time to time. References to a particular section of, or rule under, the 1934 Act
include references to successor provisions.
(t) "Option Price" means the per share exercise price of an option.
(u) "Option Term" means the period beginning on the Grant Date of an
option and ending on the expiration date of such option, as specified in the
Award Agreement for such option and as may, in the discretion of the Committee
and consistent with the provisions of the Plan, be extended from time to time
prior to the expiration date of such stock option then in effect, provided,
however, that such period as extended shall under no circumstances extend more
than 10 years after the Grant Date.
(v) "Participant" means any salaried employee (including any officer) of
the Company or any Subsidiary, including any such salaried employee who is on an
approved leave of absence, layoff, or has been subject to a disability which
does not qualify as a Disability, or any Consultant to or any non-employee
director of the Company or any Subsidiary.
(w) "Performance Percentage" -- see Section 6(f)(i)(C).
(x) "Performance Period" -- see Section 6(f)(i)(B).
(y) "Performance Share" means a right granted to a Participant under
Section 6(f) to receive Shares, the payment of which is contingent upon
achieving certain performance goals established by the Committee as further
specified in Section 6(f).
(z) "Plan" -- see the introductory paragraph.
(aa) "Reload Option" -- see Section 6(d).
(bb) "Required Withholding" -- see Section 11(a);
(cc) "Restricted Shares" means Shares that are subject to vesting
conditions specified in the Award Agreement applicable to such Shares.
(dd) "SAR" means stock appreciation right.
(ee) "SEC" means the Securities and Exchange Commission.
(ff) "Section 16 Person" means a person who is subject to potential
liability under Section 16(b) of the 1934 Act with respect to transactions
involving equity securities of the Company.
(gg) "Share" means a share of Common Stock.
(hh) "Strike Price" -- see Section 6(e)(ii).
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(ii) "Subsidiary" means, for purposes of grants of incentive stock
options, a corporation as defined in Section 424(f) of the Code (with the
Company being treated as the employer corporation for purposes of this
definition) and, for all other purposes, a United States or foreign corporation
with respect to which the Company owns, directly or indirectly, 50% or more of
the then-outstanding common stock.
(jj) "10% Owner" means a person who owns capital stock (including stock
treated as owned under Section 424(d) of the Code) possessing more than 10% of
the Voting Power of all classes of capital stock of the Company or any
Subsidiary.
(kk) "Voting Power" means the combined voting power of the
then-outstanding securities of a corporation entitled to vote generally in the
election of directors.
3. SCOPE OF THE PLAN. Subject to adjustment as provided in Section 21,
(a) the total number of Shares available for grant under the Plan shall be
500,000; (b) no more than 20,000 Shares shall be cumulatively available for the
grant of Restricted Shares under the Plan; (c) no more than 20,000 Shares shall
be cumulatively available for the grant of Bonus Shares under the Plan; and (d)
no more than 150,000 Shares shall be cumulatively available for the grant of
SARs under the Plan. If any Shares subject to any Award granted hereunder fail
to vest or such Award otherwise terminates without the issuance of such Shares
or of other consideration in lieu of such Shares, the Shares subject to such
Award, to the extent of any such failure to vest or termination, shall again be
available for grant under the Plan.
4. ADMINISTRATION
(a) Subject to Section 4(b), the Plan shall be administered by a
committee (the "Committee") which shall consist of two or more directors of the
Company, all of whom qualify as "outside directors" as defined for purposes of
the regulations under Code Section 162(m) and as "non-employee directors" under
Rule 16b-3 in respect of the exemption of grants to Section 16 Persons from
potential liability under Section 16(b) of the 1934 Act. The number of members
of the Committee shall from time to time be increased or decreased, and shall be
subject to such conditions, in each case as the Board deems appropriate to
permit transactions in Shares pursuant to the Plan to satisfy such conditions of
Rule 16b-3 as are then in effect, and to permit Awards under the Plan to satisfy
the conditions for exemption from the limitations of Code Section 162(m).
(b) The Board may reserve to itself or delegate to another committee of
the Board any or all of the authority of the Committee with respect to Awards
except, in the case of such other committee, with respect to Awards to Grantees
who are Section 16 Persons at the time any such delegated authority is
exercised. Such other committee (the "Management Committee") may consist of one
(or such greater number as may from time to time be required by the bylaws of
the Company) or more directors who may, but need not be, officers or employees
of the Company or a Subsidiary. To the extent that the Board has reserved to
itself or delegated to such Management Committee the authority of the Committee,
all references to the Committee in the Plan shall be to the Board or such
Management Committee.
(c) Subject to the express provisions of the Plan, the Committee has full
and final authority and sole discretion as follows:
(i) to determine when and to whom Awards should be granted and the
terms and conditions applicable to each Award, including the benefit payable
under any SAR or Performance Share, and whether or not specific Awards shall be
identified with other specific Awards, and if so whether they shall be
exercisable cumulatively with, or alternatively to, such other specific Awards;
(ii) to determine the amount, if any, that a Grantee shall pay for
Restricted Shares, whether to permit or require the payment of cash dividends
thereon to be deferred and the terms related thereto, when Restricted Shares
(including Restricted Shares acquired upon the exercise of an option) shall vest
and whether such shares shall be held in escrow;
(iii) to interpret the Plan and to make all determinations necessary
or advisable for the administration of the Plan;
(iv) to make, amend, and rescind rules relating to the Plan,
including rules with respect to the exercisability and vesting of Awards upon
the termination of employment of a Grantee;
(v) to determine the terms and conditions of all Award Agreements
(which need not be identical) and, with the consent of the Grantee, to amend any
such Award Agreement at any time, among other things, to permit transfers of
such Awards to the extent permitted by the Plan; provided that the consent of
the Grantee shall not be required for any amendment which (A) does not adversely
affect
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the rights of the Grantee, or (B) is necessary or advisable (as determined by
the Committee) to carry out the purpose of the Award as a result of any new or
change in existing applicable law;
(vi) to cancel, with the consent of the Grantee, outstanding Awards
and to grant new Awards in substitution therefor;
(vii) to accelerate the exercisability (including exercisability
within a period of less than one year after the Grant Date) of, and to
accelerate or waive any or all of the terms and conditions applicable to, any
Award or any group of Awards for any reason and at any time, including in
connection with a termination of employment;
(viii) subject to Section 6(a)(ii) and 6(c)(ii), to extend the time
during which any Award or group of Awards may be exercised;
(ix) to make such adjustments or modifications to Awards to Grantees
working outside the United States as are advisable to fulfill the purposes of
the Plan;
(x) to impose such additional terms and conditions upon the grant,
exercise or retention of Awards as the Committee may, before or concurrently
with the grant thereof, deem appropriate, including limiting the percentage of
Awards which may from time to time be exercised by a Grantee; and
(xi) to take any other action as the Committee may deem necessary or
advisable with respect to any matters relating to the Plan for which it is
responsible.
The determination of the Committee on all matters relating to the Plan or
any Award Agreement shall be final. No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Award.
5. ELIGIBILITY. The Committee may in its discretion grant Awards to any
Participant, whether or not he or she has previously received an Award.
References in Section 13 to termination of a Grantee's employment shall be
deemed to include termination of a Grantee's status as a Consultant or
non-employee director of the Company.
6. CONDITIONS TO GRANTS
(a) GENERAL CONDITIONS
(i) The Grant Date of an Award shall be the date on which the
Committee grants the Award or such later date as specified in advance by the
Committee.
(ii) Any provision of the Plan to the contrary notwithstanding, an
Option Term shall under no circumstances extend more than 10 years after the
Grant Date, and shall be subject to earlier termination as herein provided.
(iii) To the extent not set forth in the Plan, the terms and
conditions of each Award shall be set forth in an Award Agreement.
(b) GRANT OF OPTIONS
(i) No later than the Grant Date of any option, the Committee shall
determine the Option Price of such option. The Option Price of an option shall
not be less than 100% of the Fair Market Value of a Share on the Grant Date. An
option shall be exercisable for unrestricted Shares unless the Award Agreement
provides that it is exercisable for Restricted Shares.
(ii) The Committee may, in its discretion, permit a Participant to
elect, before earning compensation, to be granted an Award in lieu of receiving
such compensation; provided that, in the judgment of the Committee, the value of
such Award on the Grant Date equals the amount of compensation foregone by such
employee.
(iii) The number of shares for which options may be granted to any
Grantee in any calendar year shall not exceed 150,000, subject to adjustment as
provided in Section 21.
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(c) GRANT OF INCENTIVE STOCK OPTIONS. At the time of the grant of any
option, the Committee may in its discretion designate that such option shall be
made subject to additional restrictions to permit it to qualify as an "incentive
stock option" under the requirements of Section 422 of the Code. Only employees
(including directors who are employees) may be granted incentive stock options.
Any option designated as an incentive stock option:
(i) shall, if granted to a 10% Owner, have an Option Price not less
than 110% of the Fair Market Value of a Share on the Grant Date;
(ii) shall be for a period of not more than 10 years (five years in
the case of an incentive stock option granted to a 10% Owner) from the Grant
Date, and shall be subject to earlier termination as provided herein or in the
applicable Award Agreement;
(iii) shall not have an aggregate Fair Market Value (determined for
each incentive stock option at its Grant Date) of the Shares with respect to
which incentive stock options are exercisable for the first time by such Grantee
during any calendar year (under the Plan and any other employee stock option
plan of the Grantee's employer or any parent or Subsidiary thereof ("Other
Plans")), determined in accordance with the provisions of Section 422 of the
Code, which exceeds $100,000 (the "$100,000 Limit");
(iv) shall, if the aggregate Fair Market Value of the Shares
(determined on the Grant Date) with respect to the portion of such grant which
is exercisable for the first time during any calendar year ("Current Grant") and
all incentive stock options previously granted under the Plan and any Other
Plans which are exercisable for the first time during a calendar year ("Prior
Grants") would exceed the $100,000 Limit, be exercisable as follows:
(A) the portion of the Current Grant which would, when added
to any Prior Grants, be exercisable with respect to Shares which would have an
aggregate Fair Market Value (determined as of the respective Grant Date for such
options) in excess of the $100,000 Limit shall, notwithstanding the terms of the
Current Grant, be exercisable for the first time by the Grantee in the first
subsequent calendar year or years in which it could be exercisable for the first
time by the Grantee when added to all Prior Grants without exceeding the
$100,000 Limit; and
(B) if, viewed as of the date of the Current Grant, any
portion of a Current Grant could not be exercised under the preceding provisions
of this Section during any calendar year commencing with the calendar year in
which it is first exercisable through and including the last calendar year in
which it may by its terms be exercised, such portion of the Current Grant shall
not be an incentive stock option, but shall be exercisable as a separate option
at such date or dates as are provided in the Current Grant;
(v) shall be granted within 10 years from the earlier of the date
the Plan is adopted or the date the Plan is approved by the shareholders of the
Company;
(vi) shall require the Grantee to notify the Committee of any
disposition of any Shares issued pursuant to the exercise of the incentive stock
option under the circumstances described in Section 421(b) of the Code (relating
to certain disqualifying dispositions) (any such circumstance, a "Disqualifying
Disposition"), within 10 days of such Disqualifying Disposition; and
(vii) shall by its terms not be assignable or transferable other than
by will or the laws of descent and distribution and may be exercised, during the
Grantee's lifetime, only by the Grantee; provided, however, that the Grantee
may, to the extent provided in the Plan in any manner specified by the
Committee, designate in writing a beneficiary to exercise his or her incentive
stock option after the Grantee's death.
Notwithstanding the foregoing and Section 4(c)(v), the Committee may,
without the consent of the Grantee, at any time before the exercise of an option
(whether or not an incentive stock option), take any action necessary to prevent
such option from being treated as an incentive stock option.
(d) GRANT OF RELOAD OPTIONS. The Committee may in connection with the
grant of an option or thereafter provide that a Grantee who (i) is a Participant
when he or she exercises an Option, (ii) exercises such option for Shares which
have a Fair Market Value equal to not less than 120% of the Option Price for
such option ("Exercised Option"), and (iii) satisfies the Option Price or
Required Withholding applicable thereto with Shares shall automatically be
granted, subject to Section 3, an additional option ("Reload Option") in an
amount equal to the sum ("Reload Number") of the number of Shares tendered to
exercise the Exercised Option plus, if so provided by the
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<PAGE> 8
Committee, the number of Shares, if any, retained by the Company in connection
with the exercise of the Exercised Option to satisfy any federal, state or local
tax withholding requirements; provided that no Reload Option shall be granted in
connection with the exercise of an Option that has been transferred by the
initial Grantee thereof.
Reload Options shall be subject to the following terms and conditions:
(i) the Grant Date for each Reload Option shall be the date of exercise
of the Exercised Option to which it relates;
(ii) subject to Section 6(d)(iii), the Reload Option may be exercised at
any time during the Option Term of the Exercised Option (subject to earlier
termination thereof as provided in the Plan or in the applicable Award
Agreement); and
(iii) the terms of the Reload Option shall be the same as the terms of the
Exercised Option to which it relates, except that (A) the Option Price shall be
100% of the Fair Market Value of a Share on the Grant Date of the Reload Option,
(B) subject to Section 4(c)(vii), no Reload Option may be exercised within one
year after its Grant Date, and (C) in no event shall a second Reload Option be
granted in connection with the exercise of such initial Reload Option.
(e) GRANT OF SARS
(i) When granted, SARs may, but need not, be identified with a
specific option, specific Restricted Shares, or specific Performance Shares of
the Grantee (including any option, Restricted Shares, or Performance Shares
granted on or before the Grant Date of the SARs) in a number equal to or
different from the number of SARs so granted. If SARs are identified with Shares
subject to an option, with Restricted Shares, or with Performance Shares, then,
unless otherwise provided in the applicable Award Agreement, the Grantee's
associated SARs shall terminate upon (x) the expiration, termination, failure to
vest or cancellation of such option, Restricted Shares, or Performance Shares,
(y) the exercise of such option or Performance Shares or (z) the date such
Restricted Shares vest.
(ii) The strike price ("Strike Price") of any SAR shall equal, for
any SAR that is identified with an option, the Option Price of such option, or
for any other SAR, 100% of the Fair Market Value of a Share on the Grant Date of
such SAR; provided that the Committee may (x) specify a higher Strike Price in
the Award Agreement, or (y) provide that the benefit payable upon exercise of
any SAR shall not exceed such percentage of the Fair Market Value of a Share on
such Grant Date as the Committee shall specify.
(iii) The number of shares for which SARs may be granted to any
Grantee in any calendar year shall not exceed 150,000, subject to adjustment as
provided in Section 21.
(f) GRANT OF PERFORMANCE SHARES
(i) Before the grant of any Performance Share, the Committee shall:
(A) determine objective performance goals (which may consist
of any one or more of the following: the attainment by a Share of a specified
Fair Market Value for a specified period of time, earnings per share, return to
shareholders (including dividends), return on equity, earnings of the Company,
growth in revenues, market share, cash flow or cost reduction or customer
service goals, or any combination of the foregoing), and the amount of
compensation under the goals applicable to such grant;
(B) designate a period, of not less than one year nor more
than five years, for the measurement of the extent to which performance goals
are attained, which period may begin prior to the Grant Date (the "Performance
Period"); and
(C) assign a "Performance Percentage" to each level of
attainment of performance goals during the Performance Period, with the
percentage applicable to minimum attainment being zero percent (0%) and the
percentage applicable to maximum attainment to be determined by the Committee
from time to time, but not in excess of 200%.
(ii) If a Grantee is promoted, demoted or transferred to a different
position or different business unit of the Company during a Performance Period,
then, to the extent the Committee determines the performance goals or
Performance Period are no longer appropriate, the Committee may adjust, change
or eliminate the performance goals or the applicable Performance Period as it
deems appropriate in order to make them appropriate and comparable to the
initial performance goals or Performance Period.
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(iii) When granted, Performance Shares may, but need not, be
identified with Shares subject to a specific option, specific Restricted Shares
or specific SARs of the Grantee granted under the Plan in a number equal to or
different from the number of the Performance Shares so granted. If Performance
Shares are so identified, then, unless otherwise provided in the applicable
Award Agreement, the Grantee's associated Performance Shares shall terminate
upon (A) the expiration, termination, failure to vest or cancellation of the
option, Restricted Shares or SARs with which the Performance Shares are
identified, (B) the exercise of such option or SARs or (C) the date Restricted
Shares vest.
(iv) The Shares related to the Performance Shares awarded to any
Grantee for any Performance Period shall not have a Fair Market Value as of the
Grant Date in excess of 100% of the Grantee's base annual salary in effect at
the time of the grant of the Award multiplied by the number of years in the
Performance Period.
(g) GRANT OF RESTRICTED SHARE
(i) The Committee shall determine the amount, if any, that a
Grantee shall pay for Restricted Shares.
(ii) The Committee may, but need not, provide that all or any
portion of a Grantee's Restricted Shares, or Restricted Shares acquired upon
exercise of an option shall fail to vest:
(A) except as otherwise specified in the Plan or the Award
Agreement, upon the Grantee's ceasing to be a Participant within a specified
time period after the Grant Date, or
(B) if the Company or the Grantee does not achieve specified
performance goals (if any) within a specified time period after the Grant Date
and before the Grantee ceases to be a Participant, or
(C) upon failure to satisfy such other restrictions as the
Committee may specify in the Award Agreement.
(iii) If Restricted Shares fail to vest, then if the Grantee was
required to pay for such shares or acquired such Restricted Shares upon the
exercise of an option, the Grantee shall be deemed to have resold such
Restricted Shares to the Company at a price equal to the lesser of (x) the
amount paid by the Grantee for such Restricted Shares, or (y) the Fair Market
Value of such Restricted Shares on the date of such failure to vest. The Company
shall pay to the Grantee the required amount as soon as is administratively
practical. Such Restricted Shares shall cease to be outstanding, and shall no
longer confer on the Grantee thereof any rights as a shareholder of the Company,
from and after the date or the event causing the failure to vest, whether or not
the Grantee accepts the Company's tender of payment for such Restricted Shares.
(iv) The Committee may provide that the certificates for any
Restricted Shares (x) shall be held (together with a stock power executed in
blank by the Grantee) in escrow by the Secretary of the Company until such
Restricted Shares vest or fail to vest, and/or (y) shall bear an appropriate
legend restricting the transfer of such Restricted Shares. If any Restricted
Shares vest, the Company shall cause certificates for such shares to be issued
without such legend.
(v) The Committee may require the payment of cash dividends on
Restricted Shares to be deferred and, if the Committee so determines, reinvested
in additional Restricted Shares. Stock dividends and deferred cash dividends
issued with respect to Restricted Shares shall be subject to the same
restrictions and other terms as apply to the Restricted Shares with respect to
which such dividends are issued. The Committee may provide for payment of
interest on deferred cash dividends.
(h) GRANT OF BONUS SHARES. The Committee may grant Bonus Shares to any
Participant.
7. NON-TRANSFERABILITY. Each Award granted hereunder shall not be
assignable or transferable other than by will or the laws of descent and
distribution and may be exercised, during the Grantee's lifetime, only by the
Grantee or his or her guardian or legal representative, except that, subject to
Section 6(c)(vii) in respect of incentive stock options, a Grantee may in a
manner and to the extent permitted by the Committee in its discretion, (i)
designate in writing a beneficiary to exercise an Award after his or her death
(provided, however, that no such designation shall be effective unless received
by the office of the Company designated for that purpose prior to the Grantee's
death) and (ii) transfer a Stock Option (other than an incentive stock option)
to a member of his or her Immediate Family, to a trust established exclusively
for such Immediate Family member or to a limited liability company or
partnership of which all of the
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members or partners are members of the Grantee's Immediate Family. The Committee
may specify different or more restrictive provisions applicable to a transferred
Award.
8. EXERCISE
(a) EXERCISE OF OPTIONS.
(i) Subject to Sections 4(c)(vii), 6(d) and 8(d) and except as
otherwise provided in the applicable Award Agreement, each option shall become
exercisable with respect to 6.25% of the shares subject thereto on the first day
of each of the first sixteen calendar quarters after the Grant Date of such
option. Options shall be exercisable for a period of not more than 10 years from
the Grant Date, and shall be subject to earlier termination as provided herein
or in the applicable Award Agreement.
(ii) An option shall be exercised by the delivery to the Company
during the Option Term of (x) written notice of intent to purchase a specific
number of Shares subject to the option and (y) payment in full of the Option
Price of such specific number of Shares.
(iii) Payment of the Option Price may be made by any one or more of
the following means: personal check or wire transfer; Mature Shares, valued at
their Fair Market Value on the date of exercise; with the approval of the
Committee, Restricted Shares held by the Grantee for at least six months prior
to the exercise of the option, each such share valued at the Fair Market Value
of a Share on the date of exercise; through the sale of the Shares acquired on
exercise of the option through a broker-dealer to whom the Grantee has submitted
an irrevocable notice of exercise and irrevocable instructions to deliver
promptly to the Company the amount of sale or loan proceeds sufficient to pay
for such Shares, together with, if requested by the Company, the amount of
federal, state, local or foreign withholding taxes payable by the Grantee by
reason of such exercise; or through simultaneous sale of shares acquired on
exercise of the option through a broker-dealer acceptable to the Company to whom
the Grantee has submitted an irrevocable notice of exercise, as permitted under
Regulation T of the Federal Reserve Board. In the discretion of the Committee,
payment may also be made in accordance with Section 9. The Committee may in its
discretion specify that, if any Restricted Shares ("Tendered Restricted Shares")
are used to pay the Option Price, (x) all the Shares acquired on exercise of the
option shall be subject to the same restrictions as the Tendered Restricted
Shares, determined as of the date of exercise of the option, or (y) a number of
Shares acquired on exercise of the option equal to the number of Tendered
Restricted Shares shall be subject to the same restrictions as the Tendered
Restricted Shares, determined as of the date of exercise of the option.
(b) EXERCISE OF SARS
(i) Subject to Sections 4(c)(vii), 6(d) and 8(d), and except as
otherwise provided in the applicable Award Agreement, (x) each SAR not
identified with any other Award shall become exercisable with respect to 6.25%
of the shares subject thereto on the first day of each of the first sixteen
calendar quarters after the Grant Date of such SAR and (y) each SAR which is
identified with any other Award shall become exercisable as and to extent that
the option or Restricted Shares with which such SAR is identified may be
exercised or becomes nonforfeitable, as the case may be. SARs shall be
exercisable for a period of not more than 10 years from the Grant Date, and
shall be subject to earlier termination as provided herein or in the applicable
Award Agreement.
(ii) SARs shall be exercised by delivery to the Company of written
notice of intent to exercise a specific number of SARs. Unless otherwise
provided in the applicable Award Agreement, the exercise of SARs which are
identified with Shares subject to an option or Restricted Shares shall result in
the cancellation or failure to vest of such option or Restricted Shares, as the
case may be, to the extent of such exercise.
(iii) The benefit for each SAR exercised shall be equal to (x) the
Fair Market Value of a Share on the date of such exercise, minus (y) the Strike
Price of such SAR. Such benefit shall be payable in cash, except that the
Committee may provide in the Award Agreement that benefits may be paid wholly or
partly in Shares.
(c) PAYMENT OF PERFORMANCE SHARES. Unless otherwise provided in the Award
Agreement with respect to an Award of Performance Shares, if the minimum
performance goals applicable to such Performance Shares have been achieved
during the applicable Performance Period, then the Company shall pay to the
Grantee of such Award that number of Shares equal to the product of:
(i) the sum of (x) number of Performance Shares specified in the
applicable Award Agreement and (y) the number of Shares that would have been
issuable if such Performance Shares had been Shares outstanding throughout the
Performance Period and the stock
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dividends, cash dividends (except as otherwise provided in the Award Agreement),
and other property paid in respect of such shares had been reinvested in
additional Shares as of each dividend payment date,
multiplied by
(ii) the Performance Percentage achieved during such Performance
Period.
The Committee may in its discretion determine that cash be paid in lieu of some
or all of such Shares. The amount of cash payable in lieu of a Share shall be
determined by valuing such share at its Fair Market Value on the business day
next preceding the date such cash is to be paid. Payments pursuant to this
Section shall be made as soon as administratively practical after the end of the
applicable Performance Period. Any Performance Shares with respect to which the
performance goals shall not have been achieved by the end of the applicable
Performance Period shall expire.
(d) POOLING CONSIDERATIONS. Any provision of the Plan to the contrary
notwithstanding, if the Committee determines, in its discretion exercised prior
to a sale or merger of the Company that in the Committee's judgment is
reasonably likely to occur, that the exercise of SARs would preclude the use of
pooling-of-interests accounting ("pooling") after the consummation of such sale
or merger and that such preclusion of pooling would have a material adverse
effect on such sale or merger, the Committee may either unilaterally cancel such
SARs prior to the consummation of such sale or merger or cause the Company to
pay the benefit attributable to such SARs in the form of Shares if the Committee
determines that such payment would not cause the transaction to become
ineligible for pooling.
9. LOANS AND GUARANTEES. The Committee may in its discretion allow a
Grantee to defer payment to the Company of all or any portion of (i) the Option
Price of an option, (ii) the purchase price of Restricted Shares, or (iii) any
taxes associated with the exercise, vesting of, or payment of benefits in
connection with, an Award, or cause the Company to guarantee a loan from a third
party to the Grantee, in an amount equal to all or any portion of such Option
Price, purchase price or any related taxes. Any such payment deferral or
guarantee by the Company shall be on such terms and conditions as the Committee
may determine; provided that the interest rate applicable to any such payment
deferral shall not be more favorable to the Grantee than the terms applicable to
funds borrowed by the Company from time to time. Notwithstanding the foregoing,
a Grantee shall not be entitled to defer the payment of such Option Price,
purchase price or any related taxes unless the Grantee enters into a binding
obligation to pay the deferred amount. If the Committee has permitted a payment
deferral or caused the Company to guarantee a loan pursuant to this Section,
then the Committee may require the immediate payment of such deferred amount or
the immediate release of such guarantee upon the Grantee's ceasing to be a
Participant or if the Grantee sells or otherwise transfers his or her Shares
purchased pursuant to such deferral or guarantee. The Committee may at any time
in its discretion forgive the repayment of any or all of the principal of, or
interest on, any such deferred payment obligation.
10. NOTIFICATION UNDER SECTION 83(b). If the Grantee, in connection with
the exercise of any option or the grant of Restricted Shares, makes the election
permitted under Section 83(b) of the Code to include in such Grantee's gross
income in the year of transfer the amounts specified in Section 83(b) of the
Code, then such Grantee shall notify the Company of such election within 10 days
of filing the notice of the election with the Internal Revenue Service, in
addition to any filing and notification required pursuant to regulations issued
under Section 83(b) of the Code. The Committee may, in connection with the grant
of an Award or at any time thereafter, prohibit a Grantee from making the
election described above.
11. MANDATORY TAX WITHHOLDING
(a) Whenever under the Plan Shares are to be delivered upon exercise or
payment of an Award, or upon the vesting of Restricted Shares, or any other
event with respect to rights and benefits hereunder, the Company shall be
entitled to require (i) that the Grantee remit an amount in cash, or in the
Company's discretion, Mature Shares, sufficient to satisfy all federal, state
and local tax withholding requirements related thereto ("Required Withholding"),
(ii) the withholding of such Required Withholding from compensation otherwise
due to the Grantee or from any Shares due to the Grantee under the Plan, or
(iii) any combination of the foregoing.
(b) Any Grantee who makes a Disqualifying Disposition or an election
under Section 83(b) of the Code shall remit to the Company an amount sufficient
to satisfy all resulting Required Withholding; provided that, in lieu of or in
addition to the foregoing, the Company shall have the right to withhold such
Required Withholding from compensation otherwise due to the Grantee or from any
Shares or other payment due to the Grantee under the Plan.
9
<PAGE> 12
12. ELECTIVE SHARE WITHHOLDING
(a) Subject to the following subsection, a Grantee may elect the
withholding ("Share Withholding") by the Company of a portion of the Shares
otherwise deliverable to such Grantee upon the exercise of an Award or upon the
vesting of Restricted Shares (each, a "Taxable Event") having a Fair Market
Value equal to (i) the minimum amount necessary to satisfy Required Withholding
liability attributable to the Taxable Event; or (ii) with the Committee's prior
approval, a greater amount, not to exceed the estimated total amount of such
Grantee's tax liability with respect to the Taxable Event.
(b) Each Share Withholding election shall be subject to the following
conditions:
(i) the Grantee's election must be made before the date (the "Tax
Date") on which the amount of tax to be withheld is determined; and
(ii) the Grantee's election shall be irrevocable.
13. TERMINATION OF EMPLOYMENT
(a) CERTAIN TERMINATES. If a Grantee's employment is terminated due to
any reason other than those set forth in Sections 13(b), (c) or (d), (i) the
Grantee's Restricted Shares that are not vested at the time of such termination
of employment shall thereupon terminate without vesting, subject to the
provisions of Section 6(g)(iii) regarding repayment of certain amounts to the
Grantee; and (ii) any unexercised option, SAR or Performance Share shall
terminate effective immediately upon such termination of employment.
(b) ON ACCOUNT OF DEATH. Except as otherwise provided by the Committee in
the Award Agreement, if a Grantee's employment terminates on account of death,
then:
(i) the Grantee's Restricted Shares that were not vested shall
thereupon vest;
(ii) any unexercised option or SAR, whether or not exercisable on
the date of such termination of employment, may be exercised, in whole or in
part, within one year after such termination of employment (but only during the
Option Term) by (A) the Grantee's personal representative or by the person to
whom the option or SAR, as applicable, is transferred by will or the applicable
laws of descent and distribution, (B) the Grantee's beneficiary designated in
accordance with Sections 6(c)(vii) or 7, or (C) the Grantee's Immediate Family
member to whom the option or SAR was transferred in accordance with Section 7;
and
(iii) any unexercised Performance Share may be exercised in whole or
in part, at any time within one year after such termination of employment on
account of death, by (A) the Grantee's personal representative or by the person
to whom the Performance Share is transferred by will or the applicable laws of
descent and distribution, (B) the Grantee's beneficiary designated in accordance
with Section 7, or (C) the Grantee's Immediate Family member to whom the
Performance Share was transferred in accordance with Section 7; provided that
the benefit payable with respect to any Performance Share with respect to which
the Performance Period has not ended as of the date of such termination of
employment on account of death shall be equal to the product of the Fair Market
Value of a Share Value multiplied successively by each of the following:
(1) a fraction, the numerator of which is the number of whole
and partial months that have elapsed between the beginning of such Performance
Period and the date of such termination of employment and the denominator of
which is the number of whole and partial months in the Performance Period; and
(2) a percentage determined in the discretion of the Committee
that would be earned under the terms of the applicable Award Agreement assuming
that the rate at which the performance goals have been achieved as of the date
of such termination of employment would continue until the end of the
Performance Period, or, if the Committee elects to compute the benefit after the
end of the Performance Period, the Performance Percentage, as determined by the
Committee, attained during the Performance Period for the Performance Share.
(c) ON ACCOUNT OF DISABILITY. Except as otherwise provided by the
Committee in the Award Agreement, if a Grantee's employment terminates on
account of Disability, then:
10
<PAGE> 13
(i) the Grantee's Restricted Shares that were not vested shall
thereupon vest;
(ii) any unexercised option or SAR, whether or not exercisable on
the date of such termination of employment, may be exercised, in whole or in
part, within one year after such termination of employment (but only during the
Option Term) by the Grantee or, after his or her death, by (A) his or her
personal representative or by the person to whom the option or SAR, as
applicable, is transferred by will or the applicable laws of descent and
distribution, (B) the Grantee's beneficiary designated in accordance with
Sections 6(c)(vii) or 7, or (C) the Grantee's Immediate Family member to whom
the option or SAR was transferred in accordance with Section 7; and
(iii) any unexercised Performance Share may be exercised in whole or
in part, at any time within one year after such termination of employment on
account of Disability by the Grantee or, after the Grantee's death, by (A) his
personal representative or by the person to whom the Performance Share is
transferred by will or the applicable laws of descent and distribution, (B) the
Grantee's beneficiary designated in accordance with Section 7, or (C) the
Grantee's Immediate Family member to whom the Performance Share was transferred
in accordance with Section 7; provided that the benefit payable with respect to
any Performance Share with respect to which the Performance Period has not ended
as of the date of such termination of employment on account of Disability shall
be equal to the product of the Fair Market Value of a Share Value multiplied
successively by each of the following:
(1) a fraction, the numerator of which is the number of whole
and partial months that have elapsed between the beginning of such Performance
Period and the date of such termination of employment and the denominator of
which is the number of whole and partial months in the Performance Period; and
(2) a percentage determined in the discretion of the Committee
that would be earned under the terms of the applicable Award Agreement assuming
that the rate at which the performance goals have been achieved as of the date
of such termination of employment would continue until the end of the
Performance Period, or, if the Committee elects to compute the benefit after the
end of the Performance Period, the Performance Percentage, as determined by the
Committee, attained during the Performance Period for the Performance Share.
(d) CERTAIN OTHER TERMINATIONS. Except as otherwise provided in the Award
Agreement, if a Grantee's employment with or service to the Company terminates
due to (i) resignation after age 65 or 10 years of service to or employment with
the Company or any Subsidiary, provided such Grantee after his or her
resignation is not employed or engaged by, and does not serve on the board of
directors of, a competitor of the Company or any Subsidiary or (ii) elimination
of the Grantee's position with the Company or a reduction in the Company's work
force, then:
(i) the Grantee's Restricted Shares (and any SARs identified
therewith), to the extent not vested on the date of the Grantee's termination of
employment), shall terminate without vesting on such date, subject to the
provisions of Section 6(g)(iii) regarding repayment of certain amounts to the
Grantee;
(ii) any unexercised option or SAR (other than a SAR identified with
a Restricted Share or Performance Share), to the extent exercisable immediately
before the Grantee's termination of employment, may be exercised in whole or in
part within such period as shall be specified in the Award Agreement, which
shall not be later than three months after such termination of employment (but
only during the Option Term); and
(iii) the Grantee's Performance Shares (and any SARs identified
therewith) may vest and may be exercised in whole or in part, only if and to the
extent determined by the Committee.
For purposes of this Section 13(d), the Committee in its sole discretion
shall determine whether a person or entity constitutes a competitor of the
Company or any Subsidiary.
(e) EXTENDED EXERCISABILITY. If the Grantee has entered into an agreement
with the Company not to sell any Shares (or the capital stock of a successor to
the Company) for a specified period after the consummation of a business
combination between the Company and another corporation or entity (the
"Specified Period"), an unexercised option or SAR (other than an SAR identified
with a Restricted Share or a Performance Share) may be exercised in whole or in
part until the later of the end of the post-termination period specified in
subparagraphs (b), (c) or (d) of this Section, as applicable, or 10 business
days after the end of the Specified Period.
11
<PAGE> 14
(f) EXTENSION OF TERM. In the event of a termination of the Grantee's
employment for any of the reasons specified in subparagraphs (b), (c) and (d) of
this Section, the term of any Award (whether or not exercisable immediately
before such termination) which would otherwise expire after the Grantee's
termination of employment but before the end of the period following such
termination of employment described in subparagraphs (b), (c) and (d) of this
Section for exercise of Awards may, in the Committee's discretion, be extended
so as to permit any unexercised portion thereof to be exercised at any time
within such period. The Committee may further extend the period of
exercisability to permit any unexercised portion thereof to be exercised within
a specified period provided by the Committee.
14. PLANS OF FOREIGN SUBSIDIARIES. The Committee may authorize any
foreign Subsidiary to adopt a plan for granting Awards ("Foreign Plan"). All
Awards granted under such Foreign Plan shall be treated as grants under the
Plan. Such Foreign Plans shall have such provisions as the Committee permits not
inconsistent with the provisions of the Plan. Awards granted under a Foreign
Plan shall be governed by the terms of the Plan, except to the extent that the
provisions of the Foreign Plan are more restrictive than the provisions of the
Plan, in which case the Foreign Plan shall control.
15. SUBSTITUTED AWARDS. If the Committee cancels any Award (whether
granted under this Plan or any plan of any entity acquired by the Company or a
Subsidiary), the Committee may in its discretion substitute a new Award therefor
upon such terms and conditions consistent with the Plan as the Committee may
determine; provided, that (a) the Option Price of any new option, and the Strike
Price of any new SAR, shall not be less than 100% (110% in the case of an
incentive stock option granted to a 10% Owner) of the Fair Market Value of a
Share on the date of grant of the new Award; and (b) the Grant Date of the new
Award shall be the date on which such new Award is granted.
16. SECURITIES LAW MATTERS. If the Committee deems it necessary to comply
with any applicable securities law, the Committee may require a written
investment intent representation by the Grantee, or any transferee of the
Grantee, and may require that a restrictive legend be affixed to certificates
for Shares. If, based upon the advice of counsel for the Company, the Committee
determines that the exercise or vesting of, or delivery of benefits pursuant to,
any Award would violate any applicable provision of (a) federal or state
securities laws or (b) the listing requirements of any national securities
exchange or national market system on which are listed any of the Company's
equity securities, then the Committee may postpone any such exercise, vesting or
delivery, as applicable, but the Company shall use all reasonable efforts to
cause such exercise, vesting or delivery to comply with all such provisions at
the earliest practicable date.
17. NO EMPLOYMENT RIGHTS. Neither the establishment of the Plan nor the
grant of any Award shall (a) give any Grantee the right to remain employed by,
or continue in the service of, the Company or any Subsidiary or to any benefits
not specifically provided by the Plan or (b) modify the right of the Company or
any Subsidiary to modify, amend or terminate any benefit plan.
18. NO RIGHTS AS A SHAREHOLDER. A Grantee shall not have any rights as a
shareholder of the Company with respect to the Shares (other than Restricted
Shares) which may be deliverable upon exercise or payment of such Award until
such shares have been delivered to him or her. Restricted Shares, whether held
by a Grantee or in escrow by the Secretary of the Company, shall confer on the
Grantee all rights of a shareholder of the Company, except as otherwise provided
in the Plan or in the Award Agreement.
19. NATURE OF PAYMENTS. Awards shall be special incentive payments to the
Grantee and shall not be taken into account in computing the amount of salary or
compensation of the Grantee for purposes of determining any pension, retirement,
death or other benefit under (a) any pension, retirement, profit-sharing, bonus,
insurance or other benefit plan of the Company or any Subsidiary or (b) any
agreement between (i) the Company or any Subsidiary and (ii) the Grantee, except
as such plan or agreement shall otherwise expressly provide.
20. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the
Plan need not be uniform and may be made by the Committee selectively among
persons who receive, or are eligible to receive, Awards, whether or not such
persons are similarly situated. Without limiting the generality of the
foregoing, the Committee shall be entitled, to enter into non-uniform and
selective Award Agreements as to (a) the identity of the Grantees, (b) the terms
and provisions of Awards, and (c) the treatment of terminations of status as a
Participant.
12
<PAGE> 15
21. ADJUSTMENTS
(a) The Committee shall make equitable adjustment of:
(i) the aggregate numbers of Shares available under the Plan for
Awards in general and for the grant of Restricted Shares, Bonus Shares and SARs
and the number of Shares for which options may be granted to any Grantee
pursuant to Section 6(b)(iii) and for which SARs may be granted to any Grantee
pursuant to Section 6(e)(iii),
(ii) the number of Shares, SARs or Performance Shares covered by an
Award, and
(iii) the Option Price of all outstanding options and the Strike
Price of all outstanding SARs,
to reflect a stock dividend, stock split, reverse stock split, share
combination, recapitalization, merger, consolidation, spin-off, split-off,
reorganization, rights offering, liquidation or similar event, of or by the
Company.
(b) Notwithstanding any provision in this Plan or any Award Agreement, in
the event of a sale, merger, reorganization, consolidation or similar
transaction in connection with which the holders of Common Stock receive shares
of common stock of the surviving or successor corporation that are registered
under Section 12 of the 1934 Act, there shall be substituted for each option and
SAR outstanding on the date of the consummation of such transaction, a new
option or SAR, as the case may be, reflecting the number and class of shares
into which each outstanding Share shall be converted pursuant to such
transaction and providing each Grantee with rights that are substantially
identical to those under this Plan in all material respects. In the event of any
such substitution, the purchase price per share in the case of an option and the
Strike Price in the case of an SAR shall be appropriately adjusted by the
Committee, such adjustments to be made in the case of outstanding options and
SARs without a change in the aggregate purchase price or Strike Price.
22. AMENDMENT OF THE PLAN. The Board may from time to time in its
discretion amend the Plan without the approval of the Company's shareholders,
except as such shareholder approval may be required under the listing
requirements of any national market system or securities exchange on which are
listed the Company's equity securities or under the Code in order to preserve
the intended federal tax effects of an Award on the Company and the Grantee.
Notwithstanding the foregoing, the Board may not amend the Plan to increase the
total number of Shares reserved for the purposes of the Plan or change the
employees or class of employees eligible to participate in the Plan without
shareholder approval.
23. TERMINATION OF THE PLAN. The Plan shall terminate on the 10th
anniversary of the Effective Date or at such earlier time as the Board may
determine. No termination shall affect any Award then outstanding under the
Plan.
24. NO ILLEGAL TRANSACTIONS. The Plan and all Awards granted pursuant to
it are subject to all applicable laws and regulations. Notwithstanding any
provision of the Plan or any Award, Grantees shall not be entitled to exercise,
or receive benefits under, any Award, and the Company shall not be obligated to
deliver any Shares or deliver benefits to a Grantee, if such exercise or
delivery would constitute a violation by the Grantee or the Company of any
applicable law or regulation.
25. CONTROLLING LAW. The law of California, except its law with respect
to choice of law, shall control all matters relating to the Plan.
26. SEVERABILITY. If any part of the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other part of the Plan. Any Section or part
of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.
13
<PAGE> 1
EXHIBIT 10.36
PHARMCHEM LABORATORIES, INC.
1997 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(Nonstatutory Stock Option)
By this Agreement, PharmChem Laboratories, Inc., a California
corporation (the "Company") grants to [_____________], [AN EMPLOYEE] [A
NON-EMPLOYEE DIRECTOR] [A CONSULTANT] of the Company (the "Grantee"), an option
(the "Option") to purchase shares of the Company's common stock, no par value
("Stock"), subject to the terms and conditions set forth below, in the attached
Exhibit A hereto and in the PharmChem Laboratories, Inc. 1997 Equity Incentive
Plan, as may from time to time be amended (as so amended, the "Plan"), all of
which are an integral part of this Agreement. A copy of the Plan may be obtained
from the Company upon request. Capitalized terms used but not defined in this
Agreement have the meaning specified in the Plan.
Grant Date . . . . . . . . . . . . . . . [_________________]
Expiration Date. . . . . . . . . . . . . [_________________]
Number of shares . . . . . . . . . . [_________________]
Option exercise price . . . . . . . . . $[________________]
When first exercisable . . . . . . . . . This Option shall become exercisable
in installments as specified below,
except as the Plan or this Agreement
may allow exercisability at a
different date:
<TABLE>
<CAPTION>
Calendar Quarter Percentage No. of Shares Cumulative
After Grant Date Exercisable Exercisable No. of Shares
- ---------------- ----------- ----------- -------------
<S> <C> <C> <C>
Prior to first day of first 0% 0 0
calendar quarter after grant date
During first calendar quarter 6.25% [________] [________]
after grant date
During second calendar quarter 12.5% [________] [________]
after grant date
During third calendar quarter 18.75% [________] [________]
after grant date
During fourth calendar quarter 25% [________] [________]
after grant date
During fifth calendar quarter 31.25% [________] [________]
after grant date
During sixth calendar quarter 37.5% [________] [________]
after grant date
During seventh calendar quarter 43.75% [________] [________]
after grant date
During eighth calendar quarter 50% [________] [________]
after grant date
During ninth calendar quarter 56.25% [________] [________]
after grant date
</TABLE>
Employee Non-Qual.
Option Agreement 10/97
<PAGE> 2
<TABLE>
<CAPTION>
Calendar Quarter Percentage No. of Shares Cumulative
After Grant Date Exercisable Exercisable No. of Shares
- ---------------- ----------- ----------- -------------
<S> <C> <C> <C>
During tenth calendar quarter 62.5% [________] [________]
after grant date
During eleventh calendar quarter 68.75% [________] [________]
after grant date
During twelfth calendar quarter 75% [________] [________]
after grant date
During thirteenth calendar 81.25% [________] [________]
quarter after grant date
During fourteenth calendar 87.5% [________] [________]
quarter after grant date
During fifteenth calendar quarter 93.75% [________] [________]
after grant date
During sixteenth calendar quarter 100% [________] [________]
after grant date
</TABLE>
Please indicate your acceptance of this Agreement by signing the
enclosed copy in the space provided below and returning it to the Chief
Financial Officer, within 30 days after the Company's mailing of this Agreement
to you.
PHARMCHEM LABORATORIES, INC.
By: ___________________________________
David A. Lattanzio
Chief Financial Officer
I ACKNOWLEDGE AND AGREE THAT THE VESTING OF SHARES PURSUANT TO
THE SCHEDULE ON THE FIRST PAGE OF THIS AGREEMENT IS EARNED ONLY BY
CONTINUING SERVICE AS AN EMPLOYEE, CONSULTANT OR NON-EMPLOYEE DIRECTOR
AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). I FURTHER
ACKNOWLEDGE AND AGREE THAT THIS OPTION, THE PLAN WHICH IS INCORPORATED
HEREIN BY REFERENCE, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR
IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR
THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE
WITH MY RIGHT OR THE COMPANY'S RIGHT TO TERMINATE MY EMPLOYMENT OR
CONSULTING RELATIONSHIP, IF ANY, AT ANY TIME, WITH OR WITHOUT CAUSE.
Employee Non-Qual.
Option Agreement 10/97
<PAGE> 3
I ACKNOWLEDGE RECEIPT OF A COPY OF THE PLAN, A COPY OF WHICH IS
ANNEXED HERETO, REPRESENT THAT I AM FAMILIAR WITH THE TERMS AND
PROVISIONS THEREOF, AND HEREBY ACCEPT THIS OPTION SUBJECT TO ALL OF THE
TERMS AND PROVISIONS THEREOF. I HAVE REVIEWED THE PLAN AND THIS OPTION
IN THEIR ENTIRETY, HAVE HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF
COUNSEL PRIOR TO EXECUTING THIS AGREEMENT AND FULLY UNDERSTAND ALL
PROVISIONS OF THE OPTION. I HEREBY AGREE TO ACCEPT AS BINDING,
CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE BOARD OF
DIRECTORS OR OF THE COMMITTEE UPON ANY QUESTIONS ARISING UNDER THE PLAN.
ACCEPTED AND AGREED:
_______________________________
Name: _________________________
Dated: __________________, ____
<PAGE> 4
EXHIBIT A
TO
EMPLOYEE OPTION AGREEMENT
1. Manner of Exercise. This Option shall be exercised by delivery to
the Company (or its authorized agent), during the period in which such Option is
exercisable, of (i) written notice of your intent to purchase a specific number
of shares of Stock pursuant to this Option and (ii) full payment of the Option
Price for such specific number of shares. Payment may be made by any one or more
of the following means:
(i) certified or cashier's check or wire transfer,
(ii) shares of Stock with a Fair Market Value on the effective
date of such exercise equal to such Option Price and owned by you for at
least six months (or such longer period as is determined by the Company
required by applicable accounting standards to avoid a charge to the
Company's earnings), or that you purchased on the open market,
(iii) pursuant to procedures previously approved by the Company,
through the sale of the shares of Stock acquired on exercise of this
Option through a broker-dealer to whom you have submitted an irrevocable
notice of exercise and irrevocable instructions to deliver promptly to
the Company the amount of sale or loan proceeds sufficient to pay for
such shares, together with, if requested by the Company, the amount of
federal, state, local or foreign withholding taxes payable by you by
reason of such exercise, or
(iv) through simultaneous sale of shares of Stock acquired on
exercise of this Option through a broker-dealer acceptable to the
Company to whom the Grantee has submitted an irrevocable notice of
exercise, as permitted under Regulation T of the Federal Reserve Board.
Such exercise shall become effective on the earliest date on which both such
notice and full payment have been actually received by the Company (which date
must be before the Expiration Date). You shall not have any rights as a
shareholder of the Company with respect to the shares of Stock deliverable upon
exercise of this Option until a certificate for such shares is delivered to you.
2. Exercise After Termination of Employment. This Option may be
exercised only while you remain an employee or non-employee director of, or a
Consultant to, the Company or a Subsidiary, except that this Option may also be
exercised after the date on which you cease to be employed by or provide
services to the Company or a Subsidiary ("Termination Date") as follows:
(i) if you cease to be employed by or provide services to the
Company or a Subsidiary on account of Disability, you may also exercise
this Option at any time during the first 6 months after your Termination
Date;
(ii) if you cease to be employed by or provide services to the
Company or a Subsidiary on account of death, the executor or
administrator of your estate, your heirs or legatees or beneficiary
designated in accordance with the Plan, as applicable, may also exercise
this Option at any time during the first 6 months after your Termination
Date; and
(iii) if you cease to be employed by or provide services to the
Company or a Subsidiary due to (a) your resignation after age 65 or 10
years of service to or employment with the Company or Subsidiary,
provided after your resignation you are not employed or
A-1
<PAGE> 5
engaged by, and do not serve on the board of directors of, a competitor
of the Company or a Subsidiary or (b) elimination of your position with
the Company or a reduction in the Company's work force, you may exercise
this Option to the extent this Option was exercisable immediately before
the Termination Date during the first 3 months after your Termination
Date;
provided, however, that under no circumstances can this Option be exercised
after the Expiration Date.
3. Option Non-Transferable. This Option is not transferable except
by will or the laws of descent and distribution. It is exercisable during your
lifetime only by you or your guardian or legal representative.
4. Nonstatutory Option. This Option has been designated by the
Committee as a nonstatutory option; it does not qualify as an incentive stock
option.
5. Taxes. The Company is not required to issue shares of Stock upon
the exercise of this Option unless you first pay to the Company such amount, if
any, as may be requested by the Company to satisfy any liability it may have to
withhold federal, state, or local income or other taxes relating to such
exercise. As provided in the Plan, you may elect Share Withholding by the
Company of a portion of the shares of Stock that would otherwise be deliverable
to you upon exercise of this Option. However, the Committee has the discretion
to revoke your right to elect Share Withholding at any time before you make such
an election.
6. Amendments. This Agreement may be amended only by a writing
executed by the Company and you which specifically states that it is amending
this Agreement; provided that this Agreement is subject to the power of the
Board (as defined in the Plan) to amend the Plan as provided therein, except
that no such amendment shall adversely affect your rights under this Option
without your consent.
7. Notices. Any notice to be given under the terms of this Agreement
to the Company shall be addressed to the Company in care of its Secretary. Any
notice to be given to you shall be addressed to you at the address listed in the
Company's records. By a notice given pursuant to this Section, either party may
designate a different address for notices. Any notice shall have been deemed
given when actually delivered.
8. Severability. If any part of this Agreement is declared by any
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any part of this Agreement not declared
to be unlawful or invalid. Any part so declared unlawful or invalid shall, if
possible, be construed in a manner which gives effect to the terms of such part
to the fullest extent possible while remaining lawful and valid.
9. Applicable Law. This Agreement shall be governed by the
substantive laws (excluding the conflict of laws rules) of the State of
California.
10. Headings. Headings are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of this
Agreement.
A-2
<PAGE> 1
EXHIBIT 10.37
PHARMCHEM LABORATORIES, INC.
1997 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(Incentive Stock Option)
By this Agreement, PharmChem Laboratories, Inc., a California
corporation (the "Company") grants to [_____________], an employee of the
Company (the "Grantee"), an option (the "Option") to purchase shares of the
Company's common stock, no par value ("Stock"), subject to the terms and
conditions set forth below, in the attached Exhibit A hereto and in the
PharmChem Laboratories, Inc. 1997 Equity Incentive Plan, as may from time to
time be amended (as so amended, the "Plan"), all of which are an integral part
of this Agreement. A copy of the Plan may be obtained from the Company upon
request. Capitalized terms used but not defined in this Agreement have the
meaning specified in the Plan.
Grant Date . . . . . . . . . . . . . . . [_________________]
Expiration Date. . . . . . . . . . . . . [_________________]
Number of shares . . . . . . . . . . [_________________]
Option exercise price . . . . . . . . . $[________________]
When first exercisable . . . . . . . . . This Option shall become exercisable
in installments as specified below,
except as the Plan or this Agreement
may allow exercisability at a
different date:
<TABLE>
<CAPTION>
Calendar Quarter Percentage No. of Shares Cumulative
After Grant Date Exercisable Exercisable No. of Shares
- ---------------- ----------- ----------- -------------
<S> <C> <C> <C>
Prior to first day of first 0% 0 0
calendar quarter after grant date
During first calendar quarter 6.25% [________] [________]
after grant date
During second calendar quarter 12.5% [________] [________]
after grant date
During third calendar quarter 18.75% [________] [________]
after grant date
During fourth calendar quarter 25% [________] [________]
after grant date
During fifth calendar quarter 31.25% [________] [________]
after grant date
During sixth calendar quarter 37.5% [________] [________]
after grant date
During seventh calendar quarter 43.75% [________] [________]
after grant date
During eighth calendar quarter 50% [________] [________]
after grant date
During ninth calendar quarter 56.25% [________] [________]
after grant date
</TABLE>
Employee Non-Qual.
Option Agreement 10/97
<PAGE> 2
<TABLE>
<CAPTION>
Calendar Quarter Percentage No. of Shares Cumulative
After Grant Date Exercisable Exercisable No. of Shares
- ---------------- ----------- ----------- -------------
<S> <C> <C> <C>
During tenth calendar quarter 62.5% [________] [________]
after grant date
During eleventh calendar quarter 68.75% [________] [________]
after grant date
During twelfth calendar quarter 75% [________] [________]
after grant date
During thirteenth calendar 81.25% [________] [________]
quarter after grant date
During fourteenth calendar 87.5% [________] [________]
quarter after grant date
During fifteenth calendar quarter 93.75% [________] [________]
after grant date
During sixteenth calendar quarter 100% [________] [________]
after grant date
</TABLE>
Please indicate your acceptance of this Agreement by signing the
enclosed copy in the space provided below and returning it to the Chief
Financial Officer, within 30 days after the Company's mailing of this Agreement
to you.
PHARMCHEM LABORATORIES, INC.
By: ___________________________________
David A. Lattanzio
Chief Financial Officer
I ACKNOWLEDGE AND AGREE THAT THE VESTING OF SHARES PURSUANT TO
THE SCHEDULE ON THE FIRST PAGE OF THIS AGREEMENT IS EARNED ONLY BY
CONTINUING SERVICE AS AN EMPLOYEE, CONSULTANT OR NON-EMPLOYEE DIRECTOR
AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). I FURTHER
ACKNOWLEDGE AND AGREE THAT THIS OPTION, THE PLAN WHICH IS INCORPORATED
HEREIN BY REFERENCE, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR
IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR
THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE
WITH MY RIGHT OR THE COMPANY'S RIGHT TO TERMINATE MY EMPLOYMENT OR
Employee Non-Qual.
Option Agreement 10/97
<PAGE> 3
CONSULTING RELATIONSHIP, IF ANY, AT ANY TIME, WITH OR WITHOUT CAUSE.
I ACKNOWLEDGE RECEIPT OF A COPY OF THE PLAN, A COPY OF WHICH IS
ANNEXED HERETO, REPRESENT THAT I AM FAMILIAR WITH THE TERMS AND
PROVISIONS THEREOF, AND HEREBY ACCEPT THIS OPTION SUBJECT TO ALL OF THE
TERMS AND PROVISIONS THEREOF. I HAVE REVIEWED THE PLAN AND THIS OPTION
IN THEIR ENTIRETY, HAVE HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF
COUNSEL PRIOR TO EXECUTING THIS AGREEMENT AND FULLY UNDERSTAND ALL
PROVISIONS OF THE OPTION. I HEREBY AGREE TO ACCEPT AS BINDING,
CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE BOARD OF
DIRECTORS OR OF THE COMMITTEE UPON ANY QUESTIONS ARISING UNDER THE PLAN.
ACCEPTED AND AGREED:
_______________________________
Name: _________________________
Dated: __________________, ____
Employee Non-Qual.
Option Agreement 10/97
<PAGE> 4
EXHIBIT A
TO
EMPLOYEE OPTION AGREEMENT
1. Manner of Exercise. This Option shall be exercised by delivery to
the Company (or its authorized agent), during the period in which such Option is
exercisable, of (i) written notice of your intent to purchase a specific number
of shares of Stock pursuant to this Option and (ii) full payment of the Option
Price for such specific number of shares. Payment may be made by any one or more
of the following means:
(i) certified or cashier's check or wire transfer, or
(ii) shares of Stock with a Fair Market Value on the effective
date of such exercise equal to such Option Price and owned by you for at
least six months (or such longer period as is determined by the Company
required by applicable accounting standards to avoid a charge to the
Company's earnings), or that you purchased on the open market.
Such exercise shall become effective on the earliest date on which both such
notice and full payment have been actually received by the Company (which date
must be before the Expiration Date). You shall not have any rights as a
shareholder of the Company with respect to the shares of Stock deliverable upon
exercise of this Option until a certificate for such shares is delivered to you.
2. Exercise After Termination of Employment. This Option may be
exercised only while you remain an employee of the Company or a Subsidiary,
except that this Option may also be exercised after the date on which you cease
to be employed by the Company or a Subsidiary ("Termination Date") as follows:
(i) if you cease to be employed by the Company or a Subsidiary
on account of Disability, you may also exercise this Option at any time
during the first 6 months after your Termination Date;
(ii) if you cease to be employed by the Company or a Subsidiary
on account of death, the executor or administrator of your estate, your
heirs or legatees or beneficiary designated in accordance with the Plan,
as applicable, may also exercise this Option at any time during the
first 6 months after your Termination Date; and
(iii) if you cease to be employed by the Company or a Subsidiary
due to (a) your resignation after age 65 or 10 years of employment by
the Company or any Subsidiary, provided after your resignation you are
not employed or engaged by, and do not serve on the board of directors
of, a competitor of the Company or a Subsidiary or (b) elimination of
your position with the Company or a reduction in the Company's work
force, you may exercise this Option to the extent this Option was
exercisable immediately before such termination during the first 3
months after your termination date;
provided, however, that under no circumstances can this Option be exercised
after the Expiration Date.
3. Option Non-Transferable. This Option is not transferable except
by will or the laws of descent and distribution. It is exercisable during your
lifetime only by you or your guardian or legal representative.
A-1
<PAGE> 5
4. Incentive Option. This Option has been designated by the
Committee as an incentive stock option and therefore it shall be subject to the
additional conditions in this paragraph. If the aggregate option exercise price
with respect to a portion of this Option which is exercisable for the first time
during any calendar year ("Current Grant") and all incentive stock options
previously granted under the Plan and other employee stock option plans of your
employer or a parent or subsidiary of your employer which are exercisable for
the first time during a calendar year ("Prior Grants") would exceed $100,000
(the "$100,000 Limit"):
(i) the portion of the Current Grant which would, when added
to any Prior Grants, be exercisable for shares of Stock which would have
an aggregate exercise price in excess of the $100,000 Limit shall,
notwithstanding any term to the contrary herein, be exercisable for the
first time in the first subsequent calendar year or years in which it
could be exercisable for the first time when added to all Prior Grants
without exceeding the $100,000 Limit; and
(ii) if, viewed as of the Grant Date, any portion of this
Option could not be exercised under paragraph (i) above during any
calendar year commencing with the calendar year in which it is first
exercisable through and including the last calendar year in which this
Option may be exercised, such portion of this Option shall not be an
incentive stock option, but shall be exercisable as a separate option at
such dates provided herein.
5. Payment of Taxes. The Company is not required to issue shares of
Stock upon the exercise of this Option unless you first pay to the Company such
amount, if any, as may be requested by the Company to satisfy any liability it
may have to withhold federal, state, or local income or other taxes relating to
such exercise.
6. Early Disposition of Stock. If you dispose of any shares of Stock
received under this Option within two (2) years after the date of this Agreement
or within one (1) year after such shares were transferred to you, you will be
treated for federal income tax purposes as having received ordinary income at
the time of such disposition in an amount generally measured as the difference
between the price paid for the shares and the lower of the fair market value of
the shares at the date of exercise or the fair market value of the shares at the
date of disposition. The amount of such ordinary income may be measured
differently if you are an officer, director or 10% shareholder of the Company,
or if the shares were subject to a substantial risk of forfeiture at the time
they were transferred. Any gain recognized on such a premature sale of the
shares in excess of the amount treated as ordinary income will be characterized
as capital gain. You hereby agree to notify the Company in writing within thirty
(30) days after the date of any such early disposition. If you dispose of such
shares at any time after the expiration of such two-year and one-year holding
periods, any gain on such sale will be treated as long-term capital gain.
7. Tax Consequences. The exercise of an incentive stock option may
subject you to the alternative minimum tax ("AMT"). AMT is payable only if it
exceeds your regular tax liability. The AMT is calculated by applying a minimum
tax rate of 26% to your alternative minimum taxable income. To compute
alternative minimum taxable income, you must include the excess of the fair
market value of shares purchased pursuant to the exercise of an incentive stock
option over the purchase price paid for such shares. You understand that any of
the foregoing references to taxation are based on federal income tax laws and
regulations now in effect. By exercising this Option, you will be representing
that you have reviewed with your own tax advisors the federal, state, local and
foreign tax consequences of the transactions contemplated by this Agreement,
that you are relying solely on such advisors and not on any statements or
representations of the Company or any of its agents, and that you understand
that you (and not the Company) shall be responsible for your own tax liability
that may arise as a result of the transactions contemplated by this Agreement.
A-2
<PAGE> 6
8. Amendments. This Agreement may be amended only by a writing
executed by the Company and you which specifically states that it is amending
this Agreement; provided that this Agreement is subject to the power of the
Board (as defined in the Plan) to amend the Plan as provided therein, except
that no such amendment shall adversely affect your rights under this Option
without your consent.
9. Notices. Any notice to be given under the terms of this Agreement
to the Company shall be addressed to the Company in care of its Secretary. Any
notice to be given to you shall be addressed to you at the address listed in the
Company's records. By a notice given pursuant to this Section, either party may
designate a different address for notices. Any notice shall have been deemed
given when actually delivered.
10. Severability. If any part of this Agreement is declared by any
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any part of this Agreement not declared
to be unlawful or invalid. Any part so declared unlawful or invalid shall, if
possible, be construed in a manner which gives effect to the terms of such part
to the fullest extent possible while remaining lawful and valid.
11. Applicable Law. This Agreement shall be governed by the
substantive laws (excluding the conflict of laws rules) of the State of
California.
12. Headings. Headings are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of this
Agreement.
A-3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 490
<SECURITIES> 0
<RECEIVABLES> 7,968
<ALLOWANCES> 483
<INVENTORY> 1,420
<CURRENT-ASSETS> 10,729
<PP&E> 17,115
<DEPRECIATION> 9,903
<TOTAL-ASSETS> 22,163
<CURRENT-LIABILITIES> 11,084
<BONDS> 0
0
0
<COMMON> 19,021
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,163
<SALES> 0
<TOTAL-REVENUES> 29,098
<CGS> 0
<TOTAL-COSTS> 23,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 72
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> (1,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,307)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
