SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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: 1-11794
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E. W. Blanch Holdings, Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1741779
- - ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 North Akard, Suite 4500, Dallas, Texas 75201
- - ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 756-7000
--------------
NONE
----
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
The number of shares of the Registrant's common stock outstanding as of October
31, 1998 was 12,831,315.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
E. W. Blanch Holdings, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Operations $ 52,539 $ 43,009 $ 142,628 $ 116,095
Interest income 2,504 2,361 6,734 6,368
--------------------- ---------------------
Total revenues 55,043 45,370 149,362 122,463
Expenses:
Salaries and benefits 22,894 20,613 67,883 56,521
Travel and marketing 3,609 3,020 11,049 9,465
General and administrative 10,018 7,109 27,454 21,275
Amortization of goodwill 696 689 2,085 1,967
Interest and other expense 550 365 1,393 962
--------------------- ---------------------
Total expenses 37,767 31,796 109,864 90,190
--------------------- ---------------------
Income before taxes 17,276 13,574 39,498 32,273
Income taxes 6,689 5,311 15,196 12,657
--------------------- ---------------------
Net income before minority interest and
loss from equity investment 10,587 8,263 24,302 19,616
Minority interest, net of tax 535 282 588 371
Equity in net loss of affiliate, net of tax 146 -- 146 --
--------------------- ---------------------
Net income $ 9,906 $ 7,981 $ 23,568 $ 19,245
===================== =====================
Net income per share $ 0.77 $ 0.63 $ 1.85 $ 1.52
Net income per share-assuming dilution $ 0.76 $ 0.62 $ 1.79 $ 1.49
===================== =====================
Cash dividends declared per share $ 0.12 $ 0.10 $ 0.34 $ 0.30
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,267 $ 11,608
Due from fiduciary accounts 28,452 30,874
Prepaid insurance 1,748 1,471
Other current assets 10,981 7,428
-------------------------------
Total current assets 45,448 51,381
Long-term investments 43,766 14,939
Property and equipment, net 30,705 26,309
Goodwill, net 31,514 34,916
Other assets 12,751 11,772
Fiduciary accounts--assets 856,675 780,450
-------------------------------
Total assets $ 1,020,859 $ 919,767
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued compensation $ 5,162 $ 6,628
Notes payable to banks 16,961 1,379
Accounts payable 15,268 14,420
Current portion of long-term liabilities 1,625 2,586
Other current liabilities 10,043 12,020
-------------------------------
Total current liabilities 49,059 37,033
Long-term debt, less current portion 608 13,675
Other liabilities, less current portion 9,125 10,536
Fiduciary accounts--liabilities 856,675 780,450
-------------------------------
Total liabilities 915,467 841,694
Minority interest 2,755 1,621
SHAREHOLDERS' EQUITY 102,637 76,452
-------------------------------
Total liabilities and shareholders' equity $ 1,020,859 $ 919,767
================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
E. W. Blanch Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,568 $ 19,245
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,966 6,074
Changes in operating assets and liabilities:
Due from fiduciary accounts 1,056 (3,458)
Other current assets (4,804) (5,048)
Accrued compensation (1,328) 280
Accounts payable and other current liabilities (3,582) 8,892
Other, net 5,418 (2,446)
--------------------------
Net cash provided by operating activities 28,294 23,539
INVESTING ACTIVITIES
Purchases of property and equipment (12,809) (8,730)
Purchase of investments (32,161) 1,342
Acquisition of subsidiary (6,731) --
Excess of cash acquired from purchase of subsidiary -- 480
Proceeds from the sale of investments 10,590 866
Proceeds from the sale of a subsidiary 2,500 15,092
Other investing activities, net 201 4
--------------------------
Net cash provided by (used in) investing activities (38,410) 9,054
FINANCING ACTIVITIES
Purchase of treasury shares (4,326) (14,550)
Proceeds from the issuance of treasury shares to
employee benefit plans 7,940 1,297
Dividends paid (4,311) (3,841)
Net (repayments) borrowings on lines of credit 3,800 (1,340)
Payments on long-term debt (445) 881
Other financing activities, net 117 257
--------------------------
Net cash provided by (used in) financing activities 2,775 (17,296)
--------------------------
Net increase (decrease) in cash and cash equivalents (7,341) 15,297
Cash and cash equivalents at beginning of period 11,608 1,069
--------------------------
Cash and cash equivalents at end of period $ 4,267 $ 16,366
==========================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
September 30, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim periods are
not necessarily indicative of the results for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report to shareholders for the year
ended December 31, 1997.
E.W. Blanch Holdings, Inc. ("the Company") and its predecessor organizations
have been in operation since 1957. The Company is a leading international
provider of integrated risk management and distribution services including
reinsurance intermediary services, risk management consulting and administration
services, and primary insurance distribution services. The consolidated
financial statements include the accounts of the Company and its wholly and
majority owned subsidiaries.
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly and majority owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. The functional
currency of the Company's foreign operations is the British pound sterling. The
Company translates income and expense accounts at the average rate in effect for
the period. Balance sheet accounts are translated at the period end exchange
rate. Adjustments resulting from the balance sheet translation are reflected in
Shareholder's Equity. The cumulative translation adjustment at September 30,
1998, is a $114,000 loss.
Investment in Affiliated Companies
Equity investments that the Company has the ability to exercise significant
influence over operating and financial policies, generally determined by
ownership of 20 percent or more of the voting stock of the investee, are
accounted for under the equity method. The equity method requires the initial
investment to be recorded at cost and subsequently increased (decreased) for the
Company's share of net income (loss) and reduced when dividends are received.
5
<PAGE>
3. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
During the three months ended September 30, 1998 and 1997, total other
comprehensive income (loss) amounted to ($617,000) and $283,000. During the nine
months ended September 30, 1998 and 1997, total other comprehensive income
amounted to $471,000 and $432,000.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14 and
defines financial and descriptive information about a Company's operating
segments that is to be disclosed in financial statements. The Company will adopt
SFAS No. 131 for the year ended December 31, 1998.
In June 1998, the FASB issued SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company has not
completed its analysis but may adopt the new Statement in 1998. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.
Based on the Company's derivative positions at September 30, 1998, management
has not completed its analysis but does not anticipate that the adoption of the
new Statement will have a significant effect on earnings or the financial
position of the Company. Because the standard allows certain foreign currency
transactions to be accounted for as hedges for financial reporting purposes that
were not previously treated as hedges, the Company may change its policies
toward the management of certain foreign currency exposures. Any changes that
may occur would be to further reduce the Company's exposure to foreign currency
risks.
6
<PAGE>
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted weighted
average shares outstanding for the periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
1998 1997 1998 1997
------------------- -------------------
<S> <C> <C> <C> <C>
Weighted average shares - basic 12,804 12,575 12,725 12,683
Effect of dilutive securities 445 358 429 209
------------------- -------------------
Weighted average shares- assuming dilution 13,249 12,933 13,154 12,892
=================== ===================
</TABLE>
After reviewing the application of SFAS No. 128 "Earnings per Share" for the
first and second quarters of 1998, the Company discovered that diluted EPS had
been understated by $0.01 for the year. Due to the immateriality of the
understatement, the Company decided to recognize the $0.01 in the third quarter
1998 diluted EPS amount rather than restating prior diluted EPS amounts.
5. SUBSEQUENT EVENT
In November, 1998, the Company terminated its prior credit facility and executed
a new $100 million revolving credit facility with several banks that will be
used to fund general corporate requirements. The new facility, which expires in
2001, will carry market rates of interest which may vary depending upon the
Company's degree of leverage. Commitment fees of .200% to .375% are payable on
any unused portion. The facility contains several financial covenants and
restrictions related to acquisitions and sales of assets.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD LOOKING STATEMENTS
Statements other than historical information contained herein are considered
forward-looking and involve a number of risks and uncertainties. Forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. There are certain important factors
that could cause results to differ materially from those anticipated by some of
the statements made herein. Some of the factors that could cause actual results
to differ materially are the following: market dynamics, interest rate changes,
regulatory changes, competition, and the failure of the Company and its
subsidiaries or significant third parties to achieve Year 2000 compliance or
material expense in connection with such compliance. Additional information
concerning those and other factors are contained in the Company's Securities and
Exchange Commission filings, including but not limited to the most recent Form
10-K, copies of which are available from the Company without charge.
YEAR 2000 ISSUE
BACKGROUND
The Year 2000 issue is the result of computer systems using a two-digit format,
as opposed to four digits, to indicate the year. Computer systems using a
two-digit format will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to a disruption
in the operation of those systems.
STATE OF READINESS
The Company began reviewing all of its information technology (IT) systems
developed internally and from outside vendors in the early 1990's because of the
Company's growth and the need to bring about operational improvements. As a
result, the Company decided to develop a new back office processing system and
to implement a new financial and human resource system. All of these systems are
Year 2000 compliant. In 1997, the Company expanded its international operations
through the acquisition of Swire Blanch. Since the acquisition, the Company
began to integrate all world-wide systems into appropriate Company systems. The
integration of the Company's IT systems is expected to be completed by the
second quarter of 1999, at which time all Company IT Systems are expected to be
Year 2000 compliant. The Company's senior management and the Board of
Directors receive regular updates on the status of the Company's Year 2000
readiness.
The Company markets software based products and services that are internally
developed or acquired from third party vendors. These software based products
and services were developed using Year 2000 compliant technologies. Software
products developed internally are in various stages of testing for Year 2000
compliance. The Company is also in the process of obtaining written
certifications from the third party developers of our marketed software. The
Company expects the process of confirming Year 2000 compliance for the software
that the Company markets to be completed by the end of March 1999.
Interfaces With Third Parties
The Company is reviewing, and has initiated formal communications with, third
parties which provide goods or services which are essential to the Company's
operations in order to: (1) determine
8
<PAGE>
the extent to which the Company is vulnerable to any failure by such material
third parties to remediate their respective Year 2000 problems; and (2) resolve
such problems to the extent practicable. The Company has requested information
from customers and vendors regarding the status of their Year 2000 compliance in
May 1998. Follow up requests will be sent by the end of 1998 to those third
parties that have not responded to the Company's initial request or that have
indicated compliance issues. A certification letter has been or will be
requested from each of our vendors to validate compliance. The Company also will
be requesting a statement of Year 2000 compliance from companies in which the
Company has made investments.
Independent Verification and Validation
All new IT systems implemented and any subsequent changes to those systems go
through several layers of testing and validation, including program testing,
systems testing by an independent quality assurance group, user testing, and
lastly, parallel processing with the old system it is replacing. Portions of the
parallel testing process involve our customer's validation of automated
interfaces and reporting.
In addition, the Company has conducted joint testing with Lloyds of London on
the back office processing system. Results of those tests will be known by the
end of 1998.
COSTS
In recent years the Company has made significant investments in new IT systems
that are Year 2000 compliant. However, those investments were made for reasons
other than strictly Year 2000 compliance. The schedule to implement these
systems has not been accelerated because of the Year 2000 issue, nor have any
other system projects been deferred because of the Year 2000 issue. Although the
Company does not record or attempt to allocate expenses for these IT systems
which relate solely to Year 2000 compliance, due to their immateriality, the
Company believes that these costs will not exceed $2 million in total. This
estimate does not include the Company's potential share of Year 2000 costs that
may be incurred by other entities that the Company does not have a controlling
interest in.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company believes
that, with the implementation of new system development, which are Year 2000
compliant, the possibility of significant interruptions of normal operations
should be substantially reduced. However, due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third parties, the Company is continuing to assess the
risks and develop its contingency plan.
CONTINGENCY PLAN
The Company is revising its existing business interruption contingency plans to
address internal and external issues specific to the Year 2000 issue, to the
extent practicable. Such revisions are expected to be completed by April 1,
1999. These plans are intended to enable the Company to continue to operate and
include performing certain processes manually; repairing or obtaining
replacement systems; and changing suppliers. The Company believes, however, that
due to the widespread nature of potential Year 2000 issues, the contingency
planning process is an ongoing one which will require further modifications as
the Company obtains additional information regarding the Company's internal
readiness and the status of third party Year 2000 readiness.
9
<PAGE>
FORWARD LOOKING STATEMENTS
Readers are cautioned that forward-looking statements contained in the Year 2000
Issue disclosures should be read in conjunction with the Company's disclosures
under the heading: "Forward Looking Statements" on page 8.
GENERAL
The Company is a leading international provider of integrated risk management
and distribution services including reinsurance intermediary services, risk
management consulting and administration services, and primary insurance
distribution services.
The following is a summary of revenues and income before taxes by geographic
area for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Sept. 30, 1998 Quarter Ended Sept. 30, 1997
------------------------------ ------------------------------
Income Income
Revenues before taxes Revenues before taxes
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Domestic operations $ 41,009 $ 14,937 $ 33,616 $ 11,603
Foreign operations 14,034 2,339 11,754 1,971
----------- ----------- ----------- -----------
$ 55,043 $ 17,276 $ 45,370 $ 13,574
=========== =========== =========== ===========
<CAPTION>
Nine Months Ended Sept. 30, 1998 Nine Months Ended Sept. 30, 1997
-------------------------------- --------------------------------
Income Income
Revenues before taxes Revenues before taxes
----------- ------------ ----------- ------------
Domestic operations $ 114,483 $ 34,230 $ 94,637 $ 28,897
Foreign operations 34,879 5,268 27,826 3,376
----------- ----------- ----------- -----------
$ 149,362 $ 39,498 $ 122,463 $ 32,273
=========== =========== =========== ===========
</TABLE>
Domestic operations include reinsurance intermediary services, risk management
consulting and administration services, program distribution services, policy
distribution capabilities, and the general agency operations. All of these
services, except general agency operations (up until disposition in May 1998),
are focused on providing solutions for the management and distribution of risk
to a client base which is primarily comprised of property and casualty insurance
companies. These services are generally recurring and, due to the Company's
expertise and the value-added nature of its services, have been able to operate
at relatively higher operating margins. The general agency operations were
focused on the primary distribution of insurance for property and casualty
insurance companies, largely through independent insurance agents. Due to the
competitive nature of the general agency business, the Company's profit margins
for these services were relatively lower.
10
<PAGE>
Foreign operations include Swire Blanch, the Company's international insurance
and reinsurance broker headquartered in London. Swire Blanch includes a Lloyd's
insurance and reinsurance brokering operation and international reinsurance
intermediary operations. Swire Blanch also provides financial services through
the sale of pension plans for insurance companies. Insurance brokerage services
include the retail operations located in northern England and Hong Kong.
Approximately 80% of foreign revenues are recognized in the United Kingdom with
the remainder primarily from the Pacific Rim and Latin America. Although certain
Pacific Rim financial markets continue to experience some economic volatility,
the Company does not anticipate a significant impact to its business in that
area of the world. The Company's foreign operations currently do not enjoy the
relatively higher profit margins of the Company's domestic risk management and
distribution services. This is due to a number of factors including competitive
market conditions for Lloyd's brokers, the small start-up nature of many of the
international offices, the competitiveness of the Swire Renshaw primary
insurance distribution business, and the capitalization and acquisition costs
associated with the purchase of the various foreign operations. The Company
seeks to grow its international profitability through the integration of
systems, services and expertise in order to increase revenue production and
processing efficiencies.
In July 1998, the Company completed acquisitions of Dunn & Carter Ltd, a London
based insurance broker specializing in retrocessional reinsurance, and K2
Technologies, Inc., a San Jose, California based company specializing in the
design and support of interactive software platforms for use in risk assessment
and engineering as well as information integration.
On September 30, 1998, the Company increased its equity investment to 24% in
Insurance Holdings of America LLC, a Massachusetts limited liability company
specializing in developing and marketing internet and intranet based insurance
products and services for insurers, independent agents and consumers.
THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997
OPERATIONS
The following are the components of operational revenue for the quarter ended
September 30 (in thousands):
1998 1997
----------- -----------
Domestic Operations $39,118 $31,933
Foreign Operations 13,421 11,076
----------- -----------
$52,539 $43,009
=========== ===========
Domestic operations increased $7.2 million, or 22.5%, from the prior year
primarily as a result of new production.
International operations increased $2.3 million or 21.2% from the prior year as
a result increased production and the acquisition of Dunn & Carter Ltd. in July
1998.
11
<PAGE>
INTEREST INCOME
1998 1997
---------- ----------
FIDUCIARY INTEREST INCOME
Domestic $1,486 $1,609
Foreign 480 495
---------- ----------
1,966 2,104
CORPORATE INTEREST INCOME
Domestic 405 74
Foreign 133 183
---------- ----------
538 257
$2,504 $2,361
========== ==========
Interest income was $2.5 million for the quarter ended September 30, 1998
compared to $2.4 million the prior year, an increase of $0.1 million or 6.1%.
Fiduciary interest income from domestic operations was $1.5 million for the
quarter ended September 30, 1998 compared to $1.6 million the prior year, a
decrease of $0.1 million or 7.6%. The average balance of domestic funds for the
quarter was $113.3 million (compared to $115.7 million for the prior year), at
an average yield of 5.1% (compared to 5.6% the prior year). Swire Blanch also
earned $0.5 million of fiduciary interest income in the three months ended
September 30, 1998 and 1997. The average balance of international funds for the
quarter was $42.0 million (compared to $37.1 million for the prior year), at an
average yield of 4.6% (compared to 5.4% for the prior year).
Corporate interest income from domestic operations was $0.4 million for the
quarter ended September 30, 1998 and $0.1 million for the quarter ended
September 30, 1997. Swire Blanch earned $0.1 million of corporate interest
income for the quarter ended September 30, 1998 compared to $0.2 million for the
quarter ended September 30, 1997.
EXPENSES
Domestic operating expenses increased $4.1 million to $26.1 million, or 18.4%,
for the quarter ended September 30, 1998 compared to $22.0 million the prior
year. This is primarily a result of increases in employee count as well as
salaries and benefits expenses including normal salary progressions and the
acquisition of K2 Technologies, Inc. in July 1998. The increase in employees is
due to increased business levels and businesses acquired or started by the
Company. Domestic operations also experienced increases in travel and marketing,
general and administrative expenses, and interest and other expenses due to
increased business levels.
International operating expenses for the quarter ended September 30, 1998
increased $1.9 million to $11.7 million, or 19.5% for the quarter ended
September 30, 1998 compared to $9.8 million the prior year. The reason for the
increase is the costs of new operations and the acquisition of Dunn & Carter
Ltd. in July 1998. Similar to the Company's domestic operations, approximately
two-thirds of these expenses relate to salaries and benefits for employees.
12
<PAGE>
PROFIT MARGINS
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 36.4% for domestic operations for the quarter ended
September 30, 1998, compared to 34.5% for the same period in the prior year.
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 16.7% for foreign operations for the quarter ended
September 30, 1998, compared to 16.8% for the same period in the prior year.
NINE MONTHS ENDED 1998 COMPARED WITH NINE MONTHS ENDED 1997
In the second quarter, the Company sold its San Antonio, Texas operations,
including the sale of its general agency, Blanch Insurance Services, Inc.
(Blanch GA), and other selected assets. The net effect of these dispositions was
a net one-time gain of $1.0 million before taxes.
In June 1998, the Company completed its acquisition of Walbaum Americana, S.A.,
a leading provider of insurance and reinsurance intermediary services in Latin
America, based in Buenos Aires, Argentina.
Foreign operations for the nine months ended September 30, 1998 include nine
months of activity as compared to eight months of activity for the nine months
ended September 30, 1997. This comparison is the result of the acquisition of
Swire Blanch in February 1997.
OPERATIONS
The following are the components of operational revenue for the nine months
ended September 30 (in thousands):
1998 1997
------------ ------------
Domestic Operations $109,557 $ 89,842
Foreign Operations 33,071 26,253
------------ ------------
$142,628 $116,095
============ ============
For the nine months ended September 30, 1998, domestic operations increased
$19.7 million, or 21.9%, from the prior year primarily as a result of new
production.
International operations increased $6.8 million, or 26.0%, from the prior year.
These increases are primarily the result of the inclusion of nine months of
activity as compared to the eight months of activity in the prior year due to
the acquisition of Swire Blanch in February 1997. Also contributing to the
increase is new production and the acquisition of Dunn & Carter Ltd. in July
1998.
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<PAGE>
INTEREST INCOME
1998 1997
---------- ----------
FIDUCIARY INTEREST INCOME
Domestic $4,101 $4,149
Foreign 1,409 1,171
---------- ----------
5,510 5,320
CORPORATE INTEREST INCOME
Domestic 825 646
Foreign 399 402
---------- ----------
1,224 1,048
$6,734 $6,368
========== ==========
Interest income was $6.7 million for the nine months ended September 30, 1998
compared to $6.4 million the prior year, an increase of $0.4 million or 5.7%.
Fiduciary interest income from domestic operations was $4.1 million for the nine
months ended September 30, 1998 and September 30, 1997. The average balance of
domestic funds for the nine months ended September 30, 1998 was $107.1 million
(compared to $102.5 million for the prior year), at an average yield of 5.1%
(compared to 5.4% the prior year). Swire Blanch also earned $1.4 million of
fiduciary interest income in the nine months ended September 30, 1998, compared
to $1.2 million the prior year. The average balance of international funds for
the nine months ended September 30, 1998 was $37.4 million (compared to $34.7
million for the prior year), at an average yield of 5.0% (compared to 5.2% the
prior year).
Corporate interest income from domestic operations was $0.8 million for the nine
months ended September 30, 1998 compared to $0.6 million the prior year. Swire
Blanch earned $0.4 million of corporate interest income for the nine months
ended September 30, 1998 and 1997.
EXPENSES
Domestic operating expenses increased $14.5 million to $80.3 million, or 22.1%,
for the nine months ended September 30, 1998 compared to $65.7 million the prior
year. This increase is primarily a result of increases in employee count as well
as salaries and benefits expenses including normal salary progression, the
acquisition of K2 Technologies, Inc. in July 1998 and one-time charges
associated with the disposition of the Company's San Antonio, Texas operations.
The increase in employees is due to increased business levels and businesses
acquired or started by the Company. Domestic operations also experienced
increases in travel and marketing, general and administrative expenses, and
interest and other expenses due to increased business levels.
International operating expenses increased $5.2 million, or 21.1%, for the nine
months ended September 30, 1998 compared to $24.5 million the prior year. The
increase is primarily the result of the inclusion of nine months of activity as
compared to eight months of activity in the prior year due to the acquisition of
Swire Blanch in February 1997. Also contributing to the increase is the cost of
new operations and the acquisition of Dunn & Carter Ltd. in July 1998. Similar
to the Company's domestic operations, approximately two-thirds of these expenses
relate to salaries and benefits for employees.
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PROFIT MARGINS
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 29.9% for domestic operations for the nine months ended
September 30, 1998, compared to 30.5% for the same period in the prior year.
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 15.1% for foreign operations for the nine months ended
September 30, 1998, compared to 12.1% for the nine months ended September 30,
1997. This increase is primarily due to increases in new production, cost
efficiencies as well as to larger portions of revenues that are earned in
January. The Company did not acquire Swire Blanch until February 1997.
INCOME TAXES
The Company's combined federal and state effective tax rate for domestic
operations continues to be 39%. The effective tax rate provided for the
Company's foreign operations is expected to be 32% for the year ended December
31, 1998.
15
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LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of brokerage commissions and
fees and interest income. Funds are applied generally to the payment of
operating expenses, the purchase of equipment used in the ordinary course of
business, the repayment of outstanding indebtedness, and the distribution of
earnings. The Company's cash and cash equivalents were $4.3 million at September
30, 1998.
The Company generated $28.3 million of cash from operations during the first
nine months of 1998 compared with $23.5 million for the same period in 1997. The
increase in operating cash flow in 1998 is primarily due to the timing of cash
distributions from the fiduciary accounts to the Company and the timing of
changes in various operating assets and liabilities.
Cash flow used in investing activities was $38.4 million for the nine months
ended September 30, 1998. During the nine months ended September 30, 1998, the
Company received net proceeds of $2.5 million from the sale of its San Antonio,
Texas operations. The Company also used $12.8 million of cash for the purchase
of property and equipment, primarily computerized systems. The Company intends
to increase its investment in such systems. The Company used $6.7 million to
acquire K2 Technologies, Inc. and Dunn & Carter Ltd. in July 1998. The Company
also used $9.0 million of cash for the purchase of government securities for its
investment portfolio, and $22.6 million for the purchase of strategic
investments in companies that provide technology solutions for the insurance
industry. The Company received proceeds from the sale of investments from its
investment portfolio of $10.6 million. During the nine months ended September
30, 1997, the Company received net proceeds of $15.1 million from the sale of
its premium finance operations.
The primary source of cash for financing activities for the nine months ended
September 30, 1998, was $7.9 million from proceeds from the issuance of treasury
shares used to fund employee benefit plans and the borrowings on lines of credit
of $3.8 million. The primary uses of cash were $4.3 million for the purchase of
treasury stock and $4.3 million of dividends paid to shareholders. In the prior
year, net cash used by financing activities included $14.6 million for the
purchase of treasury stock, $3.8 million of dividends paid to shareholders and
$1.3 million for the net repayment of lines of credit.
The Company's long-term investment portfolio at September 30, 1998, was $43.8
million, comprised of equity and debt instruments. The market value of the
Company's investment portfolio at September 30, 1998, was $0.8 million above
cost. Cash, short-term investments and the Company's line of credit are
available and managed for the payment of its operating and capital expenditures.
The Company is not subject to any regulatory capital requirements in connection
with its business.
On January 22, 1998, the Board of Directors declared a regular quarterly cash
dividend of $0.10 per share, payable March 3, 1998 to shareholders of record as
of February 9, 1998. On April 23, 1998, the Board of Directors declared a
regular quarterly cash dividend of $0.12 per share, payable June 1, 1998, to
shareholders of record as of May 4, 1998. On July 23, 1998, the Board of
Directors declared a regular quarterly dividend of $0.12 per share payable on
September 1, 1998, to shareholders of record as of August 10, 1998. On October
19, 1998, the Board of Directors declared a regular quarterly dividend of $0.12
per share payable on December 1, 1998 to shareholders of record as of November
9, 1998.
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In November, 1998, the Company terminated its prior credit facility and executed
a new $100 million revolving credit facility with several banks that will be
used to fund general corporate requirements. The new facility, which expires in
2001, will carry market rates of interest which may vary depending upon the
Company's degree of leverage. Commitment fees of .200% to .375% are payable on
any unused portion. The facility contains several financial covenants and
restrictions related to acquisitions and sales of assets.
The Company believes that its cash and investments, combined with its borrowing
facilities and internally generated funds, will be sufficient to meet its
present and reasonably foreseeable long-term capital needs.
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Part II. Other Information
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits
Exhibit 10.1 - K2 Technologies, Inc. 1994 Stock Plan
Exhibit 10.2 - K2 Technologies, Inc. 1996 Stock Plan
Exhibit 10.3 - K2 Technologies, Inc. 1998 Key Person Stock Option Plan
Exhibit 27 - Financial Data Schedule
(b.) The registrant filed a current report on Form 8-K on July 15, 1998. The
report was filed in order to disclose the sale of Common Stock pursuant
to Regulation S under the Securities Act of 1933 in connection with the
Company's acquisition of Dunn & Carter Ltd.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
E. W. BLANCH HOLDINGS, INC.
Dated: November 16, 1998 /s/ Ian D. Packer
------------------ ----------------------------------
Ian D. Packer
Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit 10.1 - K2 Technologies, Inc. 1994 Stock Plan
Exhibit 10.2 - K2 Technologies, Inc. 1996 Stock Plan
Exhibit 10.3 - K2 Technologies, Inc. 1998 Key Person Stock Option Plan
Exhibit 27 - Financial Data Schedule
20
EXHIBIT 10.1
K2 TECHNOLOGIES, INC.
1994 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1994 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means K2 Technologies, Inc., a California
corporation.
(g) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
<PAGE>
purposes of this Plan, a change in status from an Employee to a Consultant or
from a Consultant to an Employee will not constitute a termination of
employment.
(i) "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for this last market trading day prior to the time of determination, as reported
in THE WALL STREET JOURNAL or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
(o) "Optioned Stock" means the Common Stock subject to an Option
or a Stock Purchase Right.
(p) "Optionee" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
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(q) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any successor
provision.
(r) "Plan" means this 1994 Stock Plan.
(s) "Reporting Person" means an officer, director, or greater
than ten percent shareholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.
(t) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(u) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time, or any successor provision.
(v) "Share" means a share of Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(w) "Stock Exchange" means any stock exchange or consolidated
stock price reporting system on which prices for the Common Stock are quoted at
any given time.
(x) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 10 below.
(y) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. Stock Subject to the Plan. Subject to the provisions of Section
12 of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 200,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares that were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. In
addition, any shares of Common Stock which are retained by the Company upon
exercise of an Option or Stock Purchase Right in order to satisfy the exercise
or purchase price for such Option or Stock Purchase Right or any withholding
taxes due with respect to such exercise shall be treated as not issued and shall
continue to be available under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. If permitted by Rule
16b-3, the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
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<PAGE>
(ii) Administration With Respect to Reporting Persons. With
respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, the Plan shall be administered by (A) the Board if the Board
may administer the Plan in compliance with Rule 16b-3 with respect to a plan
intended to qualify thereunder as a discretionary plan, or (B) a committee
designated by the Board to administer the Plan, which committee shall be
constituted in such a manner as to permit the Plan to comply with Rule 16b-3
with respect to a plan intended to qualify thereunder as a discretionary plan.
Once appointed, such committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan. No person serving as a member of an Administrator that has
authority with respect to grants to Reporting Persons shall be eligible to
receive any grant under the Plan which would cause such member to cease to be
"disinterested" within the meaning of Rule 16b-3.
(iii) Administration with Respect to Consultants and Other
Employees. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a committee designated by the Board, which
committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of incentive stock option plans, if
any, of California corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however cause, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof are granted hereunder;
4
<PAGE>
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to accelerate the exercisability of any Option or
Stock Purchase Right;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights; and
(x) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if he or she is otherwise eligible, be granted
additional Options or Stock Purchase Rights.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall
be taken into account in the order in which they were granted, and the Fair
Market Value of the Shares subject to an Incentive Stock Option shall be
determined as of the date of the grant of such Option.
5
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(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of Optionee's employment or consulting relationship with
the Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated
in the Option Agreement, provided, however, that the term shall be no more than
ten (10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Option granted to
an Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in
6
<PAGE>
the case of an Incentive Stock Option, shall be determined at the time of grant)
and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other
Shares that (x) in the case of Shares acquired upon exercise of an Option, have
been owned by the Optionee for more than six months on the date of surrender or
such other period as may be required to avoid a charge to the Company's
earnings, and (y) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which such Option shall be
exercised, (5) authorization of the Company to retain from the total number of
Shares as to which the Option is exercised that number of Shares having a Fair
Market Value on the date of exercise equal to the exercise price for the total
number of Shares as to which the Option is exercised (6) delivery of a properly
executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan proceeds required
to pay the exercise price and any applicable income or employment taxes, (7)
delivery of an irrevocable subscription agreement for the Shares that
irrevocably obligates the option holder to take and pay for the Shares not more
than twelve months after the date of delivery of the subscription agreement, (8)
any combination of the foregoing methods of payment, or (9) such other
consideration and method of payment for the issuance of Shares to the extent
permitted under Applicable Laws. In making its determination as to the type of
consideration to accept, the Administrator shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company.
9. Exercise of Options.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan; provided that such Option shall become exercisable at the rate of
at least twenty percent (20%) per year over five (5) years from the date the
Option is granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon the exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
7
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Exercise of an Option in any manner shall result in a
decrease in the number of Shares that thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. Subject
to Section 9(c), in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee with the Company, such Optionee
may, but only within three (3) months after the date of such termination (but in
no event later than the expiration date of the term of Such Option as set forth
in the Option Agreement), exercise his or her Option to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(I) the Optionee is a Consultant who becomes an Employee within the time
specified herein; or (ii) the Optionee is an Employee who becomes a Consultant
within the time specified herein.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of the Optionee's
disability, Optionee may, but only within twelve (12) months from the date of
such termination (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), exercise the Option to the
extent otherwise entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or any consulting
relationship, the Option may be exercised, at any time within twelve (12) months
following the date of death (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death or, if earlier, the date of termination of the
consulting relationship or Continuous Status as an Employee. To the extent that
Optionee was not entitled to exercise the Option at the date of death or
termination, as the case may be, or if Optionee does not exercise such Option to
the extent so entitled within the time specified herein, the Option shall
terminate.
(e) Rule 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
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10. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that such person shall be entitled
to purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock Purchase Agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment or consulting relationship with the Company for any
reason (including death or disability). The purchase price for Shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
higher of either the original purchase price or the Fair Market Value on the
date of the repurchase.
(c) Other Provisions. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, (b) out of Optionee's
current compensation, (c) if permitted by the Administrator, in its discretion,
by surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon
9
<PAGE>
exercise of the Option, or the Shares to be issued in connection with the Stock
Purchase Right, if any, that number of Shares having a fair market value equal
to the amount required to be withheld. For this purpose, the fair market value
of the Shares to be withheld shall be determined on the date that the Amount of
tax to be withheld is to be determined (the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy
tax withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made;
(c) all elections shall be subject to the consent or disapproval
of the Administrator;
(d) if the Optionee is a Reporting Person, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
12. Adjustments Upon Changes in Capitalization, Merger or Certain
Other Transactions.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting
10
<PAGE>
from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Option will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Administrator. The Administrator may, in the exercise of its sole discretion
in such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any part of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable.
(c) Merger or Sale of Assets. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Administrator
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to some or all of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable. If the Administrator makes an
Option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option shall be exercisable for a period of thirty (30) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
(d) Certain Distributions. In the event of any distribution to
the Company's shareholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. Non-Transferability of Options, Stock Purchase Rights and
Restricted Stock. Options, Stock Purchase Rights or Restricted Stock may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised or purchased during the lifetime of the Optionee, Stock Purchase
Rights holder or Restricted Stock purchaser only by the Optionee, Stock Purchase
Rights holder or Restricted Stock purchaser.
14. Time of Granting Options and Stock Purchase Rights. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator
11
<PAGE>
makes the determination granting such Option or Stock Purchase Right, or such
other date as is determined by the Board. Notice of the determination shall be
given to each Employee or Consultant to whom an Option or Stock Purchase Right
is so granted within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 or with Section 422
of the Code (or any other applicable law or regulation, including the
requirements of any Stock Exchange), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. No amendment or
termination of the Plan shall adversely affect Options already granted, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
17. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan. The inability of
the Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced
by written agreements in such form as the Administrator shall approve from time
to time.
19. Shareholder Approval. Continuance of the Plan shall be subject
to approval by the shareholders of the Company within twelve (12) months before
or after the date the Plan is
12
<PAGE>
adopted. Such shareholder approval shall be obtained in the degree and manner
required under applicable state and federal law and the rules of any Stock
Exchange. All Options and Stock Purchase Rights issued under the Plan shall
become void in the event such approval is not obtained.
20. Information to Optionees and Purchasers. The Company shall
provide financial statements at least annually to each Optionee and to each
individual who acquired Shares pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information.
13
EXHIBIT 10.2
K2 TECHNOLOGIES, INC.
STOCK OPTION GRANT NOTICE
(1996 STOCK OPTION PLAN)
K2 Technologies, Inc. (the "Company"), pursuant to its 1996 Stock Option Plan
(the "Plan") hereby grants to Optionee an option to purchase the number of
shares of the Company's common stock set forth below. This option is subject to
all of the terms and conditions as set forth herein and in Attachments I, II and
III, which are incorporated herein in their entirety.
1. OPTIONEE: ______________________________
DATE OF GRANT: ______________________________
VESTING START DATE ______________________________
SHARES SUBJECT TO OPTION: ______________________________
EXERCISE PRICE PER SHARE: ______________________________
EXPIRATION DATE: ______________________________
_X_INCENTIVE STOCK OPTION ___NONSTATUTORY STOCK OPTION
VESTING SCHEDULE: VESTING SHALL BE AS FOLLOWS: 1/8TH OF SHARES VEST 6 MONTHS
AFTER VESTING START DATE, 1/48TH VEST MONTHLY THEREAFTER.
PAYMENT: Payment by cash or check [or by promissory note]:
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned optionee acknowledges receipt
of, and understands and agrees to, this Grant Notice, the Stock Option Agreement
and the Plan. Optionee further acknowledges that as of the Date of Grant, this
Grant Notice, the Stock Option Agreement and the Plan set forth the entire
understanding between optionee and the Company regarding the acquisition of
stock in the Company and supersedes all prior oral and written agreements on
that subject with the exception of (i) options previously granted and delivered
to optionee under the Plan, and (ii) the following agreements only:
OTHER AGREEMENTS: ______________________________
______________________________
______________________________
COMPANY OPTIONEE:
By: Garo K. Kiremidjian Signature:
-------------------------------- ------------------------------
Title: President
-----------------------------
Date: Date:
------------------------------ -----------------------------------
Attachment I: Stock Option Agreement
Attachment II: 1996 Stock Option Plan
Attachment III: Notice of Exercise
<PAGE>
STOCK OPTION AGREEMENT
Pursuant to the Grant Notice and this Stock Option Agreement, the
Company has granted you an option to purchase the number of shares of the
Company's Common Stock indicated in the Grant Notice at the exercise price
indicated in the Grant Notice.
Your option is granted in connection with and in furtherance of the
Company's compensatory benefit plan for the Company's employees (including
officers), directors or consultants, and is intended to comply with the
provisions of Rule 701 promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"). Defined
terms not explicitly defined in this Stock Option Agreement but defined in the
Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
2. VESTING. Subject to the limitations contained herein, your option
will vest as provided in the Grant Notice, provided that vesting will cease upon
the termination of your Continuous Status as an Employee, Director or
Consultant.
3. METHOD OF PAYMENT.
(a) PAYMENT OPTIONS. Payment of the exercise price by cash or
check is due in full upon exercise of all or any part of your option, provided
that you may elect, to the extent permitted by applicable law and the Grant
Notice, to make payment of the exercise price under one of the following
alternatives:
(1) Payment pursuant to a program developed under Regulation
T as promulgated by the Federal Reserve Board which, prior to the issuance of
Common Stock, results in either the receipt of cash (or check) by the Company or
the receipt of irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds;
(2) Provided that the option exercise price for the
installment, or portion thereof, being purchased exceeds one thousand dollars
($1,000), payment pursuant to the deferred payment alternative described herein;
or
(3) Payment by a combination of the above methods.
(b) DEFERRED PAYMENT. Under the deferred payment alternative:
(1) At least ten percent of the exercise price shall be due
at the time of exercise, at least ten percent of the exercise price plus accrued
interest shall be due each anniversary of the date of exercise, with final
payment of the remainder of the exercise price, plus accrued interest, due five
years from the date of exercise or, at the Company's election, upon termination
of your Continuous Status as an Employee, Director or Consultant with the
Company or an Affiliate of the Company;
<PAGE>
(2) Interest shall be payable at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Internal Revenue Code of 1986
(the "Code"), of any portion of any amounts other than amounts stated to be
interest under the deferred payment arrangement; and
(3) To elect the deferred payment alternative, your written
notice of exercise must state that you are electing this payment alternative
and, if the Company so requests, you must tender to the Company a promissory
note and a security agreement covering the purchased shares, both in form and
substance satisfactory to the Company, or such other or additional documentation
as the Company may require.
4. EXERCISE PRIOR TO VESTING. If permitted in the Grant Notice, and
subject to the provisions of your option contained herein, you may elect, at any
time that is both (i) during your Continuous Status as an Employee, Director or
Consultant and (ii) during your option's term, to exercise all or part of your
option, including the nonvested portion of your option; PROVIDED, HOWEVER, that:
(1) a partial exercise of your option shall be deemed to
cover first vested shares and then the earliest vesting installment of unvested
shares;
(2) any shares so purchased from installments which have not
vested as of the date of exercise shall be subject to the purchase option in
favor of the Company as described in the Company's form of Early Exercise Stock
Purchase Agreement;
(3) you shall enter into the Company's form of Early Exercise
Stock Purchase Agreement with a vesting schedule that will result in the same
vesting as if no early exercise had occurred; and
(4) your option shall not be exercisable with respect to any
unvested installment to the extent such exercise would cause the aggregate fair
market value of any shares subject to incentive stock options granted you by the
Company (valued as of their grant date) which would become exercisable for the
first time during any calendar year to exceed $100,000.
5. WHOLE SHARES. Your option may only be exercised for whole shares.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the
contrary contained herein, your option may not be exercised unless the shares
issuable upon exercise of your option are then registered under the Securities
Act or, if such shares are not then so registered, the Company has determined
that such exercise and issuance would be exempt from the registration
requirements of the Securities Act.
7. TERM. The term of your option commences on the date of grant and
expires upon the earliest of:
<PAGE>
(1) the Expiration Date indicated in the Grant Notice;
(2) the tenth (10th) anniversary of the Date of Grant;
(3) twelve (12) months after your death, if you die during,
or within thirty (30) days after the termination of your Continuous Status as
Employee, Director or Consultant; or
(4) eighteen (18) months after the termination of your
Continuous Status as Employee, Director or Consultant due to disability; or
(5) ninety (90) days after the termination of your Continuous
Status as an Employee, Director or Consultant for any other reason, provided
that if during any part of such ninety (90) day period the option is not
exercisable solely because of the condition set forth in paragraph 5 (Securities
Law Compliance), in which event the option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of ninety (90) days after the termination of Continuous Status as an
Employee, Director or Consultant.
To obtain the federal income tax advantages associated with an
"incentive stock option," the Code requires that at all times beginning on the
date of grant of the option and ending on the day three (3) months before the
date of the option's exercise, you must be an employee of the Company or an
Affiliate of the Company, except in the event of your death or permanent and
total disability. The Company cannot guarantee that your option will be treated
as an "incentive stock option" if you exercise your option more than three (3)
months after the date your employment with the Company terminates.
8. EXERCISE.
(a) You may exercise the vested portion of your option during its
term (and the unvested portion of your option if the Grant Notice so permits) by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require.
(b) By exercising your option you agree that:
(1) as a condition to any exercise of your option, the
Company may require you to enter an arrangement providing for the payment by you
to the Company of any tax withholding obligation of the Company arising by
reason of (1) the exercise of your option; (2) the lapse of any substantial risk
of forfeiture to which the shares are subject at the time of exercise; or (3)
the disposition of shares acquired upon such exercise;
(2) you will notify the Company in writing within fifteen
(15) days after the date of any disposition of any of the shares of the Common
Stock issued upon exercise
<PAGE>
of your incentive stock option that occurs within two (2) years after the date
of your option grant or within one (1) year after such shares of Common Stock
are transferred upon exercise of your option; and
(3) the Company (or a representative of the underwriters)
may, in connection with the first underwritten registration of the offering of
any securities of the Company under the Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date of the registration statement of the Company filed
under the Act as may be requested by the Company or the representative of the
underwriters. You further agree that the Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
9. TRANSFERABILITY. Your option is not transferable, except by will
or by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
10. RIGHT OF FIRST REFUSAL/RIGHT OF REPURCHASE. Vested shares that
are received upon exercise of your option are subject to a right of first
refusal, as described in the Company's bylaws in effect at such time the Company
may elect to exercise its right, subject to the terms of the Plan. The Company's
right of first refusal shall expire on the date of the first registration of an
equity security of the Company under Section 12 of the Exchange Act. In
addition, subject to the terms of the Plan, to the extent provided in the
Company's bylaws as amended from time to time, the Company shall have the right
to repurchase all or any part of the shares received pursuant to the exercise of
your option, which right shall be in addition to any right created by exercise
prior to vesting.
11. OPTION NOT A SERVICE CONTRACT. Your option is not an employment
contract and nothing in your option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the Company,
or of the Company to continue your employment with the Company. In addition,
nothing in your option shall obligate the Company, its shareholders, board of
directors, officers or employees to continue any relationship which you might
have as a director or consultant for the Company.
12. NOTICES. Any notices provided for in your option or the Plan
shall be given in writing and shall be deemed effectively given upon receipt or,
in the case of notices delivered by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.
13. GOVERNING PLAN DOCUMENT. Your option is subject to all the
provisions of the Plan, the provisions of which are hereby made a part of your
option, including without limitation the provisions of the Plan relating to
option provisions, and is further subject to all interpretations, amendments,
rules and regulations which may from time to time be
<PAGE>
promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of your option and those of the Plan, the provisions of
the Plan shall control.
<PAGE>
K2 TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
ADOPTED SEPTEMBER 19, 1996
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which
selected Employees and Directors of and Consultants to the Company, and its
Affiliates, may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the
services of persons who are now Employees or Directors of or Consultants to the
Company or its Affiliates, to secure and retain the services of new Employees,
Directors and Consultants, and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either Incentive Stock Options or Nonstatutory Stock Options. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and in such form as issued pursuant to Section 6,
and a separate certificate or certificates will be issued for shares purchased
on exercise of each type of Option.
<PAGE>
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.
(e) "COMPANY" means K2 Technologies, Inc.
(f) "CONSULTANT" means any person, including an advisor, engaged
by the Company or an Affiliate to render consulting services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT"
means that the service of an individual to the Company, whether as an Employee,
Director or Consultant, is not interrupted or terminated. The Board, in its sole
discretion, may determine whether Continuous Status as an Employee, Director or
Consultant shall be considered interrupted in the case of: (i) any leave of
absence approved by the Board, including sick leave, military leave, or any
other personal leave; or (ii) transfers between the Company, Affiliates or their
successors.
(h) "DIRECTOR" means a member of the Board.
(i) "EMPLOYEE" means any person, including Officers and
Directors, employed by the Company or any Affiliate of the Company. Neither
service as a Director nor
<PAGE>
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "FAIR MARKET VALUE" means, as of any date, the value of the
common stock of the Company determined in good faith by the Board and, to the
extent required by law, in a manner consistent with Section 260.140.50 of the
California Code of Regulations.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(n) "OPTION" means a stock option granted pursuant to the Plan.
(o) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. Each Option Agreement shall be subject to the terms and conditions
of the Plan.
(p) "OPTIONEE" means an Employee, Director or Consultant who
holds an outstanding Option.
(q) "PLAN" means this 1996 Stock Option Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until
the Board delegates administration to a Committee, as provided in subsection
3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
<PAGE>
(1) To determine from time to time which of the persons
eligible under the Plan shall be granted Options; when and how each Option shall
be granted; whether an Option will be an Incentive Stock Option or a
Nonstatutory Stock Option; the provisions of each Option granted (which need not
be identical), including the time or times such Option may be exercised in whole
or in part; and the number of shares for which an Option shall be granted to
each such person.
(2) To construe and interpret the Plan and Options granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
(3) To amend the Plan or an Option as provided in Section 11.
(4) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to one or
more members of the Board (the "Committee"). If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
<PAGE>
(a) Subject to the provisions of Section 10 relating to
adjustments upon changes in stock, the stock that may be sold pursuant to
Options shall not exceed in the aggregate seven hundred thousand (700,000)
shares of the Company's common stock. If any Option shall for any reason expire
or otherwise terminate, in whole or in part, without having been exercised in
full, the stock not purchased under such Option shall revert to and again become
available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees.
Nonstatutory Stock Options may be granted only to Employees, Directors or
Consultants.
(b) No person shall be eligible for the grant of an Incentive
Stock Option if, at the time of grant, such person owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates unless the exercise price of such Incentive Stock
Option is at least one hundred ten percent (110%) of the Fair Market Value of
such stock at the date of grant and the Incentive Stock Option is not
exercisable after the expiration of five (5) years from the date of grant. To
the extent required by applicable law, the provisions of this subsection 5(b)
shall also apply to the grant of a Nonstatutory Stock Option granted to a ten
percent (10%) stockholder described in the preceding sentence.
<PAGE>
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms
and conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of
ten (10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option
shall be not less than one hundred percent (100%) of the Fair Market Value on
the date of grant. The exercise price of each Nonstatutory Stock Option shall be
not less than eighty-five percent (85%) of the Fair Market Value on the date of
grant. Notwithstanding the foregoing, the Board may grant an Option with an
exercise price lower than that set forth above if such Option is granted as part
of a transaction to which section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board.
<PAGE>
In the case of any deferred payment arrangement, interest shall
be payable at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement, and a current payment of the par value
of the Company's common stock shall be reserved to the extent such payment is
required by applicable law.
(d) TRANSFERABILITY. An Option shall not be transferable except
by will or by the laws of descent and distribution, and shall be exercisable
during the lifetime of the person to whom the Option is granted only by such
person. The person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period, and
may be exercised with respect to some or all of the shares allotted to such
period and/or any prior period as to which the Option became vested but was not
fully exercised. To the extent required by applicable law, Options shall vest at
the rate of at least twenty percent (20%) per year. The Option may be subject to
such other terms and conditions on the time or times when it may be exercised
(which may be based on performance or other criteria) as the Board may deem
appropriate. The provisions of this subsection 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an Option may be
exercised.
<PAGE>
(f) SECURITIES LAW COMPLIANCE. The Company may require any
Optionee, or any person to whom an Option is transferred under subsection 6(d),
as a condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. The foregoing requirements, and any assurances
given pursuant to such requirements, shall be inoperative if (i) the issuance of
the shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may require the Optionee to provide such other representations, written
assurances or information which the Company shall determine is necessary,
desirable or appropriate to comply with applicable securities and other laws as
a condition of granting an Option to such Optionee or permitting the Optionee to
exercise such Option. The Company may, upon advice of counsel to the Company,
place legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
<PAGE>
(g) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination) but only
within such period of time ending on the earlier of (i) the date three (3)
months after the termination of the Optionee's Continuous Status as an Employee,
Director or Consultant, or such longer or shorter period specified in the Option
Agreement (which shall be at least thirty (30) days, if required by applicable
law), or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, after termination, the Optionee does not exercise his or
her Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan. Finally, an Optionee's Option
Agreement may also provide that if the exercise of the Option following the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (other than upon the Optionee's death or disability) would be
prohibited at any time solely because the issuance of shares would violate the
registration requirements under the Securities Act, then the Option shall
terminate on the earlier of (i) the expiration of the term of the Option set
forth in the first paragraph of this Section 7, or (ii) the expiration of a
period of three (3) months after the termination of the Optionee's Continuous
Status as an Employee, Director or Consultant during which the exercise of the
Option would not be in violation of such registration requirements.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise
<PAGE>
it as of the date of termination), but only within such period of time ending on
the earlier of (i) the date twelve (12) months following such termination (or
such longer or shorter period specified in the Option Agreement, which shall be
at least six (6) months if required by applicable law), or (ii) the expiration
of the term of the Option as set forth in the Option Agreement. If, at the date
of termination, the Optionee is not entitled to exercise his or her entire
Option, the shares covered by the unexercisable portion of the Option shall
revert to and again become available for issuance under the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option Agreement after the
termination of, the Optionee's Continuous Status as an Employee, Director or
Consultant, the Option may be exercised (to the extent the Optionee was entitled
to exercise the Option as of the date of death) by the Optionee's estate, by a
person who acquired the right to exercise the Option by bequest or inheritance
or by a person designated to exercise the option upon the Optionee's death
pursuant to subsection 6(d), but only within the period ending on the earlier of
(i) the date eighteen (18) months following the date of death (or such longer or
shorter period specified in the Option Agreement, which shall be at least six
(6) months if required by applicable law), or (ii) the expiration of the term of
such Option as set forth in the Option Agreement. If, at the time of death, the
Optionee was not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after death, the Option is not
exercised within the time specified herein, the Option shall terminate,
<PAGE>
and the shares covered by such Option shall revert to and again become available
for issuance under the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionee may elect at any time while an Employee, Director
or Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a repurchase right in favor of the Company with
the repurchase price to be equal to the original purchase price of the stock. To
the extent required by applicable law, the right of the Company under this
subsection to repurchase shares at the original purchase price (i) shall lapse
at a minimum rate of twenty percent (20%) per year over the five (5) year period
measured from the date the Option was granted; (ii) such right shall be
exercisable only within (A) the ninety (90) day period following the termination
of employment or the relationship as a Director or Consultant, or (B) such
longer period as may be agreed to by the Company and the Optionee (for example,
for purposes of satisfying the requirements of Section 1202(c)(3) of the Code
(regarding "qualified small business stock"); and (iii) such right shall be
exercisable only for cash or cancellation of purchase money indebtedness for the
shares.
(k) RIGHT OF REPURCHASE. The Option may, but need not, include a
provision whereby the Company may elect, prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, to repurchase all or any part of the vested shares exercised
pursuant to the Option. To the extent required by applicable law, the right of
the Company under this subsection to repurchase shares at the original purchase
price (i) shall lapse at a minimum rate of twenty percent (20%) per year over
the five (5)-year period measured from the date the Option was granted; (ii)
such right shall be exercisable only within (A) the
<PAGE>
ninety (90)-day period following the termination of employment or the
relationship as a Director or Consultant, or (B) such longer period as may be
agreed to by the Company and the Optionee (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code (regarding
"qualified small business stock")); and (iii) such right shall be exercisable
only for cash or cancellation of purchase money indebtedness for the shares at a
repurchase price equal to the greater of (A) the stock's Fair Market Value at
the time of such termination or (B) the original purchase price paid for such
shares. Should the right of repurchase be assigned by the Company, the assignee
shall pay the Company cash equal to the difference between the original purchase
price and the stock's Fair Market Value if the original purchase price is less
than the stock's Fair Market Value.
(l) RIGHT OF FIRST REFUSAL. The Option may, but need not, include
a provision whereby the Company may elect, prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, to exercise a right of first refusal following receipt of notice
from the Optionee of the intent to transfer all or any part of the shares
exercised pursuant to the Option. Such right of first refusal must be exercised
by the Company no more than thirty (30) days following receipt of notice of the
Optionee's intent to transfer shares and must be exercised as to all the shares
the Optionee intends to transfer unless the Optionee consents to exercise for
less than all the shares offered. The purchase of the shares following exercise
must be completed within sixty (60) days of the Company's receipt of notice of
the Optionee's intent to transfer shares of such longer period of time as has
been offered by the person to whom the Optionee intends to transfer the shares.
(m) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation
<PAGE>
relating to the exercise of such Option by any of the following means or by a
combination of such means: (1) tendering a cash payment; (2) authorizing the
Company to withhold shares from the shares of the common stock otherwise
issuable to the Optionee as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of the common stock of
the Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Options.
(b) The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be
required to issue and sell shares of stock upon exercise of the Options;
PROVIDED, HOWEVER, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any Option or any stock
issued or issuable pursuant to any such Option. If, after reasonable efforts,
the Company is unable to obtain from any such regulatory commission or agency
the authority which counsel for the Company deems necessary for the lawful
issuance and sale of stock under the Plan, the Company shall be relieved from
any liability for failure to issue and sell stock upon exercise of such Options
unless and until such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall
constitute general funds of the Company.
<PAGE>
9. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at
which an Option may first be exercised or the time during which an Option or any
part thereof will vest pursuant to subsection 6(e), notwithstanding the
provisions in the Option stating the time at which it may first be exercised or
the time during which it will vest.
(b) Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to such
Option unless and until such person has satisfied all requirements for exercise
of the Option pursuant to its terms.
(c) Throughout the term of any Option, the Company shall deliver
to the holder of such Option, not later than one hundred twenty (120) days after
the close of each of the Company's fiscal years during the Option term, a
balance sheet and an income statement. This section shall not apply when
issuance is limited to key employees whose duties in connection with the Company
assure them access to equivalent information or when not required by applicable
law.
(d) Nothing in the Plan or any instrument executed or Option
granted pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the employ of the Company or any Affiliate (or
to continue acting as a Director or Consultant) or shall affect the right of the
Company or any Affiliate to terminate the employment of any Employee with or
without cause, the right of the Company's Board of Directors and/or the
Company's shareholders to remove any Director pursuant to the terms of the
Company's shareholders to remove any Director pursuant to the terms of the
Company's By-Laws and
<PAGE>
applicable law, or the right to terminate the relationship of any Consultant
pursuant to the terms of such Consultant's agreement with the Company or
Affiliate.
(e) To the extent that the aggregate Fair Market Value
(determined at the time of grant) of stock with respect to which Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year under all plans of the Company and its Affiliates exceeds one hundred
thousand dollars ($100,000), the Options or portions thereof which exceed such
limit (according to the order in which they were granted) shall be treated as
Nonstatutory Stock Options.
(f) The Board or the Committee shall have the authority to
effect, at any time and from time to time (i) the repricing of any outstanding
Options under the Plan and/or (ii) with the consent of the affected holders of
Options, the cancellation of any outstanding Options and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of common stock, but having an exercise price per
share not less than eighty-five percent (85%) of the Fair Market value in the
case of a Nonstatutory Stock Option, one hundred percent (100%) of the Fair
Market Value in the case of an Incentive Stock Option or, in the case of a ten
percent (10%) stockholder (as defined in subsection 5(b)), not less than one
hundred and ten percent (110%) of the Fair Market Value), on the new grant date.
Notwithstanding the foregoing, the Board may grant an Option with an exercise
price lower than that set forth above if such Option is granted as part of a
transaction to which section 424(c) of the Code applies.
<PAGE>
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any Option (through merger, consolidation, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan pursuant to subsection 4(a), and the
outstanding Options will be appropriately adjusted in the class(es) and number
of shares and price per share of stock subject to such outstanding Options. Such
adjustments shall be made by the Board or Committee, the determination of which
shall be final, binding and conclusive. (The conversion of any convertible
securities of the Company shall not be treated as a "transaction not involving
the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or sale of
all or substantially all of the assets of the Company; (2) a merger or
consolidation in which the Company is not the surviving corporation; (3) a
reverse merger in which the Company is the surviving corporation but the shares
of the Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise; or (4) the acquisition by any person, entity or
group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of the Company)
of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the
<PAGE>
election of directors, then to the extent permitted by applicable law: (i) any
surviving or acquiring corporation shall assume any Options outstanding under
the Plan or shall substitute similar Options (including an option to acquire the
same consideration paid to the stockholders in the transaction described in this
subsection 10(b)) for those outstanding under the Plan, or (ii) such Options
shall continue in full force and effect. In the event any surviving or acquiring
corporation refuses to assume such Options, or to substitute similar options for
those outstanding under the Plan, then, with respect to Options held by persons
then performing services as Employees, Directors or Consultants, the time during
which such Options may be exercised (but not the vesting of such options) shall
be accelerated prior to such event and the Options terminated if not exercised
after such acceleration and at or prior to such event.
11. AMENDMENT OF THE PLAN AND OPTIONS.
(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in Section 10 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
shareholders of the Company within twelve (12) months before or after the
adoption of the amendment where the amendment requires shareholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code
(including an increase in the number of shares reserved for issuance under the
Plan).
(b) The Board may, in its sole discretion, submit any other
amendment to the Plan for shareholder approval.
(c) It is expressly contemplated that the Board may amend the
Plan in any respect the Board deems necessary or advisable to provide Optionees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated
<PAGE>
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the
terms of any one or more Options; PROVIDED, HOWEVER, that the rights and
obligations under any Option shall not be impaired by any such amendment unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate ten (10) years from the date
the Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Options may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the
Plan is in effect shall not be impaired by suspension or termination of the
Plan, except with the written consent of the person to whom the Option was
granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but
no Options granted under the Plan shall be exercised unless and until the Plan
has been approved by the stockholders of the Company, which approval shall be
within twelve (12) months before or after the date the Plan is adopted by the
Board.
<PAGE>
NOTICE OF EXERCISE
Stock Option Administration
K2 Technologies, Inc.
4000 Moorepark Avenue
San Jose, CA 95117 Date of Exercise: ___________________
This constitutes notice under my stock option that I elect to
purchase the number of shares for the price set forth below.
Type of option (check one): Incentive [ ] Nonstatutory [ ]
Stock option dated: ___________________
Number of shares as
to which option is
exercised: ___________________
Certificates to be
issued in name of: ___________________
Total exercise price: $__________________
Cash payment delivered
herewith: $__________________
By this exercise, I agree (i) to provide such additional documents
as you may require pursuant to the terms of the 1996 Stock Option Plan, (ii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option, and
(iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any shares
of Common Stock issued upon exercise of this option that occurs within two (2)
years after the date of grant of this option or within one (1) year after such
shares of Common Stock are issued upon exercise of this option.
I hereby make the following certifications and representations with
respect to the number of shares of Common Stock of K2 Technologies, Inc. listed
above (the "Shares"), which are being acquired by me for my own account upon
exercise of the Option as set forth above:
<PAGE>
I acknowledge that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), and are deemed to constitute
"restricted securities" under Rule 701 and "control securities" under Rule 144
promulgated under the Act. I warrant and represent to K2 Technologies, Inc. that
I have no present intention of distributing or selling said Shares, except as
permitted under the Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares
for at least ninety days after the stock of K2 Technologies, Inc. becomes
publicly traded (I.E., subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934) under Rule 701 and that more
restrictive conditions apply to affiliates of K2 Technologies, Inc. under Rule
144.
I further acknowledge that all certificates representing any of the
Shares subject to the provisions of the Option shall have endorsed thereon
appropriate legends reflecting the foregoing limitations, as well as any legends
reflecting restrictions pursuant to K2 Technologies, Inc.'s Articles of
Incorporation, Bylaws and/or applicable securities laws.
I further agree that, if required by K2 Technologies, Inc. (or a
representative of the underwriters) in connection with the first underwritten
registration of the offering of any securities of K2 Technologies, Inc. under
the Act, I will be subject to the sale restrictions described in my Stock Option
Agreement.
Very truly yours,
_______________________________________
EXHIBIT 10.3
K2 TECHNOLOGIES, INC.
1998 KEY PERSON STOCK OPTION PLAN
ADOPTED JULY 25, 1998
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
individuals who are key persons providing services to the Company as Key
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to purchase stock of the Company. The Options
granted under the Plan and the shares issuable upon exercise thereof are
intended to qualify for exemption from qualification pursuant to California
Corporations Code Section 25102(f).
(b) The Company, by means of the Plan, seeks to retain the services
of key persons who are now Key Employees or Directors of or Consultants to the
Company or its Affiliates, to secure and retain the services of new Key
Employees, Directors and Consultants, and to provide incentives for such persons
to exert maximum efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall
be Nonstatutory Stock Options. All Options shall be separately designated
Nonstatutory Stock Options at the time of grant, and in such form as issued
pursuant to Section 6, and a separate certificate or certificates will be issued
for shares purchased on exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now
<PAGE>
or hereafter existing, as those terms are defined in Sections 424(e) and (f)
respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.
(e) "COMPANY" means K2 Technologies, Inc.
(f) "CONSULTANT" means any key person, including an advisor, engaged
by the Company or an Affiliate to render consulting services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors. A Consultant
shall be determined to be a key person only if such person either (i) has
preexisting personal or business relationships with the Company or any of its
Officers, Directors or controlling persons, consisting of personal or business
contacts of a nature and duration such as would enable a reasonably prudent
purchaser to be aware of the character, business acumen and general business and
financial circumstances of the person with whom such relationship exists, or
(ii) by reason of his or her business or financial experience or the business
and financial experience of his or her professional advisors who are
unaffiliated with and who are not compensated by the Company or any Affiliate or
selling agent of the Company, either directly or indirectly, he or she could be
reasonably assumed to have the capacity to protect his or her own interests
within the meaning of California Corporations Code Section 25102(f).
2
<PAGE>
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
that the service of an individual to the Company, whether as an Employee,
Director or Consultant, is not interrupted or terminated. The Board, in its sole
discretion, may determine whether Continuous Status as an Employee, Director or
Consultant shall be considered interrupted in the case of: (i) any leave of
absence approved by the Board, including sick leave, military leave, or any
other personal leave; or (ii) transfers between the Company, Affiliates or their
successors.
(h) "DIRECTOR" means a member of the Board. A Director shall be
determined to be a key person only if such person either (i) has preexisting
personal or business relationships with the Company or any of its Officers,
Directors or controlling persons, consisting of personal or business contacts of
a nature and duration such as would enable a reasonably prudent purchaser to be
aware of the character, business acumen and general business and financial
circumstances of the person with whom such relationship exists, or (ii) by
reason of his or her business or financial experience or the business and
financial experience of his or her professional advisors who are unaffiliated
with and who are not compensated by the Company or any Affiliate or selling
agent of the Company, either directly or indirectly, he or she could be
reasonably assumed to have the capacity to protect his or her own interests
within the meaning of California Corporations Code Section 25102(f).
(i) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
3
<PAGE>
(k) "FAIR MARKET VALUE" means, as of any date, the value of the
common stock of the Company determined in good faith by the Board and, to the
extent required by law, in a manner consistent with Section 260.140.50 of the
California Code of Regulations.
(l) "KEY EMPLOYEE" means any key person, including officers and
Directors, employed by the Company or any Affiliate of the Company who is
determined to be eligible for one or more option grants under this Plan. A Key
Employee shall be determined to be a key person only if such person either (i)
has preexisting personal or business relationships with the Company or any of
its Officers, Directors or controlling persons, consisting of personal or
business contacts of a nature and duration such as would enable a reasonably
prudent purchaser to be aware of the character, business acumen and general
business and financial circumstances of the person with whom such relationship
exists, or (ii) by reason of his or her business or financial experience or the
business and financial experience of his or her professional advisors who are
unaffiliated with and who are not compensated by the Company or any Affiliate or
selling agent of the Company, either directly or indirectly, he or she could be
reasonably assumed to have the capacity to protect his or her own interests
within the meaning of California Corporations Code Section 25102(f). Neither
service as a Director nor payment of a director?s fee by the Company shall be
sufficient to constitute ?employment? by the Company.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.
(n) "OPTION" means a stock option granted pursuant to the Plan.
4
<PAGE>
(o) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(p) "OPTIONEE" means an Key Employee, Director or Consultant who
holds an outstanding Option.
(q) "PLAN" means this 1998 Key Person Stock Option Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how each Option shall be
granted; the provisions of each Option granted (which need not be identical),
including the time or times such Option may be exercised in whole or in part;
and the number of shares for which an Option shall be granted to each such
person.
(2) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
5
<PAGE>
(3) To amend the Plan or an Option as provided in Section 11.
(4) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to one or more
members of the Board (the "Committee"). If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate Ninety-Three Thousand Five Hundred (93,500) shares of
the Company's common stock. If any Option shall for any reason expire or
otherwise terminate, in whole or in part, without having been exercised in full,
the stock not purchased under such Option shall revert to and again become
available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
6
<PAGE>
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted only to Key Employees,
Directors or Consultants.
(b) Pursuant to Section 25102(f) of the California Corporations Code
and the regulations promulgated thereunder, no person shall be eligible to be
granted an Option if the grant thereof would violate the limitation that Options
granted pursuant to the Plan shall not be made to more than a total of
thirty-five (35) Purchasers. For purposes of this subsection 5(c), ?Purchaser?
shall mean an Optionee to whom an Option was originally granted, but shall
exclude (i) any person who occupies a position with the Company with duties and
authority substantially similar to those of an executive officer of the Company,
(ii) any person who, acting alone or in conjunction with one or more other
persons, has taken the initiative in founding and organizing the business or
enterprise of the Company or (iii) any relative, spouse or relative of the
spouse of Purchaser who has the same principal residence as the Purchaser.
7
<PAGE>
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Nonstatutory Stock Option
shall be not less than ten percent (10%) of the Fair Market Value on the date of
grant.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be charged at the minimum rate of interest
necessary to avoid the treatment as interest, under any applicable provisions of
the Code, of any amounts other than amounts stated
8
<PAGE>
to be interest under the deferred payment arrangement, and a current payment of
the par value of the Company's common stock shall be reserved to the extent such
payment is required by applicable law.
(d) TRANSFERABILITY. An Option shall not be transferable except by
will or by the laws of descent and distribution, and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such person.
The person to whom the Option is granted may, by delivering written notice to
the Company, in a form satisfactory to the Company, designate a third party who,
in the event of the death of the Optionee, shall thereafter be entitled to
exercise the Option.
(e) VESTING. The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period, and
may be exercised with respect to some or all of the shares allotted to such
period and/or any prior period as to which the Option became vested but was not
fully exercised. To the extent required by applicable law, Options shall vest at
the rate of at least twenty percent (20%) per year. The Option may be subject to
such other terms and conditions on the time or times when it may be exercised
(which may be based on performance or other criteria) as the Board may deem
appropriate. The provisions of this subsection 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an Option may be
exercised.
(f) SECURITIES LAW COMPLIANCE. The Company will require any
Optionee, or any
9
<PAGE>
person to whom an Option is transferred under subsection 6(d),
as a condition of exercising any such Option, to give written assurances
satisfactory to the Company that the Optionee is acquiring the Option for the
Optionee?s own account and that the Optionee has no intention of distributing,
transferring or selling all or any part of the Option except in accordance with
the terms of the Option Agreement and Section 25102(f) of the California
Corporations Code. The Optionee must also give written assurances satisfactory
to the Company that the Optionee has either (i) preexisting personal or business
relationships with the Company or any of its Officers, Directors or controlling
persons, consisting of personal or business contacts of a nature and duration
such as would enable a reasonably prudent purchaser to be aware of the
character, business acumen and general business and financial circumstances of
the person with whom such relationship exists, or (ii) the capacity to protect
the Optionee?s own interests in connection with the grant of the Option by
virtue of the Optionee?s business or financial experience or by virtue of the
business or financial experience of any of the Optionee?s professional advisors
who are unaffiliated with and who are not compensated by the Company or any of
its affiliates or selling agents, directly or indirectly. The Optionee must
additionally give written assurances satisfactory to the Company that the offer
and sale of the Option to the Optionee has not been accomplished, to the
Optionee?s knowledge, by the publication of any advertisement. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (i) the issuance of the shares upon the exercise of the Option
has been registered under a then currently effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) as
to any particular requirement, a determination is made
10
<PAGE>
by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may require
the Optionee to provide such other representations, written assurances or
information which the Company shall determine is necessary, desirable or
appropriate to comply with applicable securities and other laws as a condition
of granting an Option to such Optionee or permitting the Optionee to exercise
such Option. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(g) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination) but only
within such period of time ending on the earlier of (i) the date three (3)
months after the termination of the Optionee's Continuous Status as an Employee,
Director or Consultant, or such longer or shorter period specified in the Option
Agreement (which shall be at least thirty (30) days, if required by applicable
law), or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, after termination, the Optionee does not exercise his or
her Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan. Finally, an Optionee's Option
Agreement may also provide that if the exercise of the Option
11
<PAGE>
following the termination of the Optionee's Continuous Status as an Employee,
Director or Consultant (other than upon the Optionee's death or disability)
would be prohibited at any time solely because the issuance of shares would
violate the registration requirements under the Securities Act, then the Option
shall terminate on the earlier of (i) the expiration of the term of the Option
set forth in the first paragraph of this Section 7, or (ii) the expiration of a
period of three (3) months after the termination of the Optionee's Continuous
Status as an Employee, Director or Consultant during which the exercise of the
Option would not be in violation of such registration requirements.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it as of the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement, which shall be at least six
(6) months if required by applicable law), or (ii) the expiration of the term of
the Option as set forth in the Option Agreement. If, at the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the shares covered by such Option shall revert
to and again become available for issuance under the Plan.
12
<PAGE>
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option Agreement after the
termination of, the Optionee's Continuous Status as an Employee, Director or
Consultant, the Option may be exercised (to the extent the Optionee was entitled
to exercise the Option as of the date of death) by the Optionee's estate, by a
person who acquired the right to exercise the Option by bequest or inheritance
or by a person designated to exercise the option upon the Optionee's death
pursuant to subsection 6(d), but only within the period ending on the earlier of
(i) the date eighteen (18) months following the date of death (or such longer or
shorter period specified in the Option Agreement, which shall be at least six
(6) months if required by applicable law), or (ii) the expiration of the term of
such Option as set forth in the Option Agreement. If, at the time of death, the
Optionee was not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after death, the Option is not
exercised within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionee may elect at any time while an Employee, Director
or Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a repurchase right in favor of the Company with
the repurchase price to be equal to the original purchase price of the stock. To
the extent required by applicable law, the right of the Company under this
subsection to repurchase shares
13
<PAGE>
at the original purchase price (i) shall lapse at a minimum rate of twenty
percent (20%) per year over the five (5) year period measured from the date the
Option was granted; (ii) such right shall be exercisable only within (A) the
ninety (90) day period following the termination of employment or the
relationship as a Director or Consultant, or (B) such longer period as may be
agreed to by the Company and the Optionee (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code (regarding
"qualified small business stock"); and (iii) such right shall be exercisable
only for cash or cancellation of purchase money indebtedness for the shares.
(k) RIGHT OF REPURCHASE. The Option may, but need not, include a
provision whereby the Company may elect, prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, to repurchase all or any part of the vested shares exercised
pursuant to the Option. To the extent required by applicable law, the right of
the Company under this subsection to repurchase shares at the original purchase
price (i) shall lapse at a minimum rate of twenty percent (20%) per year over
the five (5)-year period measured from the date the Option was granted; (ii)
such right shall be exercisable only within (A) the ninety (90)-day period
following the termination of employment or the relationship as a Director or
Consultant, or (B) such longer period as may be agreed to by the Company and the
Optionee (for example, for purposes of satisfying the requirements of Section
1202(c)(3) of the Code (regarding "qualified small business stock")); and (iii)
such right shall be exercisable only for cash or cancellation of purchase money
indebtedness for the shares at a repurchase price equal to the greater of (A)
the stock's Fair Market Value at the time of such termination or (B) the
14
<PAGE>
original purchase price paid for such shares. Should the right of repurchase be
assigned by the Company, the assignee shall pay the Company cash equal to the
difference between the original purchase price and the stock's Fair Market Value
if the original purchase price is less than the stock's Fair Market Value.
(l) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, to exercise a right of first refusal following receipt of notice
from the Optionee of the intent to transfer all or any part of the shares
exercised pursuant to the Option. Such right of first refusal must be exercised
by the Company no more than thirty (30) days following receipt of notice of the
Optionee's intent to transfer shares and must be exercised as to all the shares
the Optionee intends to transfer unless the Optionee consents to exercise for
less than all the shares offered. The purchase of the shares following exercise
must be completed within sixty (60) days of the Company's receipt of notice of
the Optionee's intent to transfer shares of such longer period of time as has
been offered by the person to whom the Optionee intends to transfer the shares.
(m) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2) authorizing
the Company to withhold shares from the shares of the common stock otherwise
issuable to the Optionee as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of the common stock of
the
15
<PAGE>
Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Options.
(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; PROVIDED, HOWEVER,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is unable
to obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such options unless and until
such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which
an Option may first be exercised or the time during which an Option or any part
thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in
the Option stating the time at which it may first be exercised or the time
during which it will vest.
16
<PAGE>
(b) Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to such
Option unless and until such person has satisfied all requirements for exercise
of the Option pursuant to its terms.
(c) Throughout the term of any Option, the Company shall deliver to
the holder of such Option, not later than one hundred twenty (120) days after
the close of each of the Company's fiscal years during the Option term, a
balance sheet and an income statement. This section shall not apply when
issuance is limited to key employees whose duties in connection with the Company
assure them access to equivalent information or when not required by applicable
law.
(d) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the employ of the Company or any Affiliate (or
to continue acting as a Director or Consultant) or shall affect the right of the
Company or any Affiliate to terminate the employment of any Employee with or
without cause, the right of the Company's Board of Directors and/or the
Company's shareholders to remove any Director pursuant to the terms of the
Company's shareholders to remove any Director pursuant to the terms of the
Company's By-Laws and applicable law, or the right to terminate the relationship
of any Consultant pursuant to the terms of such Consultant's agreement with the
Company or Affiliate.
(e) The Board or the Committee shall have the authority to effect,
at any time and from time to time (i) the repricing of any outstanding Options
under the Plan and/or (ii) with the
17
<PAGE>
consent of the affected holders of Options, the cancellation of any outstanding
Options and the grant in substitution therefor of new Options under the Plan
covering the same or different numbers of shares of common stock, but having an
exercise price per share not less than ten percent (10%) of the Fair Market
value in the case of a Nonstatutory Stock Option, in the case of a ten percent
(10%) stockholder (as defined in subsection 5(b)), not less than one hundred and
ten percent (110%) of the Fair Market Value), on the new grant date.
Notwithstanding the foregoing, the Board may grant an Option with an exercise
price lower than that set forth above if such Option is granted as part of a
transaction to which section 424(c) of the Code applies.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any Option (through merger, consolidation, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan pursuant to subsection 4(a), and the
outstanding Options will be appropriately adjusted in the class(es) and number
of shares and price per share of stock subject to such outstanding Options. Such
adjustments shall be made by the Board or Committee, the determination of which
shall be final, binding and conclusive. (The conversion of any convertible
securities of the Company shall not be treated as a "transaction not involving
the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or sale of all
or substantially all of
18
<PAGE>
the assets of the Company; (2) a merger or consolidation in which the Company is
not the surviving corporation; (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's common stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise; or (4) the
acquisition by any person, entity or group within the meaning of Section 13(d)
or 14(d) of the Exchange Act, or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
directors, then to the extent permitted by applicable law: (i) any surviving or
acquiring corporation shall assume any Options outstanding under the Plan or
shall substitute similar Options (including an option to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 10(b)) for those outstanding under the Plan, or (ii) such Options
shall continue in full force and effect. In the event any surviving or acquiring
corporation refuses to assume such Options, or to substitute similar options for
those outstanding under the Plan, then, with respect to Options held by persons
then performing services as Employees, Directors or Consultants, the time during
which such Options may be exercised (but not the vesting of such options) shall
be accelerated prior to such event and the Options terminated if not exercised
after such acceleration and at or prior to such event.
19
<PAGE>
11. AMENDMENT OF THE PLAN AND OPTIONS.
(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in Section 10 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
shareholders of the Company within twelve (12) months before or after the
adoption of the amendment where the amendment requires shareholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code
(including an increase in the number of shares reserved for issuance under the
Plan).
(b) The Board may, in its sole discretion, submit any other
amendment to the Plan for shareholder approval.
(c) Rights and obligations under any Option granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Option was granted and
(ii) such person consents in writing.
(d) The Board at any time, and from time to time, may amend the
terms of any one or more Options; PROVIDED, HOWEVER, that the rights and
obligations under any Option shall not be impaired by any such amendment unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Options may be granted under the Plan while the Plan is
suspended or after it is terminated.
20
<PAGE>
(b) Rights and obligations under any Option granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the written consent of the person to whom the Option was granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board.
21
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,267
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,448
<PP&E> 30,705
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,020,859
<CURRENT-LIABILITIES> 49,059
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,020,859
<SALES> 142,628
<TOTAL-REVENUES> 149,362
<CGS> 0
<TOTAL-COSTS> 109,864
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,393
<INCOME-PRETAX> 39,498
<INCOME-TAX> 15,196
<INCOME-CONTINUING> 0
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<NET-INCOME> 23,568
<EPS-PRIMARY> 1.85
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