<PAGE> 1
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 000-22755
COMPUTER MOTION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified on in its charter)
DELAWARE 77-0458805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
130-B CREMONA DRIVE
GOLETA, CA 93117
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(805) 968-9600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check /X/ whether the registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
As of May 1, 1998 there were 7,932,000 shares of the Registrant's common stock
outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER MOTION, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(Unaudited) (1)
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,964,000 $ 22,555,000
Marketable securities 10,324,000 10,179,000
Accounts receivable 2,085,000 1,804,000
Inventory 1,541,000 992,000
Prepaid expenses 291,000 283,000
------------ ------------
Total current assets 34,205,000 35,813,000
Plant and equipment, net 1,437,000 1,108,000
Other assets 465,000 392,000
------------ ------------
Total assets $ 36,107,000 $ 37,313,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,665,000 $ 1,218,000
Accrued expenses 1,266,000 1,039,000
Capital lease obligations 120,000 141,000
------------ ------------
Total current liabilities 3,051,000 2,398,000
Shareholders' equity:
Preferred stock, $.001 par value; authorized-5,000,000 shares -- --
Common stock, $.001 par value; authorized 25,000,000 shares
outstanding - 7,916,316 and 7,670,589 shares 8,000 8,000
Additional paid-in capital 59,065,000 58,341,000
Deferred compensation expense (1,634,000) (1,781,000)
Accumulated deficit (24,383,000) (21,653,000)
------------ ------------
Total shareholders' equity 33,056,000 34,915,000
------------ ------------
Total liabilities and shareholders' equity $ 36,107,000 $ 37,313,000
============ ============
</TABLE>
(1) Derived from audited financial statements for the year ended December 31,
1997. See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue $ 2,077,000 $ 1,373,000
Cost of revenue 893,000 651,000
----------- -----------
Gross profit 1,184,000 722,000
Selling, general and administrative
expense 2,575,000 1,338,000
Research and development expense 1,745,000 558,000
----------- -----------
Loss from operations (3,136,000) (1,174,000)
Other expense (income) (413,000) 356,000
----------- -----------
Loss before income taxes (2,723,000) (1,530,000)
Provision for taxes 7,000 --
----------- -----------
Net loss ($2,730,000) ($1,530,000)
=========== ===========
Weighted average shares outstanding used
to compute net loss per share 7,792,000 1,744,000
=========== ===========
Net loss per share - basic and diluted ( $ .35) ($ .88)
=========== ===========
</TABLE>
See notes to condensed financial statements.
2
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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (2,730,000) ($ 1,530,000)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 87,000 92,000
Provision for doubtful accounts 43,000 (22,000)
Common stock issued for services 24,000 --
Financing costs attributable to fixed conversion feature of a
convertible debenture and warrants issued with debt -- 230,000
Compensation expense for stock options, warrants and common stock
issued below fair market value 169,000 26,000
Decrease in working capital (208,000) (189,000)
------------ ------------
Net cash used by operating activities (2,615,000) (1,393,000)
Cash flows from investing activities:
Purchase of plant and equipment (414,000) (45,000)
Net proceeds from short-term investments (145,000) --
------------ ------------
Net cash used by investing activities (559,000) (45,000)
Cash flows from financing activities:
Proceeds from issuance of debt -- 4,227,000
Repayment of debt (21,000) (1,430,000)
Proceeds from common stock and warrant issuance, net of expense 40,000 49,000
Proceeds from preferred stock issuance -- 2,215,000
Investment in sales-type lease (75,000) (69,000)
Proceeds from stock option exercises 639,000 --
------------ ------------
Net cash provided by financing activities 583,000 4,992,000
------------ ------------
Increase/decrease in cash and cash equivalents (2,591,000) 3,554,000
Cash and cash equivalents at beginning of period 22,555,000 432,000
------------ ------------
Cash and cash equivalents at end of period $ 19,964,000 $ 3,986,000
============ ============
</TABLE>
See notes to condensed financial statements.
3
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COMPUTER MOTION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
The operating results of the interim periods presented are not
necessarily indicative of the results expected for the year ending December 31,
1998 or for any other interim period. The accompanying condensed financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 1997 included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 as filed with
the Securities and Exchange Commission.
NOTE 2. NET LOSS PER SHARE
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings
Per Share," requires presentation of both basic and diluted net loss per share
in the financial statements. The Company's basic net loss per share is the same
as its diluted net loss per share because inclusion of outstanding stock options
and warrants in the calculation is antidilutive. Net loss per share is based on
the weighted average number of common shares outstanding. Under SFAS No. 128,
outstanding shares no longer include the dilutive effect of common shares
issued, or issuable pursuant to the exercise of warrants issued or options
granted, during the 12 months immediately preceding the Company's initial public
offering.
NOTE 3. INITIAL PUBLIC OFFERING
The Company closed its initial public offering (IPO) of 2,500,000
shares of common stock at a price of $14.00 per share in August 1997. In
September 1997, the underwriters exercised an option to purchase an additional
375,000 shares of common stock at $14.00 per share. Net proceeds of
approximately $37,000,000 were received by the Company. All shares of
convertible preferred stock were converted to common stock upon the IPO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed herein under "Risk
Factors That May Affect Future Results" as well as those discussed in the "Risk
Factors" section of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
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OVERVIEW
Computer Motion, Inc. (the "Company") develops and markets proprietary
robotic and computerized surgical systems that are intended to enhance a
surgeon's performance and centralize and simplify a surgeon's control of the
operating room ("OR"). The Company believes that its products and technologies
under development will provide surgeons with the precision and dexterity
necessary to perform complex, minimally invasive surgical procedures, as well as
enable surgeons to control critical devices in the OR through simple verbal
commands. The Company believes that its products and technologies under
development will broaden the scope and increase the effectiveness of minimally
invasive surgery, improve patient outcomes, and create a safer, more efficient
and cost effective OR.
The Company's current commercial product, AESOP(R), is a Food and Drug
Administration ("FDA") cleared, robotic endoscope positioning system. AESOP
allows direct surgeon control of the endoscope through simple verbal commands,
eliminating the need for a member of a surgical staff to manually control the
camera while providing a more stable and sustainable endoscopic image. The
Company believes that AESOP is the world's first FDA-cleared robot and first
voice control interface for a surgical device. Over 350 AESOP units have been
sold worldwide, which the Company believes have been used to perform over 35,000
procedures.
The Company's ZEUS(TM) Robotic Surgical System is designed to
fundamentally improve a surgeon's ability to perform complex surgical procedures
and enable new, minimally invasive surgical procedures, including fully
endoscopic multivessel coronary artery bypass grafts ("E-CABG(TM)"), which are
currently very difficult or impossible to perform. ZEUS is comprised of three
surgeon-controlled robotic arms, one of which positions the endoscope and two of
which manipulate surgical instruments. The Company believes that ZEUS will
improve a surgeon's dexterity and precision and enhance visualization of, and
access to, confined operative sites. The Company also believes that new
minimally invasive surgical procedures performed with ZEUS will result in
reduced patient pain and trauma, fewer complications, lessened cosmetic concerns
and shortened convalescent periods and will increase the number of patients
qualified for certain surgical procedures. In addition, the Company believes
that an increase in minimally invasive procedures will result in lower overall
healthcare costs to providers, payors and patients. The Company has commenced
limited pre-clinical testing in several medical centers and intends to seek
clearance from the FDA to market ZEUS(TM) in the United States later this year.
The Company's HERMES(TM) OR Control Center is designed to enable a
surgeon to directly control multiple OR devices, including various laparoscopic,
arthroscopic and video devices, as well as the Company's robotic devices,
through simple verbal commands. HERMES is also designed to provide standardized
visual and digitized voice feedback to a surgical team. The Company believes
that the enhanced control and feedback provided by HERMES has the potential to
improve safety, increase efficiency, shorten procedure times and reduce costs.
The Company is currently performing HERMES functionality testing in human
clinical procedures. Four 510(k) market clearance submissions relating to HERMES
have been approved by the FDA and two are pending with the FDA. The Company
expects to commence marketing of HERMES through its OEM agreement with Stryker
Corporation in the third quarter of this year.
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The Company has sustained significant losses since inception and
expects to continue to incur significant losses due to research and development
efforts, costs associated with obtaining regulatory approvals and clearances,
continued marketing expenditures to increase sales and other costs associated
with the Company's anticipated growth. Furthermore, the Company anticipates that
its operating results may fluctuate significantly from quarter to quarter in the
future, depending on a number of factors, many of which are outside the
Company's control. These factors include timing and results of pre-clinical and
clinical trials, delays associated with FDA and other clearance processes,
changes in pricing policy by the Company or its competitors, the number, timing
and significance of product enhancements and new products by the Company and its
competitors, health care reimbursement policies and product quality issues.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 compared to the Three Months Ended March 31,
1997.
Revenue. Revenue increased $704,000 (51%) to $2,077,000 for the three
months ended March 31, 1998 from $1,373,000 for the same period in 1997. The
increase resulted from a 22% ($277,000) increase in AESOP sales from the first
quarter 1997 to the first quarter 1998. Although AESOP unit sales were down by
14%, average selling prices increased by 45% and were favorably impacted by the
commercial introduction of an enhanced version of AESOP (the "AESOP 3000") in
the fourth quarter of 1997. The first quarter of 1998 included $239,000 of
initial revenue related to the Company's HERMES OR Control Center under its
original equipment agreement with Stryker Corporation, and $187,000 of increased
development related revenue for the Company's ZEUS product line.
Gross Profit. Gross profit increased $462,000 (64%) to $1,184,000 for
the three months ended March 31, 1998 from $722,000 for the same period in 1997.
Gross margin increased to 57.0% in the first quarter of 1998 as compared to
52.6% in the first quarter of 1997. The increase in gross margin was primarily
due to increased AESOP average selling prices.
Selling, General and Administrative. Selling, general and
administrative expense increased $1,237,000 (92%) to $2,575,000 for the three
months ended March 31, 1998 from $1,338,000 for the same period in 1997. The
increase was due mainly to the addition of sales and marketing personnel as the
Company expanded its domestic sales force and product management capability,
related recruiting and relocation costs, higher commissions on increased AESOP
sales, and higher travel and business related expenses, as well as amortization
of non-cash compensation charges related to the grant of stock, warrants and
stock options of $169,000 in the first quarter of 1998. The Company expects
selling, general and administrative expenses to increase in future periods as it
continues to expand its sales and marketing capability.
Research and Development. Research and development expenses increased
$1,187,000 (213%) to $1,745,000 for the three months ended March 31, 1998 from
$558,000 for the same period in 1997, primarily as a result of increased
research and development efforts with respect to HERMES and ZEUS, as well as for
pre-clinical and clinical trial activity. The Company
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<PAGE> 8
expects research and development expenditures to increase in future periods as
it continues to develop its technologies and conduct clinical trials.
Other Income/Expense. Other income of $413,000 for the three months
ended March 31, 1998 compared to other expense of $356,000 for the same period
in 1997. Other income for the first quarter of 1998 was principally interest
income earned on the proceeds received from the Company's initial public
offering which was completed in August, 1997. Other expense in the first quarter
of 1997 included the amortization of $230,000 of interest cost related to a
fixed conversion feature of a convertible debenture and warrants issued with
notes payable to shareholders. The Company expects other income to decrease in
future periods as cash is utilized to fund operations.
FINANCIAL CONDITION
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $24,383,000 as of March 31, 1998. Until
its initial public offering in August 1997, the Company had primarily relied on
proceeds from issuance of preferred and common stock and bridge debt financing
to fund its operations.
During the third quarter of 1997 the Company filed an S-1 registration
statement with the Securities and Exchange Commission (Registration No.
333-29505, effective August 11, 1997) for 2,875,000 shares of its common stock
and on August 15, 1997 the Company completed its initial public offering by
selling 2,500,000 shares of its common stock at $14.00 per share, less
underwriting discounts and commissions of $.98 per share, to its underwriters,
Montgomery Securities and Piper Jaffray Inc. The Company received net proceeds
of $32,550,000 from this sale before deducting offering expenses. Effective upon
the closing of the IPO, all of the outstanding shares of convertible preferred
stock of the Company were converted into 2,344,387 shares of common stock.
In September 1997, the underwriters exercised their option to purchase
an additional 375,000 shares of common stock directly from the Company at a
price of $14.00 per share, less underwriting discounts and commissions of $.98
per share. The Company received net proceeds of $4,883,000 from this sale before
deducting offering expenses.
In conjunction with completing the IPO, the Company incurred total
direct offering expenses of approximately $727,000. Total net proceeds to the
Company from the IPO and the exercise of the over-allotment option, after
deducting underwriting discounts and commissions and total direct offering
expenses, was $36,706,000.
In 1997, the Company used $3,250,000 of the net proceeds from the IPO
for repayment of certain outstanding indebtedness. and $490,000 to make capital
purchases. In the first quarter 1998, the Company made capital expenditures
totaling $414,000. Proceeds from the IPO are also funding the Company's current
operating losses. The remaining net proceeds of the IPO of approximately
$29,000,000 have been invested in short-term investment grade debt securities.
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At March 31, 1998, the Company's current ratio (current assets divided
by current liabilities) was 11.2 to 1 versus 14.9 to 1 at December 31, 1997,
reflecting the use of initial public offering proceeds.
For the three months ended March 31, 1998, the Company had net cash
used in operating activities of $2,615,000 primarily attributable to the net
loss partially offset by depreciation and amortization expense and amortization
of deferred compensation expense.
For the three months ended March 31, 1998, cash outflows from purchases
of plant and equipment was $559,000. The Company currently has no material
commitments for capital expenditures, but is planning to procure additional
leased space in anticipation of continued business growth.
For the three months ended March 31, 1998, net cash provided by
financing activities of $583,000 was almost entirely attributable to proceeds
from stock option exercises of $639,000, offset somewhat by $21,000 repayment of
debt.
The Company's operations to date have consumed substantial amounts of
cash, and the Company expects its capital and operating expenditures to continue
to increase. The Company believes that the net proceeds of its initial public
offering should be adequate to fund its expected operating losses and satisfy
its capital requirements through 1999. The Company's need for additional
financing will depend upon numerous factors, including, but not limited to, the
extent and duration of the Company's future operating losses, the level and
timing of future revenues and expenditures, the progress and scope of clinical
trials, the timing and costs required to receive both United States and
international governmental approvals or clearances, market acceptance of new
products, the results and scope of ongoing research and development projects,
the costs of training physicians to become proficient in the use of the
Company's products and procedures, and the cost of developing marketing and
distribution capabilities. To the extent that existing resources are
insufficient to fund the Company's activities, the Company may seek to raise
additional funds through public or private financing. There can be no assurance
that additional financing, if required, would be available on acceptable terms,
if at all. If adequate funds are not available, the Company's business,
financial condition and results of operations would be materially adversely
affected.
RISK FACTORS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion summarizes some of these risks which could affect the Company's
actual future results and could cause them to differ materially from any
forward-looking statements made by the Company.
The Company has a limited operating history and has not yet made a
profit. The HERMES and ZEUS product lines are important to the Company's future
success and neither product has achieved complete regulatory approval, or market
acceptance. Government regulation of the medical device industry is strict and
regulatory approvals are generally lengthy, expensive and uncertain. There are
alternative treatments and procedures to using the
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Company's products. The Company's products are subject to rapid technological
change and the success of the Company, in part, is based on its ability to
obtain patent protection for its products. The Company is dependent on sole
source suppliers for principal components of its AESOP product line. The
Company's anticipated growth will place significant demands on the Company's
management and resources, particularly in research and development, sales and
marketing and manufacturing. A more detailed discussion of factors that could
affect the Company's future results can be found in the "Risk Factors" section
of the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Reference is made to the discussion of the use of proceeds of the Company's
initial public offering under the caption "Financial Condition" in Management's
Discussion and Analysis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
10.18.1 - Computer Motion, Inc. Employee Stock Purchase Plan, as restated
on April 21, 1998
27.1 - Financial data schedule
b) No Reports on Form 8-K were filed during the quarter ended March 31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 6, 1998 COMPUTER MOTION, INC.
By: /s/ Stephen L. Wilson
--------------------------------
STEPHEN L. WILSON
Executive Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
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EXHIBIT 10.18.1
COMPUTER MOTION, INC.
EMPLOYEE STOCK PURCHASE PLAN
This EMPLOYEE STOCK PURCHASE PLAN (the "Plan") was adopted by COMPUTER
MOTION, INC., a California corporation, on May 23, 1997, approved by the
shareholders on July 3, 1997, and assumed by COMPUTER MOTION, INC., a Delaware
corporation (the "Company"), on August 5, 1997, and became effective as of
August 11, 1997 (the "Effective Date").
1.
PURPOSE OF THE PLAN
1.1 Purpose. The Company has determined that it is in its best interest
to provide incentives to attract and retain employees and to increase employee
morale by providing a program through which employees of the Company and its
subsidiaries (as designated by the Board) may acquire a proprietary interest in
the Company through the purchase of shares of the common stock of the Company
("Company Stock"). The Plan is hereby established by the Company to permit
employees to subscribe for and purchase directly from the Company shares of
Company Stock at a discount from the market price, and to pay the purchase price
in installments by payroll deductions. The Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended from time to time (the "Code"). The provisions of the Plan are
to be construed in a matter consistent with the requirements of Section 423 of
the Code. The Plan is not intended to be an employee benefit plan under the
Employee Retirement Income Security Act of 1974, and therefore is not required
to comply with that Act.
2.
DEFINITIONS
2.1 Compensation. "Compensation" means the amount indicated on an
employee's Internal Revenue Service Form W-2, including any elective deferrals
with respect to a plan of the Company qualified under either Section 125 or
Section 401(a) of the Code.
2.2 Eligible Employee. "Eligible Employee" means any person currently
employed by the Company or any of its subsidiaries (as designated by the Board),
any portion of whose income is subject to withholding of income tax or for whom
Social Security retirement contributions are made by the Company or any
subsidiary who is regularly scheduled for not less then 20 hours of work per
week and who has been so employed for not less than thirty (30) days.
2.3 Effective Date. "Effective Date" means the effective date of the
Company's first Registration Statement filed with the Securities and Exchange
Commission registering Company Stock.
2.4 Entry Date. "Entry Date" means the date an Eligible Employee first
joins an Offering Period. The earliest Entry Date shall be the Effective Date.
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2.5 5% Owner. "5% Owner" means an Employee who, immediately after the
grant of any rights under the Plan, would own Company Stock or hold outstanding
options to purchase Company Stock possessing 5% or more of the total combined
voting power of all classes of stock of the Company. For purposes of this
Section, the ownership attribution rules of Code Section 425(d) shall apply.
2.6 Initial Offering Period. "Initial Offering Period" means the period
beginning on the Effective Date and ending June 30, 1999.
2.7 Participant. "Participant" means an employee who has satisfied the
definition of Eligible Employee and has become a participant in the Plan in
accordance with Section 3.2.
2.8 Plan Year. "Plan Year" means the twelve consecutive month period
ending on the last day of December.
2.9 Offering Period. "Offering Period" means the period beginning on
the Effective Date and ending on December 31, 1997, and thereafter each six (6)
month (semi-annual) period beginning the date after the expiration of the
previous Offering Period.
2.10 Purchase Date. "Purchase Date" means the last trading day of each
semi-annual Offering Period.
3.
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility. An individual who is an Eligible Employee on the first
day of the Initial Offering Period or any subsequent Offering Period shall be
eligible to commence participation under the Plan in that Offering Period on
such day. Such date shall become such individual's Entry Date for the Offering
Period, and on that date such individual shall be granted his purchase right for
the Offering Period. Should any Eligible Employee not enter an Offering Period
on its start date, then he/she may not subsequently participate in that
particular Offering Period, but may participate in any future Offering Period.
3.2 Participation. An Eligible Employee may become a Participant in the
Plan upon his completion and delivery to the Human Resources Department of the
Company of a Participation/Withdrawal/Change ("PWC") form authorizing payroll
deductions. Payroll deductions for a Participant shall commence on the Entry
Date coincident with or next following the filing of the Participant's PWC form
and shall remain in effect until revoked by the Participant by withdrawing from
the Plan under Article 8 or by changing a deduction rate under Section 5.2.
3.3 Special Rules. Under no circumstances shall
(a) A 5% Owner be granted a right to purchase Company Stock
under the Plan;
(b) A Participant be entitled to purchase Company Stock under
the Plan which, when aggregated with all other employee stock purchase plans of
the Company, exceeds an amount equal to $25,000 worth of Company Stock
(determined using the fair market value of such Company Stock at each applicable
Entry Date) during each calendar year; or
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(c) The number of shares of Company Stock purchasable by a
Participant on any Purchase Date exceed 2,593 shares, subject to periodic
adjustments under Section 10.4.
4.
OFFERING PERIODS
4.1 Offering Periods.
(a) Each Offering Period shall have a duration of
approximately six months commencing on the first trading day in January and July
and ending on the last trading day of June and December; provided, however that
the Board or Committee (as defined in Section 9.1 below) may designate the
duration of future Offering Periods prior to the start date of any Offering
Period and in the absence of any express determination otherwise, each Offering
Period shall have a duration equal to that of the preceding Offering Period.
Notwithstanding the foregoing, the Initial Offering Period shall begin on the
Effective Date and end on the last trading day in June of 1999.
(b) The Participant shall be granted a separate purchase right
for each Offering Period in which he participates. The purchase right shall be
granted on the Entry Date on which such individual joins an Offering Period and
shall be automatically exercised on the last trading day of each December and
June occurring within the Offering Period.
(c) Except as otherwise provided in this Plan, the
Participant's acquisition of Company Stock under the Plan on any Purchase Date
shall neither limit nor require the Participant's acquisition of Company Stock
on any subsequent Purchase Date.
5.
PAYROLL DEDUCTIONS
5.1 Participant Election. Upon completion of the PWC form, each
Participant shall designate the amount of payroll deductions to be made from his
or her paycheck to purchase Company Stock under the Plan. The amount of payroll
deductions shall be designated in whole percentages of Compensation or in whole
dollar amounts, not to exceed 10% of Compensation. The amount so designated on
the PWC form shall be effective as of the next Entry Date and shall continue
until terminated or altered in accordance with Section 5.2 below.
5.2 Changes in Election. A Participant may terminate participation in
the Plan at any time prior to the close of an Offering Period as provided in
Article 8. A Participant may decrease or increase the rate of payroll deductions
one time during any semi-annual Offering Period or may terminate payroll
deductions and have accumulated deductions for the Offering Period applied to
the purchase of Company Stock as of the next Purchase Date, by completing and
delivering to the Human Resources Department of the Company a new PWC form
setting forth the desired change. Any change under this Section shall become
effective on the next payroll period (to the extent practical under the
Company's payroll practices) following the delivery of the new PWC form.
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5.3 Participant Accounts. The Company shall establish and maintain a
separate account ("Account") for each Participant. The amount of each
Participant's payroll deductions shall be credited to his Account. No interest
will be paid or allowed on amounts credited to a Participant's Account. All
payroll deductions received by the Company under the Plan are general corporate
assets of the Company and may be used by the Company for any corporate purpose.
The Company is not obligated to segregate such payroll deductions.
6.
GRANT OF PURCHASE RIGHTS
6.1 Right to Purchase Shares. On each Entry Date, each Participant
shall be granted a right to purchase at the price determined under Section 6.2
that number of whole shares of Company Stock that can be purchased or issued by
the Company based upon that price with the amounts held in his Account, subject
to the limits set forth in Section 3.3. In the event that there are amounts held
in a Participant's Account that are not used to purchase Company Stock, such
amounts shall remain in the Participant's Account and shall be eligible to
purchase Company Stock at any subsequent Purchase Date.
6.2 Purchase Price. The purchase price for any Offering Period shall be
the lesser of:
(a) 85% of the Fair Market Value of Company Stock on the Entry
Date in that Offering Period; or
(b) 85% of the Fair Market Value of Company Stock on the
Purchase Date in that Offering Period.
6.3 Fair Market Value. "Fair Market Value" means for the initial Entry
Date (which is the Effective Date), the price per share at which the Common
Stock is sold to the public in the initial public offering of the Company Stock.
For any subsequent date thereafter, Fair Market Value shall mean the value of
one share of Company Stock, determined as follows:
(a) The closing sale price of the Company Stock on the date of
valuation on the Nasdaq Stock Market or principal stock exchange on which the
Company Stock is then listed or admitted to trading, or, if no closing sale
price is quoted or no sale takes place on such day, then the Fair Market Value
shall be the closing sale price of the Company Stock on the Nasdaq Stock Market
or such exchange on the next preceding day on which a sale occurred.
(b) If the Company Stock is not then listed on a stock
exchange which reports closing sale prices, the Fair Market Value shall be the
average of the closing bid and asked prices of the Company Stock in the
over-the-counter market on the date of valuation.
(c) If neither (a) nor (b) is applicable as of the date of
valuation, then the Fair Market Value shall be determined by the Board or
Committee (as defined in Section 9.1 below) in good faith using any reasonable
method of valuation, which determination shall be conclusive and binding on all
interested parties.
13
<PAGE> 5
7.
PURCHASE OF STOCK
7.1 Purchase of Company Stock. Absent an election by the Participant to
terminate and have his or her Account returned, on each Purchase Date, the Plan
shall purchase on behalf of each Participant the maximum number of whole shares
of Company Stock at the purchase price determined under Section 6.2 as can be
purchased with the amounts held in each Participant's Account. In the event that
there are amounts held in a Participant's Account that are not used to purchase
Company Stock, all such amounts shall be held in the Participant's Account and
carried forward to the next semi-annual Offering Period.
7.2 Delivery of Company Stock.
(a) Company Stock acquired under the Plan may either be issued
directly to Participants or may be issued to a contract administrator
("Administrator") engaged by the Company to administer the Plan under Article 9.
(b) If the Company Stock is issued in the name of the
Administrator, all Company Stock so issued shall be held in the name of the
Administrator for the benefit of the Plan and the Administrator shall maintain
accounts for the benefit of the Participants which shall reflect each
Participant's interest.
(c) If the Company Stock is issued directly to Participants,
the Company will arrange to have each Participant's Company Stock purchased
under the Plan from his Account delivered to each Participant in the form of a
stock certificate or certificates issued in his name for the number of shares
purchased as soon as practicable after the Purchase Date.
(d) Only full shares of Company Stock will be issued to a
Participant. The time of issuance and delivery of shares may be postponed for
such period as may be necessary to comply with the registration requirements
under the Securities Act of 1933, as amended, the listing requirements of any
securities exchange on which the Company Stock may then be listed, or the
requirements under other laws or regulations applicable to the issuance or sale
of such shares.
8.
WITHDRAWAL
8.1 In Service Withdrawals. At any time prior to the Purchase Date of
an Offering Period, any Participant may withdraw the amounts held in his Account
by executing and delivering to the Human Resources Department of the Company
written notice of withdrawal on the PWC form. In such a case, the entire balance
of the Participant's Account shall be paid to the Participant, without interest,
as soon as is practicable. Upon such notification, the Participant shall cease
to participate in the Plan for the remainder of the Offering Period in which the
notice is given. Any employee who has withdrawn under this Section may
thereafter be reinstated as a Participant for a subsequent Offering Period by
executing and delivering a new PWC form to Human Resources.
14
<PAGE> 6
8.2 Termination of Employment.
(a) In the event that a Participant's employment with the
Company terminates for any reason, the Participant shall cease to participate in
the Plan on the date of termination. As soon as is practical following the date
of termination, the entire balance of the Participant's Account shall be paid to
the Participant or his beneficiary, without interest.
(b) A Participant may file a written designation of a
beneficiary who is to receive any shares of Company Stock purchased under the
Plan or any cash from the Participant's Account in the event of his or her death
subsequent to a Purchase Date, but prior to delivery of such shares and cash. In
addition, a Participant may file a written designation of a beneficiary who is
to receive any cash from the Participant's Account under the Plan in the event
of his death prior to a Purchase Date.
(c) Any beneficiary designation under paragraph (b) above may
be changed by the Participant at any time by written notice on a PWC form. In
the event of the death of a Participant, the Committee may rely upon the most
recent beneficiary designation it has on file as being the appropriate
beneficiary. In the event of the death of a Participant where no valid
beneficiary designation exists or the beneficiary has predeceased the
Participant, the Committee shall deliver any cash or shares of Company Stock to
the executor or administrator of the estate of the Participant, or if no such
executor or administrator has been appointed to the knowledge of the Committee,
the Committee, in its sole discretion, may deliver such shares of Company Stock
or cash to the spouse or any one or more dependents or relatives of the
Participant, or if no spouse, dependent or relative is known to the Committee,
then to such other person as the Committee may designate.
9.
PLAN ADMINISTRATION
9.1 Plan Administration.
(a) Authority to control and manage the operation and
administration of the Plan shall be vested in the Board of Directors (the
"Board") of the Company, or a committee ("Committee") thereof. The Board or
Committee shall have all powers necessary to supervise the administration of the
Plan and control its operations.
(b) In addition to any powers and authority conferred on the
Board or Committee elsewhere in the Plan or by law, the Board or the Committee
shall have the following powers and authority:
(i) To designate agents to carry out responsibilities
relating to the Plan;
(ii) To administer, interpret, construe and apply this
Plan and to answer all questions which may arise or which may be raised under
this Plan by a Participant, his beneficiary or any other person whatsoever;
(iii) To establish rules and procedures from time to
time for the conduct of its business and for the administration and effectuation
of its responsibilities under the Plan; and
(iv) To perform or cause to be performed such further
acts as it may deem to be necessary, appropriate, or convenient for the
operation of the Plan.
15
<PAGE> 7
(c) Any action taken in good faith by the Board or Committee
in the exercise of authority conferred upon it by this Plan shall be conclusive
and binding upon a Participant and his beneficiaries. All discretionary powers
conferred upon the Board shall be absolute.
9.2 Limitation on Liability. No employee of the Company nor member of
the Board or Committee shall be subject to any liability with respect to his
duties under the Plan unless the person acts fraudulently or in bad faith. To
the extent permitted by law, the Company shall indemnify each member of the
Board or Committee, and any other Employee of the Company with duties under the
Plan who was or is a party, or is threatened to be made a party, to any
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the person's conduct in the performance of his duties under the Plan.
10.
COMPANY STOCK
10.1 Limitations on Purchase of Shares. The maximum number of shares of
Company Stock that shall be made available for sale under the Plan shall be
129,668 shares, subject to adjustment under Section 10.4 below. The shares of
Company Stock to be sold to Participants under the Plan will be issued by the
Company. If the total number of shares of Company Stock that would otherwise be
issuable pursuant to rights granted pursuant to Section 6.1 of the Plan at the
Purchase Date exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining available in as
uniform and equitable manner as is practicable. In such event, the Company shall
give written notice of such reduction of the number of shares to each
participant affected thereby and any unused payroll deductions shall be returned
to such participants if necessary.
10.2 Company Stock. The Participant will have no interest or voting
right in shares to be purchased under Section 6.1 of the Plan until such shares
have been purchased.
10.3 Changes in Capitalization of the Company. Subject to any required
action by the shareholders of the Company, the number of shares of Company Stock
covered by each right under the Plan which has not yet been exercised and the
number of shares of Company Stock which have been authorized for issuance under
the Plan but have not yet been placed under rights or which have been returned
to the Plan upon the cancellation of a right, as well as the purchase price per
share of Company Stock covered by each right under the Plan which has not yet
been exercised, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Company Stock resulting from a stock split,
stock dividend, spin-off, reorganization, recapitalization, merger,
consolidation, exchange of shares or the like. Such adjustment shall be made by
the Board of Directors of the Company, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no issue
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 Company Stock
subject to any right granted hereunder.
10.4 Merger of Company. In the event that the Company at any time
proposes to merge into, consolidate with or enter into any other reorganization
pursuant to which the Company is not the surviving entity (including the sale of
substantially all of its assets or a "reverse" merger in which the Company is
the surviving entity), the Plan shall terminate, unless provision is made in
writing in connection with such transaction for the continuance of the Plan and
for the assumption of rights theretofore granted, or the substitution for such
rights of new rights covering the shares of a successor
16
<PAGE> 8
corporation, with appropriate adjustments as to number and kind of shares and
prices, in which event the Plan and the rights theretofore granted or the new
rights substituted therefor, shall continue in the manner and under the terms so
provided. If such provision is not made in such transaction for the continuance
of the Plan and the assumption of rights theretofore granted or the substitution
for such rights of new rights covering the shares of a successor corporation,
then the Board of Directors or the Committee shall cause written notice of the
proposed transaction to be given to the persons holding rights not less than 10
days prior to the anticipated effective date of the proposed transaction, and,
concurrent with the effective date of the proposed transaction, such rights
shall be exercised automatically in accordance with Section 7.1 as if such
effective date were a Purchase Date of the applicable Offering Period unless a
Participant withdraws from the Plan as provided in Section 8.1.
11.
MISCELLANEOUS MATTERS
11.1 Amendment and Termination. The Plan shall terminate June 30, 2007.
Since future conditions affecting the Company cannot be anticipated or foreseen,
the Company reserves the right to amend, modify, or terminate the Plan at any
time. Upon termination of the Plan, all benefits shall become payable
immediately. Notwithstanding the foregoing, no such amendment or termination
shall affect rights previously granted, nor may an amendment make any change in
any right previously granted which adversely affects the rights of any
Participant. In addition, no amendment may be made without prior approval of the
shareholders of the Company if such amendment would increase the number of
shares of Company Stock that may be issued under the Plan, materially modify the
requirements as to eligibility for participation in the Plan, or materially
increase the benefits which accrue to Participants under the Plan.
11.2 Shareholder Approval. Continuance of the Plan and the
effectiveness of any right granted hereunder shall be subject to approval by the
shareholders of the Company.
11.3 Benefits Not Alienable. Benefits under the Plan may not be
assigned or alienated, whether voluntarily or involuntarily. Any attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Article 8.
11.4 No Enlargement of Employee Rights. This Plan is strictly a
voluntary undertaking on the part of the Company and shall not be deemed to
constitute a contract between the Company and any employee or to be
consideration for, or an inducement to, or a condition of, the employment of any
employee. Nothing contained in the Plan shall be deemed to give the right to any
employee to be retained in the employ of the Company or to interfere with the
right of the Company to discharge any employee at any time.
11.5 Governing Law. To the extent not preempted by Federal law, all
legal questions pertaining to the Plan shall be determined in accordance with
the laws of the state of incorporation of the Company.
11.6 Non-trading Days. When any act under the Plan is required to be
performed on a day that falls on a Saturday, Sunday or legal or stock market
holiday, that act shall be performed on the next succeeding day which is not a
Saturday, Sunday or holiday. Notwithstanding the above, Fair Market Value shall
be determined in accordance with Section 6.3.
17
<PAGE> 9
11.7 Compliance With Securities Laws. Notwithstanding any provision of
the Plan, the Committee shall administer the Plan in such a way to ensure that
the Plan at all times complies with any requirements of Federal Securities Laws.
For example, affiliates may be required to make irrevocable elections in
accordance with the rules set forth under Section 16b-3 of the Securities
Exchange Act of 1934.
(AS RESTATED ON APRIL 21, 1998)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON PAGES
TWO AND THREE OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 19,964,000
<SECURITIES> 10,324,000
<RECEIVABLES> 2,190,000
<ALLOWANCES> 105,000
<INVENTORY> 1,541,000
<CURRENT-ASSETS> 34,205,000
<PP&E> 2,709,000
<DEPRECIATION> 1,272,000
<TOTAL-ASSETS> 36,107,000
<CURRENT-LIABILITIES> 3,051,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 33,048,000
<TOTAL-LIABILITY-AND-EQUITY> 36,107,000
<SALES> 2,077,000
<TOTAL-REVENUES> 2,077,000
<CGS> 893,000
<TOTAL-COSTS> 893,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 43,000
<INTEREST-EXPENSE> 22,000
<INCOME-PRETAX> (2,723,000)
<INCOME-TAX> 7,000
<INCOME-CONTINUING> (2,730,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,730,000)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
