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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-25992
NETVANTAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4324525
(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification No.)
201 Continental Blvd. Suite 201, El Segundo, CA 90245
(Address of Principal Executive Offices)
(310) 726-4130
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares outstanding of each of the Registrant's classes of
Common Stock as of August 7, 1997: 10,019,508 shares of Class A Common Stock,
338,343 shares of Class B Common Stock and 540,995 shares of Class E Common
Stock.
1
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NetVantage, Inc.
Quarterly Report on Form 10-Q
Index
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION:........................................... 3
Item 1. Financial Statements:............................................ 3
Balance Sheets -- June 30, 1997 (unaudited) and
December 31, 1996.............................................. 3
Statements of Operations -- Three Month and Six Month Periods
Ended June 30, 1997 and 1996................................... 4
Statements of Cash Flows -- Six Months Ended
June 30, 1997 and 1996......................................... 5
Notes to Financial Statements (unaudited)........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
PART II. OTHER INFORMATION................................................ 13
Item 1. Legal Proceedings................................................ 13
Item 2. Changes in Securities............................................ 13
Item 3. Defaults upon Senior Securities.................................. 13
Item 4. Submission of Matters to a Vote of Security Holders.............. 13
Item 5. Other Information................................................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 14
Signatures....................................................... 14
Exhibit Index.................................................... 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NetVantage, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited) December 31,
June 30, 1997 1996
-------------- --------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,722,276 $ 2,787,593
Accounts receivable, net allowance of $105,000 at
June 30, 1997 and $50,000 at December 31, 1996 5,511,365 8,667,627
Accounts receivable - other 85,938 740,975
Due from related parties - 100,000
Inventory 9,829,115 7,440,038
Prepaid expenses and other current assets 135,203 121,134
------------ ------------
Total current assets 40,283,897 19,857,367
Deferred warrant call costs - 157,500
Fixed assets, net 1,591,663 1,572,804
Goodwill and other intangibles, net 301,164 350,891
Note receivable 750,000 -
Other assets 33,532 25,208
------------ ------------
Total assets $ 42,960,256 $ 21,963,770
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,406,864 $ 3,081,664
Accrued expenses 686,009 1,171,989
------------ ------------
Total current liabilities 5,092,873 4,253,653
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, par value $0.01 per share,
5,000,000 shares authorized, non issued - -
Class A Common Stock, par value $0.001 per share,
17,000,000 shares authorized, 10,014,815 issued and out-
standing at June 30, 1997 (5,941,523 at December 31, 1996) 10,015 5,941
Class B Common Stock, convertible into Class A Common
Stock, par value $0.001 per share, 1,800,000 shares
authorized, 343,036 issued and outstanding at June 30, 1997
(689,701 at December 31, 1996) 343 690
Class E Common Stock, convertible into Class B Common
Stock, par value $0.001 per share, 1,200,000 shares
authorized, 540,995 issued, all shares are held in escrow 541 541
Additional paid-in-capital - Other 63,114,442 37,638,720
Additional paid-in-capital - Issuance of warrants 1,574,911 1,462,185
Accumulated deficit (26,832,869) (21,397,960)
------------ ------------
Total stockholders' equity 37,867,383 17,710,117
------------ ------------
Total liabilities and stockholders' equity $ 42,960,256 $ 21,963,770
============ ============
</TABLE>
See accompanying notes to financial statements.
3
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NetVantage, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue - sale of product $ 5,710,485 $ 4,784,527 $ 9,013,071 $ 5,790,429
Cost and expenses:
Cost of revenue 6,278,103 5,513,479 8,635,998 6,411,827
Research and development 1,714,020 778,443 3,171,593 1,629,599
Marketing and selling 575,870 444,335 1,279,765 688,590
General and administrative 558,573 663,469 1,749,245 1,098,577
------------- ------------ ------------ ------------
9,126,566 7,399,726 14,836,601 9,828,593
------------- ------------ ------------ ------------
Loss from operations (3,416,081) (2,615,199) (5,823,530) (4,038,164)
Interest income 319,092 30,362 472,794 62,594
Interest expense (50,860) - (84,173) -
------------- ------------ ------------- ------------
Net loss $ (3,147,849) $ (2,584,837) $ (5,434,909) $ (3,975,570)
============= ============ ============= ============
Net loss per share $ (0.30) $ (0.76) $ (0.53) $ (1.32)
============= ============ ============= ============
Weighted average number of
shares outstanding 10,357,851 3,407,619 10,177,982 3,018,430
============= ============ ============= ============
</TABLE>
See accompanying notes to financial statements.
4
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NetVantage, Inc.
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
------------- -------------
<S> <C> <C>
Net loss $ (5,434,909) $ (3,975,570)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 419,163 120,603
Provision for losses on accounts receivable 55,000 -
Compensation recorded upon issuance of warrants 112,426 -
Provision for losses on inventory 533,518 -
Changes in assets and liabilities:
Accounts receivable 3,101,262 (4,278,348)
Accounts receivable - other 655,037 -
Due from related parties 100,000 -
Inventory (2,938,944) (1,573,203)
Prepaid expenses and other current assets (14,069) (60,385)
Other assets 8,324 -
Note receivable (750,000) -
Accounts payable 1,325,200 4,931,183
Accrued expenses (485,980) 47,736
Due to related parties - 450,000
------------- -------------
Net cash used in operating activities (3,313,972) (4,337,984)
------------- -------------
Investing activities:
Purchase of fixed assets (388,295) (1,029,781)
Cash, expended in acquisition of MultiMedia, LANS - (8,904)
------------- -------------
Net cash used in investing activities (388,295) (1,038,685)
------------- -------------
Financing activities:
Proceeds from issuance of B warrant call 26,233,120 -
Issuance costs on warrant call (596,170) -
Proceeds received from private placement - 5,000,000
------------- -------------
Net cash provided by financing activities 25,636,950 5,000,000
------------- -------------
Net increase (decrease) in cash and cash equivalents 21,934,683 (376,669)
Cash and cash equivalents at beginning of period 2,787,593 482,535
------------- -------------
Cash and cash equivalents at end of period $ 24,722,276 $ 105,866
============= =============
</TABLE>
Supplemented disclosure of non cash investing activities:
During 1997 the Company applied $157,500 of deferred warrant call costs as
a reduction of additional paid-in-capital - Other.
See accompanying notes to financial statements.
5
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NetVantage, Inc.
Notes to Financial Statements
(unaudited)
1. Description of Business and Basis of Presentation
NetVantage, Inc. (the "Company") is a leading worldwide provider of
Ethernet Workgroup switching products to the worldwide Original Equipment
Manufacturer ("OEM") marketplace. Ethernet Workgroup switches increase the
information handling capacity of Local Area Networks ("LANs"). Other
applications for the Company's switching products include connecting LANs to
each other to extend the network's scope and power and to provide installed
networks with the ability to connect to networking devices incorporating new
technologies such as Asynchronous Transfer Mode or "ATM," Gigabit Ethernet and
Layer 3 Switching. The Company's switching products require no special skills
to install, and require no changes to existing user network equipment, wiring,
hub equipment, software protocols or applications. The Company's products offer
end-users cost effective solutions for their connectivity needs.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited financial statements reflect, in the
opinion of management, adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as of
June 30, 1997, the results of operations for the three month and six month
periods ended June 30, 1997 and 1996, and its cash flows for the six months
ended June 30, 1997 and 1996. The unaudited financial statements should be read
in conjunction with the Company's audited annual financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
Certain 1996 amounts and previously reported March 31, 1997 amounts have
been reclassified in order to conform to the current 1997 presentation.
2. Inventory
The Company's inventory as of June 30, 1997 and December 31, 1996 was
comprised of the following:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Finished goods $ 231,348 $ 108,030
Work in process 2,201,551 -
Parts and materials 7,396,216 7,332,008
------------- -----------------
$ 9,829,115 $ 7,440,038
============= =================
</TABLE>
Inventories consisted of material, direct labor and overhead cost associated
with the procurement, storage, and manufacturing of inventory.
3. Net Loss Per Share
Net loss per share was computed based on the weighted average number of the
Company's Class "A" and "B" Common Stock Shares outstanding and excludes the
shares of Class E Common Stock held in escrow because the conditions for the
release of these shares from escrow have not been satisfied. Common Stock
equivalents were not considered in the net loss per share calculation because
the effect on the net loss would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued the
Statement on Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share", which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of common stock
equivalents will be excluded. The impact of SFAS 128 on the calculation of
earnings per share is not expected to be material.
6
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4. Stockholders' Equity
Class E Escrow Arrangement
In connection with the public offering of the units (comprised of one share
of the Company's Class A Common Stock, one Class A Warrant and one Class B
Warrant) on May 3, 1995, all outstanding shares of Class E Common Stock were
placed in escrow by existing stockholders. All shares of Class E Common Stock
placed into escrow, including those shares which may be issued upon exercise of
options, ("Escrowed Contingent Shares") are not transferable (but those issued
and outstanding may be voted).
These shares are to be released from escrow in the event that net income
before provision for income taxes, and exclusive of any extraordinary earnings
or charges and the compensation charges discussed in the next paragraph, reaches
certain targets during the next three years (the first 600,000 shares will be
released if pretax income exceeds $4.3 million, $5.8 million or $7.2 million in
fiscal years 1996, 1997 or 1998, respectively, and the remaining 600,000 will be
released if pretax income exceeds $5.3 million, $7.1 million, or $8.9 million in
fiscal years 1996, 1997 or 1998, respectively); or the market price of the
common stock reaches specified levels over the next three years (the first
600,000 shares will be released if, commencing at May 3, 1995 and ending
November 3, 1996, the bid price of the Company's common stock averages in excess
of $13.33 per share for 30 consecutive business days, or commencing November 3,
1996 and ending May 3, 1998, the bid price averages $16.67 per share for 30
consecutive business days and the remaining 600,000 shares will be released if,
commencing at May 3, 1995 and ending November 3, 1996, the bid price of the
Company's common stock averages in excess of $18.50 per share for 30 consecutive
business days or commencing November 3, 1996 and ending May 3, 1998, the bid
price averages in excess of $23.50 for 30 consecutive business days). Any
options to purchase common stock shall be deemed converted into similar options
to acquire Class B and Class E Common Stock in the same proportion that
outstanding Class E Common Stock is converted upon attaining the specified
earnings or market price levels.
On October 17, 1996, the criteria for the release of certain Escrowed
Contingent Shares were met and on that date, 600,000 shares, including 541,062
shares held by employees, officers, directors, consultants and their relatives,
were released from escrow. The release of 541,062 shares was deemed
compensatory and, accordingly, resulted in a charge to earnings of $4,189,428 in
the fourth quarter of 1996 equal to the fair market value of the Escrowed
Contingent Shares on release.
The release of Escrowed Contingent Shares held by individuals that have not
had any relationship with the Company, other than that of a common stockholder,
have been deemed not to be compensatory.
All Escrowed Contingent Shares that have not been released from escrow by
March 31, 1999 are subject to redemption by the Company at a redemption price of
$0.01 per share.
Warrants
The Company redeemed its Class B Warrants on January 10, 1997, pursuant to
its November 27, 1996 notice of redemption. Prior to the redemption date,
approximately $3.5 million or greater than 99% of the outstanding Class B
Warrants were exercised, resulting in gross proceeds to the Company during 1997
of approximately $26,233,000. After the warrant exercise, approximately 9.9
million shares of Class A Common Stock were outstanding.
5. Credit Facility
The Company had a secured revolving bank line of credit of $5,000,000 which
carried interest at the prime rate (as defined) plus 2%. This agreement was
scheduled to expire in July 1997. During July, the Company amended the loan
agreement to extend the expiration date to October 15, 1997. All other terms
remained the same. The credit facility requires the Company to comply with
certain financial covenants. The Company was in compliance with or has received
a waiver for these covenants as of June 30, 1997. As of June 30, 1997 and
throughout 1997, the line of credit was unused.
6. Note Receivable
During April 1997, the Company provided a loan to the President of the
Company. The $750,000 loan is due on the earlier of April 22, 2000 or 180 days
following the date the President ceases to be an employee of the Company. The
loan has a stated annual interest rate of 6.23%. Interest only on the loan is
due annually. At the time of the interest payment, the Company will pay the
President a bonus of $49,250. If the President's employment with the Company
terminates for any reason, the Company will forgive a portion of the principal
balance up to $421,667. The President is required to use 60% of any profit on
the exercise of his options to reduce the principal of the note. The loan is
secured by a portion of the President's options covering 182,875 shares of
Company Common Stock.
7
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7. Stock Option Repricing
On April 22, 1997, the Company repriced certain options and warrants issued
to certain of its executive officers and key employees. The per share exercise
prices of options to purchase an aggregate of 823,983 shares of Class A Common
Stock were changed to $5.8125, options to purchase an aggregate of 49,017 shares
of Class B and Class E Common Stock (exercisable two-thirds Class B and one-
third Class E Common Stock) were changed to $4.65, warrants to purchase an
aggregate of 30,000 shares of Class A Common Stock were changed to $5.8125 and
warrants to purchase an aggregate of 22,875 shares of Class A Common Stock were
changed to $3.8125. Prior to the repricing, the options to purchase Class A
Common Stock had per share exercise prices ranging from $6.06 to $14.625 the
options to purchase Class B and Class E Common Stock had per share exercise
prices ranging from $4.70 to $5.90, and the warrants had per share exercise
prices ranging from $7.125 to $9.00. The options to purchase an aggregate of
10,500 shares of Class A Common Stock, with per share exercise prices below the
new per share exercise prices, were not changed. On April 22, 1997, $5.8125 was
the average of the bid and ask prices of a share of Class A Common Stock as
reported by the NASDAQ Stock Market. Due to certain restrictions on
transferability of the Class B and Class E Common Stock, the per share exercise
price for the options to purchase such shares was set at 80% of $5.8125.
8. Sales Concentration
Sales to customers which constituted greater than 10% of the revenue during
the quarters ended June 30, 1997 and 1996 were Customer A - $3,719,000 (65%) and
Customer B - $821,000 (14%), and Customer C - $3,241,000 (68%) and Customer A -
$859,000 (18%), respectively.
Sales to customers which constituted greater than 10% of the revenue during
the six months ended June 30, 1997 and 1996 were Customer A - $3,862,000 (43%)
and Customer D - $2,731,000 (30%), and Customer C - $3,672,000 (63%) and
Customer A - $1,116,000 (19%), respectively.
Sales concentrations are expected due to the large individual orders,
characteristic of our OEM customer base.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause the actual results to differ materially
from the forward-looking statements. Potential risks and uncertainties include,
without limitation, those mentioned in this report, as well as those in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
(including those listed under the heading "Risk Factors") and other factors
described from time to time in other filings made by the Company with the
Securities and Exchange Commission.
The following discussion should be read in conjunction with the unaudited
financial statements and accompanying notes, included in Part I - Item 1 of this
Quarterly Report, and the audited financial statements and accompanying notes
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
GENERAL
In mid-1994, the Company introduced its first 8 port Ethernet switch and
began commercial shipments of this product in late 1994. In 1995, the Company
attempted to market this product both through distribution channels and to
Original Equipment Manufacturers ("OEMs"). Late in the third quarter of 1995,
the Company focused its marketing efforts on OEM customers and discontinued its
marketing through distribution channels. In the first quarter of 1996,
production and sale of the original 8 port product was discontinued and the
Company began commercial shipments of its second product, a 16 port Ethernet
switch with a 100 Base T uplink capability. During the third quarter of 1996,
the Company added an 8 port Ethernet switch with a 100 Base T uplink capability
to its product line.
In 1996, the Company began development of its first Application Specific
Integrated Circuit ("ASIC"). Development and testing of this component, code
named "Coyote", has been completed and commercial shipments of product
containing the Coyote ASIC began in the second quarter of 1997. Significant
internal investment has been made in ASIC technology and in building a strong
engineering knowledge base as ASIC-based products provide higher levels of
component integration resulting in significant manufacturing cost reductions.
The Company has also made significant investments in the development of two new
ASIC-based families of Ethernet switches code named Cyclone/TM/ and Cougar/TM/,
which are expected to contain high feature content and low manufacturing costs.
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
Revenue for the quarters ended June 30, 1997 and 1996 was $5,710,485 and
$4,784,527, respectively. The increase of $925,958 or 19% was due to the
positive impact of the Company's 8500 series product which shipped in quantities
during the second quarter of 1997. The Company is working with its customer
base in an effort to seek greater revenue diversification. The Company has made
progress as the percentage of total revenue from the Company's two largest
customers comprised 79% of revenue for the quarter ended June 30, 1997, an
improvement from the 86% of revenue for the quarter ended June 30, 1996.
Cost of revenues for the three months ended June 30, 1997 and 1996 was
$6,278,103 or 110% of revenue and $5,513,479 or 115% of revenue, respectively.
The negative gross margins in both periods were due primarily to a large
concentration of sales to a customer during 1997 and a different customer during
1996. The 1997 sale reduced the Company's exposure on certain previously
manufactured inventory. In addition, the Company needs higher sales volumes in
order to obtain the necessary purchasing economies of scale, production
efficiencies and reasonable overhead application rates required to significantly
improve gross margins. See additional information under "Liquidity and Capital
Resources".
In the future, the Company's gross margins may be affected by several
factors, including the mix of products sold, the price of products sold, price
competition, manufacturing volumes, fluctuations in material costs, changes in
other components of cost of revenue and the technological innovativeness of
products sold. Timing and new product introductions may impact gross margins
and result in excess or obsolete inventories.
Research and development expense for the quarters ended June 30, 1997 and
1996 was $1,714,020 or 30% of revenue and $778,443 or 16% of revenue,
respectively. A significant portion of the $935,577 or 120% increase was due to
the addition of new personnel and related incentive and recruitment costs,
depreciation on equipment, and higher expenditures on prototypes and increased
costs associated with the development of the Company's new generation of
products called Cyclone/TM/ and Cougar/TM/. Similar or increasing research and
development expenditures are expected for the foreseeable future.
9
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Marketing and selling expenses for the three months ended June 30, 1997 and
1996 were $575,870 or 10% of revenues and $444,335 or 9% of revenues,
respectively. The expense increase is due to continual expansion of the
Company's sales force and marketing expenses attributed to incentives to OEM's.
Due to further anticipated expansion of the Company's sales force, marketing and
selling expenses are expected to increase. By this expansion, the Company hopes
to increase both domestic and international orders for existing products,
enhance the Company's position for securing orders of new products and expand
the Company's account base and distribution channels.
General and administrative expense for the quarters ended June 30, 1997 and
1996 was $558,573 or 10% of revenue and $663,469 or 14% of revenue,
respectively. The decrease of $104,896 or 16% was due in part to the higher
1996 costs associated with relocation of the Company's main office.
Interest income for three months ended June 30, 1997 and 1996 was $319,092
and $30,362, respectively. The increase was due to the increase of investable
funds as a result of the redemption of the Company's Class B Warrants during the
first quarter of 1997.
The net loss for the three months ended June 30, 1997 and 1996 was
$3,147,849 and $2,584,837, respectively. The $563,012 increase in net loss was
due to significant research and development expense increases offset by
increased interest income from investments.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenue for the six months ended June 30, 1997 and 1996 was $9,013,071 and
$5,790,429, respectively. The increase of $3,222,642 or 56% was due in part to
the additional number of OEMs that the Company has under contract. With each
new OEM, the Company expands the potential market access for its current and
future products. The Company's development and expansion of its customer base
is expected to reduce the effect that any one customer will have on future
revenues. During the six months ended June 30, 1996, 82% of the Company's
revenues were generated from the top two customers. For the same period ended
June 30, 1997 the top two customers generated 73% of revenues. Although future
periods are still expected to have a majority of the revenue concentrated among
a few customers.
Cost of revenue for the six months ended June 30, 1997 was $8,635,998 or
96% of revenue compared to $6,411,827 or 111% of revenue for the same period
ended June 30, 1996. The low 1997 gross margin is due to a number of factors
including the Company's sale of certain previously manufactured inventory at
below cost in order to reduce the Company's inventory exposure. In addition,
the timing of orders were such that additional manufacturing costs were incurred
in order to meet scheduled shipment requirements. Equally important, the Company
has charged operations approximately $500,000 during the past six months for
current inventory valuation issues identified by management. See additional
information under "Liquidity and Capital Resources".
The negative 1996 gross margin was due primarily to a large concentration
of sales to one customer of a particular product which had negative gross
margin. During the 1996 period the Company's sales volume could not absorb the
increased costs associated with manufacturing staffing additions. These added
costs were needed in order to handle the increasing manufacturing demands placed
on the Company's contract manufacturer.
In the future, the Company's gross margins may be affected by several
factors, including the mix of products sold, the price of products sold, price
competition, manufacturing volumes, fluctuations in material costs, changes in
other components of cost of revenue and the technological innovativeness of
products sold. Timing and new product introductions may impact gross margins
and result in excess or obsolete inventories.
Research and development expense for the six months ended June 30, 1997 and
1996 was $3,171,593 or 35% of revenues and $1,629,599 or 28% of revenues,
respectively. The increase of $1,541,944 or 95% over the 1996 prior period is
due to the significant Company effort expended in the development of the new
generation products, called Cyclone/TM/ and Cougar/TM/. The increases in costs
are primarily due to increases in engineering employment levels, which increased
from 19 people at June 30, 1996 to 31 people at June 30, 1997. In addition,
higher depreciation expense resulting from the significant capital investments
made in 1996 have also contributed to the increase in research and development
expense in 1997.
Marketing and selling expense for the six months ended June 30, 1997 and
1996 was $1,279,765 or 14% of revenues and $688,590 or 12% of revenues,
respectively. The increase of $591,175 or 86% over the 1996 prior period was
due primarily to expense increases during the first three months of 1997 related
to increases in the size of the Company's direct sales force and related
commissions on higher revenue volumes, as well as additional incentives offered
to OEMs to expand the Company's product distribution network and increase market
share. The Company intends to selectively expand the sales force presence
through additional domestic and international hiring and negotiating strategic
domestic and foreign relationships.
10
<PAGE>
General and administrative expense for the six months ended June 30, 1997
and 1996 was $1,749,245 or 19% of revenue and $1,098,577 or 19% of revenue,
respectively. The increase of $650,668 or 59% over the 1996 prior period was
due primarily to additional legal, accounting and consulting costs incurred
after the resignation of the Company's Chief Financial Officer in January 1997,
in addition to, increased costs incurred from public relations activity,
increases in employee benefits and the issuance of warrants to a key executive.
Interest income for the six months ended June 30, 1997 and 1996 was
$472,794 and $62,594, respectively. The increase of $410,200 or 655% is due to
the increase of investable funds as a result of the redemption of the Company's
Class B Warrants during the first quarter of 1997.
The net loss for the six months ended June 30, 1997 and 1996 was $5,434,909
and $3,975,570, respectively. The increase of $1,459,339 or 37% is primarily
due to increases in the Company's research and development effort not being
absorbed by adequate sales margin. Management is reviewing all of the costs of
the business in order to seek ways to reduce or better manage future costs.
However, additional investments are expected in research and development and
sales as the Company positions itself for the release of the Cyclone/TM/ and
Cougar/TM/ product lines.
VARIABILITY OF PERIODIC RESULTS AND SEASONALITY
Results from any one period cannot be used to predict the results for other
periods. Revenues fluctuate from period to period; however, management does not
see any overriding seasonality or a high level of predictability to these
fluctuations at this time. Revenues can be negatively affected by, among other
things, expected releases of both the Company or its competitors' new product
lines. The Company's reliance on a few base product types also makes it more
susceptible to revenue shortfalls.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in March 1991, the Company has financed its development
activities, operations and capital resources through a combination of an initial
public offering completed in 1995 and private transactions involving the
issuance of common stock for cash, convertible notes, bridge notes and the
exercise of stock options and warrants. For the period from March 12, 1991 to
June 30, 1997, the Company raised approximately $64,700,000 from such sources.
In October 1996, the Company completed the redemption of its Class A Warrants
which resulted in the issuance of 2,335,568 shares of Class A Common Stock and
the same number of Class B Warrants. In addition, in October 1996, Class B
Warrants to purchase 368,360 shares of Class A Common Stock were voluntarily
exercised. Total proceeds during 1996 from the exercise of all Class A and
Class B Warrants was approximately $17,368,000. On January 10, 1997, the
Company redeemed its Class B Warrants pursuant to its November 27, 1996 notice
of redemption. Greater than 99% of the outstanding Class B Warrants were
exercised, resulting in gross proceeds to the Company during 1997 of
approximately $26,233,000.
The Company's cash and cash equivalents increased by $21,934,683 during the
six months to $24,722,276 at June 30, 1997 from $2,787,593 at December 31, 1996.
This increase was primarily due to the net proceeds from the redemption of Class
B Warrants of $25,636,950 partially offset by cash used for operating activities
of $3,313,972 and further increases in equipment of $388,295 to increase our
research and development effort.
Inventory decreased $1,469,597 or 13% from the March 31, 1997 level of
$11,298,712. However, for the six months ended June 30, 1997, inventory
increased $2,389,077 or 32% from the December 31, 1996 level. Fluctuations in
inventory are primarily affected by the timing in the receipt of key component
parts critical to meeting the shipping demand of certain product's anticipated
orders. Management has initiated a program to tighten its level of inventory
control. This program includes evaluating the best use of existing component
inventory. In addition to improving coordination of inventory purchasing and
manufacturing requirements with our internal sales and finance departments along
with our customers and suppliers. Management believes that disciplined
strategic reduction and management of our inventory will reduce our future
exposure to changing market conditions and internally generated technological
obsolescence, in addition to, providing additional liquidity and enhancing the
effectiveness of our manufacturing capabilities. Although, reductions are
expected in the inventory, future short-term increases are possible due to the
timing of inventory receipts near the end of a reporting period.
At June 30, 1997, the Company had working capital of $35,191,024. The
Company requires substantial working capital to fund its business, particularly
to finance its research and development efforts, inventories and accounts
receivable. The Company's future capital requirements will depend on many
factors, including the rate of revenue growth, the timing and extent of spending
to support product development and sales and marketing efforts, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of the Company's products.
11
<PAGE>
In July 1997, the Company extended its existing revolving line of credit
with a bank to October 15, 1997. The line of credit provides for borrowings of
up to $5,000,000. The line of credit has not been used during 1997.
The Company believes that its existing cash and the unused bank line of
credit are sufficient to meet the liquidity requirements of the Company for the
next twelve months. However, due to the continuing investments in research and
development, operating losses or possible business acquisitions, the Company may
need to seek additional credit, alternative financing and/or further equity
investment in the future. The sources of such credit or equity investment may
include increased lines of credit and/or issuance of additional securities.
There can be no assurance, however, that additional funds from equity or debt
sources will be available on favorable terms or at all. The Company's future
capital requirements will depend upon numerous factors, including the progress
of the Company's cost reduction efforts for its existing products, the success
or lack thereof of its new product development, the amount of resources devoted
to manufacturing and marketing, technological advances, the status of
competitors and the success or lack thereof of the Company's marketing
activities.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company, held on July 29,
1997, the Company's stockholders elected all the nominees for director (who
constituted the entire Board of Directors) and approved the Company's Equity
Incentive Plan (the "1997 Plan"). The 1997 Plan authorizes the issuance of up to
800,000 shares of Class A Common Stock under awards made or to be made to
selected employees, consultants and directors of the Company in accordance with
the 1997 Plan. Awards may be in the form of stock options, restricted stock,
stock purchase rights or performance shares.
The following table set forth for each nominee for director and for the
proposal to approve the 1997 Plan, the number of votes cast for, against and
withheld (or to abstain), as well as the number of broker nonvotes:
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Stephen R. Rizzone 10,642,051 101,655
Carlos A. Tomaszewski 10,642,051 101,655
Seiji Uehara 10,642,351 101,355
Richard N. Tinsley 10,641,851 101,855
John E. Marmon 10,632,850 110,856
</TABLE>
<TABLE>
<CAPTION>
For Abstain Against Broker Nonvote
--------- ------- ------- --------------
<S> <C> <C> <C> <C>
Proposed to approve 4,612,099 45,215 373,788 5,712,604
the 1997 Plan
</TABLE>
ITEM 5. Other Information
None
13
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.15 Amended and Restated Employment Agreement between
NetVantage, Inc. and Stephen Rizzone.
Exhibit 10.17 Equity Incentive Plan
Exhibit 27 Financial Data Schedule - Electronic Format
Only
(b) Reports on Form 8-K
None
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Date: August 13, 1997 NetVantage, Inc.
---------------------------------
(Registrant)
By: /s/ Stephen R. Rizzone
------------------------------
STEPHEN R. RIZZONE,
Chairman of the Board, President
and Chief Executive Officer
By: /s/ Thomas Iwanski
--------------------------------
THOMAS IWANSKI,
Vice President of Finance,
Secretary and
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
NUMBER TITLE PAGES
- ------ ----- ------------
10.15 Employment Agreement effective January 1, 1997 between
the Company and Stephen R. Rizzone (6)
10.17 1997 Equity Incentive Plan
27 Financial Data Schedule
15
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT PAGE 1
---------------------------
AMENDED AND RESTATED
--------------------
EMPLOYMENT AGREEMENT
--------------------
I.
--
PARTIES
-------
This Employment Agreement ("Agreement") entered into as of January 1, 1997
and amended and restated as of April 22, 1997, by and between NetVantage Inc.,
201 Continental Blvd., Suite 201, El Segundo, CA 90245-4427 ("NVI") and Stephen
R. Rizzone residing at 17 Nantucket Place, Manhattan Beach, CA 90266
("Executive").
II.
---
RECITALS
--------
1. Executive originally joined NVI in November, 1995 as President and
Chief Operating Officer. In conjunction with his employment, a letter agreement
setting forth the terms and conditions of his employment was executed by and
between Executive and NVI on or about November 16, 1995, hereinafter the "Letter
Agreement". On or about June 19, 1996, the parties executed an Employment
Agreement (the "1996 Agreement").
2. The Executive having served successfully in the original position of
President and Chief Operating Officer, and, the former Chairman of the Board
and Chief Executive Officer of NVI having resigned, the Board of Directors of
NVI ("the Board"), unanimously promoted the Executive to the position of
Chairman of the Board and Chief Executive Officer of NVI.
3. Employee has successfully performed his duties and responsibilities as
Chairman of the Board, President and Chief Executive Officer from the date of
execution of the 1996 Agreement to the present, and the parties desire that the
Executive continue his employment on the terms and conditions set forth herein.
III.
----
TERMS
-----
1. EFFECTIVE DATE: The 1996 Agreement shall terminate, and this Agreement
---------------
shall become effective on January 1, 1997, except that Executive shall retain
all stock options granted under the Letter Agreement and the 1996 Agreement.
Stock options granted herein shall be in addition to the stock options granted
in the Letter Agreement and the 1996 Agreement.
2. EMPLOYMENT OF SPOUSE: The parties acknowledge that Mashid Emdadian
----------------------
Rizzone, who is the spouse of Executive, is currently employed by NVI in direct
marketing and sales. The employment of Executive is separate and apart from,
and shall not have an impact upon the employment of Mashid E. Rizzone. It is
agreed that the performance of Executive and Mashid E. Rizzone will be evaluated
separately, and any future promotion, employment, compensation and/or incentive
packages will be offered on an individual basis and will not be considered on a
collective basis.
3. POSITIONS: Executive shall retain the positions of Chairman of the
----------
Board of Directors, President and Chief Executive Officer.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 2
----------------------------
4. EMPLOYMENT DUTIES: As Chairman of the Board of Directors, President
------------------
and Chief Executive Officer, Executive will have total overall responsibility
for all business activities of NVI, including, without limitation, the tactical
operation and strategic direction of NVI. In conjunction with this
responsibility, all personnel will report either to the Executive or to persons
reporting to him. Executive will report only to the Board. Executive will be
allowed to vote on all matters before the Board concerning NVI, including,
without limitation, Executive's employment, but excluding only matters directly
and solely related to Executive's compensation. In all voting matters, excluding
only matters directly and solely related to Executive's compensation, in the
case of any tie vote, Executive shall have the option of casting multiple votes.
Notwithstanding the foregoing the Chief Financial Officer shall also report to
the Board of Directors with respect to the books, records, financial condition
and financial reporting of the Company.
5. TERM: The term of this Agreement is five (5) years, commencing
-----
January 1, 1997, and terminating December 31, 2001. However, either party may
terminate Executive's employment, with or without cause, upon giving at least
thirty (30) days prior written notice. Termination of Executive's employment by
NVI shall also require a majority vote of the Board. Executive shall be allowed
to vote on this matter and cast the tie breaking vote if required. Termination
of Executive's employment, whether with or without cause, shall not terminate,
modify, reduce or in any way affect any of the provisions of Section 11. of this
Agreement.
6. SALARY: Executive shall be paid $200,000.00 per year, paid bi-weekly
-------
commencing January 1, 1997. Usual and customary expenses will be or reimbursed
to Executive by NVI according to its policy regarding business expenses. The
Board shall review Executive's salary, incentive compensation and stock/stock
option position annually, on January 1, of each year, with the next review to be
January 1, 1998. NVI shall provide annual salary increases, incentive
compensation and stock/stock options consistent with the custom and practice in
the industry for equivalent-sized companies with equivalent executive
responsibilities. No such annual review shall reduce Executive's annual salary,
incentive compensation, stock/stock options, nor shall it terminate or modify
any economic compensation, options, or other rights or benefits granted herein.
7. COMPANY AUTOMOBILE ALLOWANCE: NVI shall, provide to Executive for his
-----------------------------
sole use a 1997 BMW model 750 ("Auto"). NVI shall pay all upkeep and maintenance
and insurance for Auto. Executive shall have the option to purchase Auto at 40%
of the then wholesale Kelly Bluebook value in the event that Executive
terminates his employment voluntarily or if in the event the Executive's
employment is terminated involuntarily NVI shall continue to maintain the Auto
until December 31, 1999 at which time Executive shall have the option to
purchase Auto at 40% of the then wholesale Kelly Bluebook value. If the
Termination Benefits referenced in Section 11 are in effect on December 31,
1999, NVI will pay to the Executive a monthly car allowance of $2,000.00 from
January 1, 2000 through the end of the Termination period.
8. HEALTH CLUB MEMBERSHIP: NVI shall provide Executive with a family
-----------------------
health club membership in a health club selected by Executive, the monthly dues
for such membership shall not exceed $500.00.
9. STOCK OPTIONS: In the Letter Agreement and the 1996 Agreement,
--------------
Executive was granted options to buy shares of stock of NVI. Those stock options
granted in the Letter Agreement and the 1996 Agreement shall remain in full
force and effect. The stock options set forth herein shall be in addition to the
stock options previously granted to Executive.
a. Whereas Executive has performed extraordinary services which
have benefited NVI and NVI is unable to pay Executive cash compensation in
amounts which the Board of Directors deems adequate and whereas NVI and the
Executive have rescinded certain previously granted options in order to prevent
adverse consequences to NVI, Executive is granted options to purchase 180,000
shares of Class A
<PAGE>
EMPLOYMENT AGREEMENT PAGE 3
Common Stock pursuant to the 1994 and 1996 Equity Incentive Plans and options to
purchase 340,000 shares of Class A Common Stock pursuant to the 1997 Equity
Incentive Plan at the average of the NASDAQ bid/ask price of the NVI Common A
stock on April 22, 1997 which was $5.75/share.
b. All options granted to Executive in the Letter Agreement, the
1996 Agreement and the 1997 Agreement as referenced above in Section 9a., are
fully vested and exercisable in whole or part at any time.
c. Executive shall have two (2) years to exercise options granted in
the Letter Agreement, 1996 Agreement and the 1997 Agreement as referenced above
after either the effective date of his voluntary resignation from NVI or the end
of the Termination Period as defined in Section 11(a)(2) below, which ever is
applicable.
d. In the event of an NVI Reorganization as defined in section 12(a)
herein, Executive shall retain all exercise rights with respect to any
substitute options and shall benefit in any subsequent reduction in exercise
price of options held by others that may occur.
e. Except as otherwise provided, the stock options referred to
herein will be for class A common stock. If NVI issues any class of stock other
than the existing class A common stock, Executive's options shall apply to such
additional class(es) of stock in the same ratio as his options for class A
common stock bear to the total issued and outstanding class A common stock.
10. HEALTH BENEFITS: NVI will provide Executive with the same health,
----------------
disability and life insurance benefits as are made available to other Executives
of NVI.
11. RIGHTS ON TERMINATION OF EMPLOYMENT:
------------------------------------
a. Executive shall have the rights and benefits described below
(hereinafter "Termination Benefits"), in the event Executive's employment is
terminated as follows:
(1) NVI terminates Executive's employment, either with or without
cause at any time, for any reason, including but not limited to Executive's
voluntary or involuntary inability or failure to perform his duties hereunder;
or
(2) Executive terminates his employment for any of the following
reasons: (a) a change of job duties, title or responsibility from those
described in paragraph 4.; (b) Executive is removed from, or not re-elected to
the Board of Directors, or is removed as Chairman of the Board of Directors; (c)
there is a change in the organizational structure of NVI, i.e., who Executive
reports to or who reports to him; (d) NVI for any reason decreases the salary,
benefits or compensation to Executive; (e) Executive is required to travel more
than fifty (50) miles from his principal residence to the principal offices of
NVI; or (f) there is an acquisition or merger of NVI.
b. Executive shall not have Termination Benefits if he voluntarily
terminates his employment for any reason other than as set forth above.
c. Executive's Termination Benefits are as follows:
(1) NVI shall continue to pay Executive his salary for a period of
thirty-six (36) months from the date of termination of employment.
(2) NVI shall continue to pay and/or provide to Executive all
Health, medical, disability, life insurance, health club and other benefits
described in paragraphs 8 and 10., for a period of thirty-six (36) months from
the date of termination of employment.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 4
(3) NVI shall continue to pay and/or provide to Executive the car
allowance/automobile lease described in paragraph 7., for a period of thirty-six
(36) months from the date of termination.
(4) NVI shall pay Executive for accrued but unused vacation time
vested as of the date of termination of his employment.
(5) The termination benefits described herein shall be measured by
the highest level of salary and other benefits paid to or on behalf of
Executive.
(6) All Reorganization Consideration (described below) which would
have been payable to Executive hereinunder, if Executive's employment had
continued, for a period of forty-eight (48) months after the date of
termination of employment.
d. The parties acknowledge that any public discussion of the
circumstances pertaining to the parties' termination of their relationship would
be counter productive to the interests of either party. The parties therefore
agree to refrain from making any negative, disparaging or defamatory remarks
about the other party, or to interfere with the other party's prospective
economic gain.
12. NVI REORGANIZATION:
-------------------
a. For purposes of this Agreement, the term "Reorganization" means
any merger, acquisition, or consolidation of businesses of which NVI is a party,
or any sale of all or substantially all of NVI's assets or stock of any class. A
Reorganization shall be deemed to have occurred on the earlier of (1) execution
of an agreement for an event of Reorganization or (2) the occurrence of any
event of Reorganization.
b. For purposes of the Agreement, the term "Reorganization
Consideration" shall be the total value of all consideration paid or payable to
NVI, or, in the case of a sale or exchange of NVI stock, the cash value, or at
Executive's election, the stock consideration paid or exchanged for NVI stock.
c. The Reorganization Consideration shall be divided by the total
number of outstanding shares of NVI class A common stock as of the date
immediately preceding the occurrence of the Reorganization. The resulting amount
is hereinunder referred to as the "Reorganization Price Per Share".
d. Executive shall be paid a cash bonus (hereinafter "Reorganization
Cash Bonus"), according to the following schedule, within five (5) days of
either (1) the execution of an agreement for an event of Reorganization or (2)
the occurrence of any event of Reorganization, whichever occurs first. Payment
of the bonus will be in cash.
(1) If the Reorganization Price Per Share is $15.00 or less,
Executive will be paid two percent (2%) of the Reorganization Consideration.
(2) If the Reorganization Price Per Share is greater than $15.00
but less than $20.00, Executive will be paid three percent (3%) of the
Reorganization Consideration.
(3) If Reorganization Price Per Share is $20.00 or greater,
Executive will be paid four percent (4%) of the Reorganization Consideration.
e. The Reorganization Cash Bonus shall remain in effect twelve (12)
months after the voluntary resignation of the Executive or Forty-eight (48)
months after the date of Termination of Employment as described in section 11.2
above.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 5
f. NVI will reimburse and gross-up any extraordinary tax assessments
or tax penalties that may be applied by the IRS or any other tax authority on
the Reorganization Cash Bonus and Stock Option exercise at the time of
reorganization. Such payment will be made within fourteen (14) days of the
earlier to occur of (i) assessment or ruling by IRS or any other tax authority
or(ii) payments of such amounts by Executive in conjunction with the filing of
the personal income return for the year in which the Bonus was granted. For
calculation purposes, all gross ups will take into account the combined tax
effect at the highest applicable federal, state and local tax.
13. SECURED PROMISSORY NOTE: NVI shall lend to Executive the sum of
------------------------
$750,000.00 on such terms and conditions as are set forth in the form of a
secured promissory note attached to this Agreement as Exhibit A.
14. SURVIVORSHIP: This agreement is binding on the parties and their
-------------
heirs, successors and assigns. In the event of Executive's death, his employment
shall be deemed terminated under section 11.a above, and the rights and benefits
of this agreement, including termination, shall inure to the estate of the
Executive.
15. DISABILITY: If, during the employment period, The Executive shall,
----------
in the opinion of the Board of Directors of the Company as confirmed by
competent medical evidence, become physically or mentally incapacitated to
perform his duties, then NVI shall terminate his employment under Section 11.a
above.
16. PROPRIETARY INFORMATION:
------------------------
a) Executive recognizes that his position with NVI requires
substantial trust and confidence because of his access to trade secrets and
other proprietary information of NVI (collectively "Proprietary Information").
At all times, during the term of this Agreement, and for a period of five (5)
years after the termination of this Agreement for any reason, Executive shall
use his best efforts and exercise utmost diligence to protect the unauthorized
disclosure of any Proprietary Information. Said Proprietary Information includes
but is not limited to NVI's software, marketing, manufacturing and design
processes, and operating procedures. Executive will not be required to incur
personnel expense to protect the unauthorized disclosure of any Proprietary
Information.
b) Except as may be required in the performance of his duties
hereinunder, Executive shall not use NVI's Proprietary Information for his own
benefit, or disclose NVI's Proprietary Information to another, without NVI's
prior written consent.
c) The provisions of this section 15 are in addition to those set
forth in NVI Employee Proprietary Information and Invention Agreement previously
executed by the Executive.
17. COVENANT NOT TO COMPETE: During the term of Executive's employment,
------------------------
Executive shall not engage in any act in competition with the business or best
interests of NVI. During the term of this Agreement, Executive shall not be an
agent, employee, or consultant for any competitor of NVI. Following any
notification of termination of his employment, Executive may pursue and accept
any employment or occupation whether or not it competes with NVI.
18. NO ORAL MODIFICATION: This Agreement is not subject to oral
---------------------
modification in any fashion. The terms of this Agreement may be modified only by
an agreement in writing executed by the Parties hereto. No subsequent attempt at
an oral novation will be effective to modify or change this agreement.
19. NOTICE: Any notice required by this Agreement shall be in writing
------
and shall be mailed or delivered to the other party at the addresses set forth
above. If said notice is mailed, it shall be deemed effective five (5) days
after the date of mailing.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 6
20. COVENANTS INDEPENDENT: The covenants set forth herein are independent
----------------------
of one another, and a breach by one party of any promise or covenant set forth
herein, shall not terminate the Agreement or excuse performance by the other
party of his or its obligations set forth herein.
21. ENTIRE AGREEMENT: Except as provided herein, this Agreement
-----------------
constitutes the entire agreement between the parties and supersedes all prior
written or oral agreements. There are no promises, warranties, or
representations other than as contained herein. This Agreement may only be
modified by an Agreement in writing executed by the Parties hereto.
22. GOVERNING LAW: This agreement shall be governed by the laws of the
--------------
State of California. Any action or mediation dispute arising out of this
Agreement shall be conducted in Orange County, California.
23. MEDIATION: In the event of a dispute between the parties arising out
----------
of this Agreement, the parties agree to submit the dispute to mediation prior to
the commencement of litigation. Mediation shall be conducted by any neutral
mediator selected by both parties. If the parties cannot agree on the selection
of a mediator, then either party may seek an order of the court of competent
jurisdiction to appoint a mediator. The party requesting the court to appoint a
mediator shall be entitled to reasonable attorney's fees and costs incurred in
obtaining the order. In the event mediation does not resolve the parties
dispute, then either party may commence an action against the other party.
24. ATTORNEYS FEES: In the event of any action arising out of this
---------------
Agreement, the prevailing party will be entitled to reasonable attorney's fees
and costs, including pre-litigation attorney's fees and costs.
25. FURTHER ASSURANCES: Each party shall execute such documents and
-------------------
perform such acts as may be reasonably necessary or appropriate to carry out the
terms of this Agreement.
26. REVIEW BY COUNSEL: Each party has had the opportunity to review this
------------------
Agreement with an attorney of his or its choice, and each party acknowledges
this Agreement is entered into voluntarily.
AGREED AGREED
/s/ Stephen R. Rizzone 4-22-97 /s/ CA Tomaszewski 4-22-97
_______________________/_________ ______________________/_________
STEPHEN R. RIZZONE DATE AUTHORIZED AGENT DATE
NetVantage, Inc.
<PAGE>
EXHIBIT 10.17
NETVANTAGE, INC.
EQUITY INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
(a) Purpose. The purpose of the Plan is to provide the directors and
selected eligible employees of, and consultants to, NetVantage, Inc., a
Delaware corporation, its subsidiaries and affiliates an opportunity to
participate in the Company's future by offering them an opportunity to acquire
stock in the Company so as to retain, attract and motivate them.
(b) Definitions. For purposes of the Plan, the following terms have the
following meanings:
(i) "Award" means any award under the Plan, including any Option,
Restricted Stock, Stock Purchase Right or Performance Share Award.
(ii) "Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Plan participant setting
forth the terms and conditions of the Award.
(iii) "Board" means the Board of Directors of the Company.
(iv) "Change in Control" has the meaning set forth in Section 9(a).
(v) "Change in Control Price" has the meaning set forth in Section 9(c).
(vi) "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor statute.
(vii) "Commission" means the Securities and Exchange Commission and any
successor agency.
(viii) "Committee" means the Committee referred to in Section 2, or the
Board in its capacity as administrator of the Plan in accordance with
Section 2.
(ix) "Company" means NetVantage, Inc., a Delaware corporation.
(x) "Disability" means permanent and total disability as determined by
the Committee for purposes of the Plan.
(xi) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor statute.
(xii) "Fair Market Value" means as of any given date (a) if the Stock is
listed on any established stock exchange or a national market system,
either the closing sale price for the Stock or the closing bid if no sales
were reported, or the average of the bid and ask prices, as selected by the
Committee in its discretion, as quoted on such system or exchange, as
reported in The Wall Street Journal; or (b) in the absence of an
established market for the Stock, the fair market value of the Stock as
determined by the Committee in good faith.
(xiii) "Incentive Stock Option" means any Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422
of the Code.
(xiv) "Nonqualified Stock Option" means any Option that is not an
Incentive Stock Option.
(xv) "Option" means an option granted under Section 5.
(xvi) "Performance Period" means the period determined by the Committee
under Section 8(a).
(xvii) "Performance Share" means a share of Stock granted pursuant to a
Performance Share Award.
(xiii) "Performance Share Award" means an Award under Section 8.
A-1
<PAGE>
(xix) "Plan" means this NetVantage, Inc. Equity Incentive Plan, as
amended from time to time.
(xx) "Restricted Stock" means an Award of Stock subject to restrictions,
as more fully described in Section 6.
(xxi) "Restriction Period" means the period determined by the Committee
under Section 6(b).
(xxii) "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange
Act, as amended from time to time, and any successor rule.
(xxiii) "Stock" means the Class A Common Stock of the Company, and any
successor security.
(xxiv) "Stock Purchase Right" means an Award granted under Section 7.
(xxv) "Subsidiary" has the meaning set forth in Section 424 of the Code.
(xxvi) "Tax Date" means the date defined in Section 10(f).
(xxvii) "Termination" means, for purposes of the Plan, with respect to a
participant, that (a) if the participant is a director of the Company, he
or she has ceased to be, for any reason, a director and (b) if the
participant is an employee of or consultant to the Company, he or she has
ceased to be, for any reason, employed by, or consulting to, the Company, a
subsidiary or an affiliate; provided, that for purposes of this definition,
if so determined by the Committee, Termination shall not include a change
in status from an employee of, to a consultant to the Company or any
subsidiary or affiliate, or vice versa.
SECTION 2. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Board or, upon
delegation by the Board, by a committee of the Board that will satisfy Rule
16b-3 and Section 162(m) of the Code, as in effect with respect to the Company
from time to time. In connection with the administration of the Plan, the
Committee shall have the powers possessed by the Board. The Committee may act
only by a majority of its members, except that the Committee may from time to
time select another committee or one or more other persons to be responsible
for any matters so long as the selection comports with the requirements of
Section 162(m) of the Code and Rule 16b-3. The Board at any time may abolish
the Committee and revest in the Board the administration of the Plan.
(b) Authority. The Committee shall grant Awards to directors, eligible
employees and consultants. In particular and without limitation, the
Committee, subject to the terms of the Plan, shall:
(i) select the directors, officers, other key employees and consultants
to whom Awards may be granted;
(ii) determine whether and to what extent Awards are to be granted under
the Plan;
(iii) determine the number of shares to be covered by each Award granted
under the Plan;
(iv) determine the terms and conditions of any Award granted under the
Plan and any related loans to be made by the Company, based upon factors
determined by the Committee; and
(v) determine to what extent and under what circumstances any Award
payments may be deferred by a participant.
(c) Committee Determinations Binding. The Committee may adopt, alter and
repeal administrative rules, guidelines and practices governing the Plan as it
from time to time shall deem advisable, may interpret the terms and provisions
of the Plan, any Award and any Award Agreement and may otherwise supervise the
administration of the Plan. Any determination made by the Committee pursuant
to the provisions of the Plan with respect to any Award shall be made in its
sole discretion at the time of the grant of the Award or, unless in
contravention of any express term of the Plan or Award, at any later time. All
decisions made by the Committee under the Plan shall be binding on all
persons, including the Company and Plan participants.
A-2
<PAGE>
SECTION 3. STOCK SUBJECT TO PLAN.
(a) Number of Shares. The total number of shares of Stock reserved and
available for issuance pursuant to Awards under this Plan shall be 800,000
shares. Such shares may consist, in whole or in part, of authorized and
unissued shares or treasury shares or shares reacquired in private
transactions or open market purchases, but all shares issued under the Plan,
regardless of source, shall be counted against the 800,000 share limitation.
If any Option terminates or expires without being exercised in full or if any
shares of Stock subject to an Award are forfeited, or if an Award otherwise
terminates without a payment being made to the participant in the form of
Stock, the shares issuable under such Option or Award shall again be available
for issuance in connection with Awards. Any Award under this Plan shall be
governed by the terms of the Plan and any applicable Award Agreement.
(b) Adjustments. In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Stock, such substitution or adjustments shall be made
in the aggregate number of shares of Stock reserved for issuance under the
Plan, in the number and exercise price of shares subject to outstanding
Options, and in the number of shares subject to other outstanding Awards, as
may be determined to be appropriate by the Committee, in its sole discretion;
provided, however, that the number of shares subject to any Award shall always
be a whole number.
SECTION 4. ELIGIBILITY.
Awards may be granted to directors, officers and other key employees of, and
consultants to, the Company, its subsidiaries and affiliates.
SECTION 5. STOCK OPTIONS.
(a) Types. Any Option granted under the Plan shall be in such form as the
Committee may from time to time approve. The Committee shall have the
authority to grant to any participant Incentive Stock Options, Nonqualified
Stock Options or both types of Options. Incentive Stock Options may be granted
only to employees of the Company, its parent (within the meaning of Section
424(e) of the Code) or Subsidiaries. Any portion of an Option that is not
designated as, or does not qualify as, an Incentive Stock Option shall
constitute a Nonqualified Stock Option.
(b) Terms and Conditions. Options granted under the Plan shall be subject to
the following terms and conditions:
(i) Option Term. The term of each Option shall be fixed by the Committee,
but no Incentive Stock Option shall be exercisable more than ten years
after the date the Option is granted, and no Nonqualified Stock Option
shall be exercisable more than 15 years after the date the Option is
granted. If, at the time the Company grants an Incentive Stock Option, the
optionee owns directly or by attribution stock possessing more than 10
percent of the total combined voting power of all classes of stock of the
Company, or any parent or Subsidiary of the Company, the Incentive Stock
Option shall not be exercisable more than five years after the date of
grant.
(ii) Grant Date. The Company may grant Options under the Plan at any time
and from time to time before the Plan terminates. The Committee shall
specify the date of grant or, if it fails to, the date of grant shall be
the date of action taken by the Committee to grant the Option. However, if
an Option is approved in anticipation of employment, the date of grant
shall be the date the intended optionee is first treated as an employee for
payroll purposes.
(iii) Exercise Price. The exercise price per share of Stock purchasable
under an Option shall be equal to at least 85 percent of the Fair Market
Value on the date of grant, and in the case of Incentive Stock Options
shall be equal to at least the Fair Market Value on the date of grant;
provided, however, that if, at the time the Company grants an Incentive
Stock Option, the optionee owns directly or by attribution stock possessing
more than 10 percent of the total combined voting power of all classes of
stock of the Company,
A-3
<PAGE>
or any parent or Subsidiary of the Company, then the exercise price shall
be not less than 110 percent of the Fair Market Value on the date the
Incentive Stock Option is granted.
(iv) Exercisability. Subject to the other provisions of the Plan, an
Option shall be exercisable in its entirety at grant or at such times and
in such amounts as are specified in the Award Agreement evidencing the
Option. The Committee, in its absolute discretion, at any time may waive
any limitations respecting the time at which an Option first becomes
exercisable, in whole or in part, including acceleration in connection with
a reorganization of the Company if there is no adverse consequences to the
Company therefrom.
(v) Method of Exercise; Payment. To the extent the right to purchase
shares has accrued, Options may be exercised, in whole or in part, from
time to time, by written notice from the optionee to the Company stating
the number of shares being purchased, accompanied by payment of the
exercise price for the shares.
SECTION 6. RESTRICTED STOCK.
(a) Price. The Committee may grant to a participant Restricted Stock. The
grantee shall pay no consideration therefor.
(b) Restrictions. Subject to the provisions of the Plan and the Award
Agreement, during the Restriction Period set by the Committee, commencing
with, and not exceeding ten years from, the date of such Award, the
participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock. Within these limits, the
Committee may provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions, in whole or in part, based on
service, performance or such other factors or criteria as the Committee may
determine.
(c) Dividends. Unless otherwise determined by the Committee, with respect to
dividends on shares of Restricted Stock, dividends payable in cash shall be
automatically reinvested in additional Restricted Stock, and dividends payable
in Stock shall be paid in the form of Restricted Stock.
(d) Termination. Except to the extent otherwise provided in the Award
Agreement and pursuant to Section 6(b), in the event of a Termination during
the Restriction Period, all shares still subject to restriction shall be
forfeited by the participant.
SECTION 7. STOCK PURCHASE RIGHTS.
(a) Price. The Committee may grant Stock Purchase Rights which shall enable
the recipient to purchase Stock at a price equal to not less than 85 percent
of its Fair Market Value on the date of grant.
(b) Exercisability. Stock Purchase Rights shall be exercisable for a period
determined by the Committee not exceeding 30 days from the date of the grant.
SECTION 8. PERFORMANCE SHARES.
(a) Awards. The Committee shall determine the nature, length and starting
date of the Performance Period for each Performance Share Award, which period
shall be at least one year and not more than six years. The consideration
payable by a participant with respect to a Performance Share Award shall be an
amount determined by the Committee in the exercise of the Committee's
discretion at the time of the Award; provided, that the amount of
consideration may be zero and may in no event exceed 50 percent of the Fair
Market Value at the time of grant. The Committee shall determine the
performance objectives to be used in awarding Performance Shares and the
extent to which such Performance Shares have been earned. Performance Periods
may overlap and participants may participate simultaneously with respect to
Performance Share Awards that are subject to different Performance Periods and
different performance factors and criteria. At the beginning of each
Performance Period, the Committee shall determine for each Performance Share
Award subject to such Performance Period the number of shares of Stock (which
may consist of Restricted Stock) to be awarded to the
A-4
<PAGE>
participant at the end of the Performance Period if and to the extent that the
relevant measures of performance for such Performance Share Award are met.
Such number of shares of Stock may be fixed or may vary in accordance with
such performance or other criteria as may be determined by the Committee. The
Committee may provide that (i) amounts equivalent to interest at such rates as
the Committee may determine, or (ii) amounts equivalent to dividends paid by
the Company upon outstanding Stock shall be payable with respect to
Performance Share Awards.
(b) Termination. Except as otherwise provided in the Award Agreement or
determined by the Committee, in the event of a Termination during a
Performance Period, the participant shall not be entitled to any payment with
respect to the Performance Shares subject to the Performance Period.
(c) Form of Payment. Payment shall be made in the form of cash or whole
shares of Stock, as the Committee, in its discretion, shall determine.
SECTION 9. CHANGE IN CONTROL.
(a) Definition of "Change in Control". For purposes of Section 9(b), a
"Change in Control" means the occurrence of any one of the following:
(i) Any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, a subsidiary, an affiliate, or a
Company employee benefit plan, including any trustee of such plan acting as
trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 35 percent or more of the combined voting power of the
Company's then outstanding securities;
(ii) The solicitation of proxies (within the meaning of Rule 14a-1(k)
under the Exchange Act and any successor rule) with respect to the election
of any director of the Company where such solicitation is for any candidate
who is not a candidate proposed by a majority of the Board in office prior
to the time of such election; or
(iii) The dissolution or liquidation (partial or total) of the Company or
a sale of assets involving 30 percent or more of the assets of the Company,
any merger or reorganization of the Company whether or not another entity
is the survivor, a transaction pursuant to which the holders, as a group,
of all of the shares of the Company outstanding prior to the transaction
hold, as a group, less than 70 percent of the shares of the Company
outstanding after the transaction, or any other event which the Board
determines, in its discretion, would materially alter the structure of the
Company or its ownership.
(b) Impact of Event. In the event of a "Change in Control" as defined in
Section 9(a), but only if and to the extent so specifically determined by the
Board in its discretion, which determination may be amended or reversed only
by the affirmative vote of a majority of the persons who were directors at the
time such determination was made, acceleration and valuation provisions no
more favorable to participants than the following may apply:
(i) Any Options outstanding as of the date such Change in Control is
determined to have occurred and not then exercisable and vested shall
become fully exercisable and vested.
(ii) The restrictions and limitations applicable to any Restricted Stock
and Stock Purchase Rights shall lapse, and such Restricted Stock shall
become fully vested.
(iii) The value (net of any exercise price) of all outstanding Options,
Restricted Stock and Stock Purchase Rights, unless otherwise determined by
the Committee at or after grant and subject to Rule 16b-3, shall be cashed
out on the basis of the "Change in Control Price," as defined in Section
9(c), as of the date such Change in Control is determined to have occurred
or such other date as the Board may determine prior to the Change in
Control.
A-5
<PAGE>
(iv) Any outstanding Performance Share Awards shall be vested and paid in
full as if all performance criteria had been met.
(c) Change in Control Price. For purposes of this Section 9, "Change in
Control Price" means the highest price per share paid in any transaction
reported on the National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation System or paid or offered in any
bona fide transaction related to a potential or actual Change in Control of
the Company at any time during the preceding 60-day period as determined by
the Board, except that, in the case of Incentive Stock Options, such price
shall be based only on transactions reported for the date on which the Board
decides to cash out such Options.
SECTION 10. GENERAL PROVISIONS.
(a) Award Grants. Any Award may be granted either alone or in addition to
other Awards granted under the Plan. Subject to the terms and restrictions set
forth elsewhere in the Plan, the Committee shall determine the consideration,
if any, payable by the participant for any Award and, in addition to those set
forth in the Plan, any other terms and conditions of the Awards. The Committee
may condition the grant or payment of any Award upon the attainment of
specified performance goals or such other factors or criteria, including
vesting based on continued service on the Board, employment or consulting, as
the Committee shall determine. Performance objectives may vary from
participant to participant and among groups of participants and shall be based
upon such Company, subsidiary, group or division factors or criteria as the
Committee may deem appropriate, including, but not limited to, earnings per
share or return on equity. The other provisions of Awards also need not be the
same with respect to each recipient. Unless specified otherwise in the Plan or
by the Committee, the date of grant of an Award shall be the date of action by
the Committee to grant the Award. The Committee may also substitute new
Options for previously granted Options, including previously granted Options
having higher exercise prices.
(b) Award Agreement. As soon as practicable after the date of an Award
grant, the Company and the participant shall enter into a written Award
Agreement identifying the date of grant, and specifying the terms and
conditions of the Award. Options are not exercisable until after execution of
the Award Agreement by the Company and the Plan participant, but a delay in
execution of the Award Agreement shall not affect the validity of the Option
grant.
(c) Certificates. All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem advisable under the
rules, regulations and other requirements of the Commission, any market in
which the Stock is then traded and any applicable federal, state or foreign
securities law.
(d) Termination. Unless otherwise provided in the applicable Award Agreement
or by the Committee, in the event of Termination for any reason other than
death, retirement or Disability, Awards held at the date of Termination (and
only to the extent then exercisable or payable, as the case may be) may be
exercised in whole or in part at any time within three months after the date
of Termination, or such lesser period specified in the Award Agreement (but in
no event after the expiration date of the Award), but not thereafter. If
Termination is due to retirement or to death or Disability, Awards held at the
date of Termination (and only to the extent then exercisable or payable, as
the case may be) may be exercised in whole or in part by the participant in
the case of retirement or Disability, by the participant's guardian or legal
representative or by the person to whom the Award is transferred by will or
the laws of descent and distribution, at any time within one year from the
date of Termination or any lesser period specified in the Award Agreement (but
in no event after the expiration of the Award).
A-6
<PAGE>
(e) Delivery of Purchase Price. If and only to the extent authorized by the
Committee, participants may make all or any portion of any payment due to the
Company
(i) with respect to the consideration payable for an Award,
(ii) upon exercise of an Award, or
(iii) with respect to federal, state, local or foreign tax payable in
connection with an Award, by delivery of (x) cash, (y) check, or (z) any
property other than cash (including a promissory note of the participant or
shares of Stock or securities) so long as, if applicable, such property
constitutes valid consideration for the Stock under, and otherwise complies
with, applicable law. No promissory note under the Plan shall have a term
(including extensions) of more than five years or shall be of a principal
amount exceeding 90 percent of the purchase price paid by the borrower.
(f) Tax Withholding. Unless the Committee permits otherwise, the participant
shall pay to the Company in cash, promptly when the amount of such obligations
becomes determinable (the "Tax Date"), all applicable federal, state, local
and foreign withholding taxes that the Committee in its discretion determines
to result, (i) from the lapse of restrictions imposed upon an Award, (ii) upon
exercise of an Award, or (iii) from a transfer or other disposition of shares
acquired upon exercise or payment of an Award, or otherwise related to the
Award or the shares acquired in connection with an Award.
A participant who has received an Award or payment under an Award may, to
the extent, if any, authorized by the Committee in its discretion, make an
election to (x) deliver to the Company a promissory note of the participant on
the terms set forth in Section 10(e), or (y) tender any such securities to the
Company to pay the amount of tax that the Committee in its discretion
determines to be required to be withheld by the Company; provided, however,
that such election shall be subject to the disapproval of the Committee.
Any shares or other securities so withheld or tendered shall be valued by
the Committee as of the date they are withheld or tendered; provided, however,
that Stock shall be valued at Fair Market Value on such date. The value of the
shares withheld or tendered may not exceed the required federal, state, local
and foreign withholding tax obligations as computed by the Company.
(g) No Transferability. No Award shall be assignable or otherwise
transferable by the participant other than by will or by the laws of descent
and distribution. During the life of a participant, an Award shall be
exercisable, and any elections with respect to an Award may be made, only by
the participant or participant's guardian or legal representative.
(h) Adjustment of Awards; Waivers. The Committee may adjust the performance
goals and measurements applicable to Awards (i) to take into account changes
in law and accounting and tax rules, (ii) to make such adjustments as the
Committee deems necessary or appropriate to reflect the inclusion or exclusion
of the impact of extraordinary or unusual items, events or circumstances in
order to avoid windfalls or hardships, and (iii) to make such adjustments as
the Committee deems necessary or appropriate to reflect any material changes
in business conditions. In the event of hardship or other special
circumstances of a participant and otherwise in its discretion, the Committee
may waive in whole or in part any or all restrictions, conditions, vesting, or
forfeiture with respect to any Award granted to such participant.
(i) Non-Competition. The Committee may condition its discretionary waiver of
a forfeiture, the acceleration of vesting at the time of Termination of a
participant holding any unexercised or unearned Award, the waiver of
restrictions on any Award, or the extension of the expiration period to a
period not longer than that provided by the Plan upon such participant's
agreement (and compliance with such agreement) (i) not to engage in any
business or activity competitive with any business or activity conducted by
the Company and (ii) to be available for consultations at the request of the
Company's management, all on such terms and conditions (including conditions
in addition to (i) and (ii)) as the Committee may determine.
A-7
<PAGE>
(j) Dividends. The reinvestment of dividends in additional Stock or
Restricted Stock at the time of any dividend payment pursuant to Section 6(c)
shall only be permissible if sufficient shares of Stock are available under
Section 3 for such reinvestment (taking into account then outstanding Awards).
(k) Regulatory Compliance. Each Award under the Plan shall be subject to the
condition that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the shares of Stock upon any
securities exchange or for trading in any securities market or under any state
or federal law, (ii) the consent or approval of any government or regulatory
body or (iii) an agreement by the participant with respect thereto, is
necessary or desirable, then such Award shall not be consummated in whole or
in part unless such listing, registration, qualification, consent, approval or
agreement shall have been effected or obtained free of any conditions not
acceptable to the Committee.
(l) Rights as Shareholder. Unless the Plan or the Committee expressly
specifies otherwise, an optionee shall have no rights as a shareholder with
respect to any shares covered by an Award until the stock certificates
representing the shares are actually delivered to the optionee. Subject to
Sections 3(b) and 6(c), no adjustment shall be made for dividends or other
rights for which the record date is prior to the date the certificates are
delivered.
(m) Beneficiary Designation. The Committee, in its discretion, may establish
procedures for a participant to designate a beneficiary to whom any amounts
payable in the event of the participant's death are to be paid.
(n) Additional Plans. Nothing contained in the Plan shall prevent the
Company, a subsidiary or an affiliate from adopting other or additional
compensation arrangements for its directors, employees and consultants.
(o) No Employment Rights; No Right to Directorship. Neither the adoption of
this Plan nor the grant of any Award hereunder shall (i) confer upon any
employee any right to continued employment nor shall it interfere in any way
with the right of the Company, a subsidiary or an affiliate to terminate the
employment of any employee at any time; or (ii) confer upon any participant
any right with respect to continuation of the participant's membership on the
Board or shall interfere in any way with provisions in the Company's Articles
of Incorporation and Bylaws relating to the election, appointment, terms of
office, and removal of members of the Board.
(p) Rule 16b-3. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with the
applicable conditions of Rule 16b-3 under the Exchange Act. To the extent any
provision of this Plan or action by the Committee fails to so comply, it shall
be adjusted to comply with Rule 16b-3, to the extent permitted by law and
deemed advisable by the Committee. It shall be the responsibility of persons
subject to Section 16 of the Exchange Act, not of the Company or the
Committee, to comply with the requirements of Section 16 of the Exchange Act;
and neither the Company nor the Committee shall be liable if this Plan or any
transaction under this Plan fails to comply with the applicable conditions of
Rule 16b-3, or if any such person incurs any liability under Section 16 of the
Exchange Act.
(q) Governing Law. The Plan and all Awards shall be governed by and
construed in accordance with the laws of the State of California.
(r) Use of Proceeds. All cash proceeds to the Company under the Plan shall
constitute general funds of the Company.
(s) Unfunded Status of Plan. The Plan shall constitute an "unfunded" plan
for incentive and deferred compensation. The Committee may authorize the
creation of trusts or arrangements to meet the obligations created under the
Plan to deliver Stock or make payments; provided, however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements shall be consistent with the "unfunded" status of the Plan.
A-8
<PAGE>
(t) Assumption by Successor. The obligations of the Company under the Plan
and under any outstanding Award may be assumed by any successor corporation,
which for purposes of the Plan shall be included within the meaning of
"Company".
(u) Limitation on Award Grants. The Company may not grant Awards under the
Plan for more than 500,000 shares to any one participant over the life of the
Plan.
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan or any Award, but no
amendment, alteration or discontinuance shall be made which would impair the
rights of a participant under an outstanding Award without the participant's
consent. No amendment, alteration or discontinuance shall require shareholder
approval except:
(a) an increase in the total number of shares reserved for issuance
pursuant to Awards under the Plan, or
(b) with respect to provisions solely as they relate to Incentive Stock
Options, to the extent required for the Plan to comply with Section 422 of
the Code, or
(c) to the extent required by other applicable laws, rules or
regulations, or
(d) to the extent the Board otherwise concludes that shareholder approval
is advisable.
SECTION 12. EFFECTIVE DATE OF PLAN.
The Plan shall be effective as of May 1, 1997, but all Awards shall be
conditioned upon approval of the Plan (a) at a duly held stockholders' meeting
by the affirmative vote of the holders of a majority of the voting power of
the shares of the Company represented in person or by proxy at the meeting and
entitled to vote thereon, or (b) by an action by written consent of the
holders of a majority of the voting power of the shares of the Company
entitled to vote.
SECTION 13. TERM OF PLAN.
No Award shall be granted on or after May 1, 2007, but Awards granted prior
to May 1, 2007 may extend beyond that date.
A-9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET INCOME STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 24,722,276
<SECURITIES> 0
<RECEIVABLES> 5,702,303
<ALLOWANCES> (105,000)
<INVENTORY> 9,829,115
<CURRENT-ASSETS> 40,283,897
<PP&E> 2,564,492
<DEPRECIATION> (972,829)
<TOTAL-ASSETS> 42,960,256
<CURRENT-LIABILITIES> 5,092,873
<BONDS> 0
0
0
<COMMON> 10,899
<OTHER-SE> 64,689,353
<TOTAL-LIABILITY-AND-EQUITY> 42,960,256
<SALES> 5,710,485
<TOTAL-REVENUES> 5,710,485
<CGS> 6,278,103
<TOTAL-COSTS> 9,126,566
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 55,000
<INTEREST-EXPENSE> 50,860
<INCOME-PRETAX> (3,147,849)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,147,849)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> 0
</TABLE>
