<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 1O-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-26226
MICROFIELD GRAPHICS, INC.
(Exact name of small business issuer as specified in its charter)
OREGON 93-0935149
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
7216 SW DURHAM RD.
PORTLAND, OREGON 97224
(Address of principal executive offices and zip code)
(503) 620-4000
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 3 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 the Registrant's Common Stock as of July
31, 1998 was 3,627,919 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
MICROFIELD GRAPHICS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - July 4, 1998
and January 3, 1998 3
Consolidated Statement of Operations - Three and
Six Months Ended July 4, 1998 and June 28, 1997 4
Consolidated Statement of Cash Flows -Six Months
Ended July 4, 1998 and June 28, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash $1,335,939 $909,184
Accounts receivable, net of allowances
of $24,848 and $24,680 1,532,629 1,027,902
Inventories (Note 3) 864,431 712,000
Prepaid expenses and other 190,359 216,427
------------ ------------
Total current assets 3,923,359 2,865,513
Property and equipment, net (Note 4) 413,301 384,251
Other assets 63,336 72,444
------------ ------------
$4,399,997 $3,322,208
------------ ------------
------------ ------------
Current liabilities:
Current portion of debt $883,333 $1,083,333
Accounts payable 473,021 606,556
Accrued payroll and payroll taxes 59,307 193,757
Unearned income 54,588 53,745
Accrued liabilities 220,449 164,483
------------ ------------
Total current liabilities 1,690,698 2,101,874
Long-term debt, net of current portion 48,612 90,278
------------ ------------
1,739,310 2,192,152
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized, 3,626,280 and 3,195,575 shares
issued and outstanding 14,261,945 12,185,527
Accumulated deficit (11,601,258) (11,055,471)
------------ ------------
Total shareholders' equity 2,660,687 1,130,056
------------ ------------
$4,399,997 $3,322,208
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $1,839,122 1,182,739 $4,397,046 2,368,106
Cost of goods sold 1,130,984 668,198 2,555,091 1,308,759
---------- --------- ---------- ----------
Gross profit 708,138 514,541 1,841,955 1,059,347
Operating expenses
Research and development 245,179 210,091 455,497 428,978
Marketing and sales 795,491 660,713 1,431,255 1,418,778
General and administrative 259,007 253,782 468,656 465,589
---------- --------- ---------- ----------
1,299,677 1,124,586 2,355,409 2,313,345
---------- --------- ---------- ----------
Loss from operations (591,539) (610,045) (513,454) (1,253,998)
Other income (expense)
Interest income (expense), net (7,619) (2,847) (31,758) (1,112)
Other income, net 131 -- 131 4,682
---------- --------- ---------- ----------
Loss before provision for income taxes (599,026) (612,892) (545,081) (1,250,428)
Provision for income taxes -- 800 706 1,256
---------- --------- ---------- ----------
Net loss $(599,026) (613,692) $(545,787) (1,251,684)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Net loss per share
Basic $(.17) (.19) $(.16) (.39)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Diluted $(.17) (.19) $(.16) (.39)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Shares used in per share calculations
Basic 3,625,988 3,195,575 3,454,899 3,195,575
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Diluted 3,625,988 3,195,575 3,454,899 3,195,575
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
------------------------
July 4, June 28,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (545,787) $(1,251,684)
Adjustments to reconcile net loss to net cash
used operating activities:
Depreciation and amortization 95,574 132,817
Gain on sale and leaseback of property and equipment -- (1,626)
Changes in assets and liabilities:
Accounts receivable (504,727) 20,737
Inventories (152,431) 394,890
Prepaid expenses and other 26,068 64,581
Accounts payable (133,535) (193,637)
Accrued payroll and payroll taxes (134,450) (115,425)
Unearned income 843 1,306
Accrued liabilities 55,964 72,884
----------- -----------
Net cash used in operating activities (1,292,481) (875,157)
Cash flows from investing activities:
Investments in marketable securities -- --
Acquisition of property and equipment (115,516) (40,431)
Purchases of other assets -- --
----------- -----------
Net cash used in investing activities (115,516) (40,431)
Cash flows from financing activities:
Payments on equipment line of credit (41,666) (34,720)
Payments on capital lease obligations -- (51,493)
Proceeds from (payments on) operating line of credit (200,000) 500,000
Proceeds from exercise of common stock options
and warrants 86,210 --
Proceeds from issuance of common stock 1,990,208 --
Adjustments to common stock -- 349
----------- -----------
Net cash provided by financing activities 1,834,752 414,136
Net increase (decrease) in cash and cash equivalents 426,755 (501,452)
Cash and cash equivalents, beginning of period 909,184 1,867,856
----------- -----------
Cash and cash equivalents, end of period $1,335,939 $1,366,404
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $54,478 26,706
----------- -----------
----------- -----------
Income taxes 706 1,256
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MICROFIELD GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Microfield Graphics, Inc. (the "Company") for the quarters and the six months
ended July 4, 1998 and June 28, 1997 have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission. The
financial information as of January 3, 1998 is derived from the Company's
Annual Report on Form 10-KSB. The accompanying consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles and should be read in conjunction
with the Company's audited consolidated financial statements and notes
thereto for the year ended January 3, 1998. In the opinion of Company
management, the unaudited consolidated financial statements for the interim
periods presented include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for such
interim periods. Operating results for the quarters and the six months ended
July 4, 1998 are not necessarily indicative of the results that may be
expected for the full year or any portion thereof.
The Company's fiscal year is the 52- or 53-week period ending on the
Saturday closest to the last day of December. The Company's current fiscal
year is the 52-week period ended January 2, 1999. The Company's last fiscal
year was the 53-week period ended January 3, 1998. The Company's second
fiscal quarters in fiscal 1998 and 1997 were the 13-week periods ended July
4, 1998 and June 28, 1997, respectively.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 128, "Earnings Per Share" (SFAS 128),
which changes the standards for computing and presenting earnings per share
and supercedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share." The FASB also issued SFAS 129, "Disclosure of Information About
Capital Structure." Both of these are effective for financial statements
issued for periods ending after December 15, 1997. The Company does not
expect the adoption of these to have a material impact on the Company's
financial condition or results of operations.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income," which establishes requirements for disclosure of comprehensive
income. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of earlier financial statements for comparative
purposes is required. The Company does not expect the adoption to have a
material impact on the Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," which defines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about operating segments, and is effective for the Company's
fiscal year ended December 1998. Reclassification of earlier financial
statements for comparative purposes is required. The Company does not expect
the adoption to have a material impact on the Company's financial condition
or results of operations.
6
<PAGE>
3. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out method), or market value. Inventory costs include
raw materials, direct labor and allocated overhead and consist of the
following:
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
-------- ----------
<S> <C> <C>
Raw materials $614,249 $515,122
Finished goods 250,182 196,878
-------- ----------
$864,431 $712,000
-------- ----------
-------- ----------
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
-------- ----------
<S> <C> <C>
Machinery and equipment $1,157,578 $1,042,062
Less accumulated depreciation and
amortization 744,277 657,811
-------- ----------
$ 413,301 $ 384,251
-------- ----------
-------- ----------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Microfield Graphics, Inc. (the "Company") develops, manufactures and
markets computer conferencing and telecommunications products to facilitate
group communications. The principal purpose of these products is to make
meetings more productive and cost effective by capturing ideas from all
meeting members (whether they are located locally or linked remotely through
a computer and an audio hookup) and making the information available to all
of the linked systems, where everyone involved can see and interact with the
information produced and presented. The Company's product lines incorporate
a series of digital whiteboards and digital whiteboard rear projection
systems under the brand name SoftBoard, along with a variety of application
software packages, supplies and accessories. Information written or drawn on
the SoftBoard surface is recorded and displayed on a personal computer
simultaneously and in color using the Company's proprietary technology. The
information is recorded in a computer file that can be replayed, printed,
faxed, e-mailed or saved for future applications. Optional proprietary
software allows the information to be communicated in real time to remote
computers over standard telephone lines, networks and the Internet.
The Company was incorporated in Oregon in 1986. The Company's executive
offices are located at 7216 SW Durham Road, Portland, OR 97224.
In July 1997 the Company entered into a General Purchase and Development
Agreement with Minnesota Mining and Manufacturing Company (3M), through which
3M globally markets advanced versions of the Company's SoftBoard family of
products. Under the terms of the two year agreement, the
7
<PAGE>
Company developed specialized versions of the SoftBoard product line
exclusively for 3M. Shipments from the Company to 3M began in the fourth
quarter 1997. For the three months ended July 4, 1998 and June 28, 1997
approximately 52% and 0%, respectively, of the Company's sales were
attributable to 3M.
The Company's future results of operations will depend on continued and
increased market acceptance of its SoftBoard products and the Company's
ability to modify them to meet the needs of its customers. Any reduction in
demand for, or increasing competition with respect to, these products could
have a material adverse effect on the Company's financial condition and
results of operations. As with any large OEM or distributor relationship,
order rates may be subject to quarterly fluctuations as demand varies and
inventories are adjusted.
In March 1998 the Company signed a Common Stock Purchase Agreement with
Steelcase Inc. (Steelcase), pursuant to which Steelcase purchased 350,000
shares of the Company's common stock and a warrant for a total of $2,012,500
in cash. The warrant gives Steelcase the right to purchase an additional
260,000 shares of the Company's common stock at $6.75 per share. The warrant
is exerciseable starting on March 16, 1999 and expires on March 16, 2001.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of sales, certain
consolidated statement of operations data relating to the SoftBoard Business
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Sales 100 % 100 % 100 % 100 %
Cost of goods sold 61 56 58 55
------- -------- ------- --------
Gross profit 39 44 42 45
Research and development expenses (13) (18) (10) (18)
Marketing and sales expenses (43) (56) (33) (60)
General and administrative expenses (14) (22) (11) (20)
------- -------- ------- --------
Loss from operations (32) (52) (12) (53)
Other income (expense) -- -- -- --
------- -------- ------- --------
Loss before provision for income taxes (32) (52) (12) (53)
Provision for income taxes -- -- -- --
------- -------- ------- --------
Net loss (32) % (52)% (12)% (53)%
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 COMPARED WITH SECOND QUARTER
AND SIX MONTHS ENDED JUNE 28, 1997
SALES. Sales increased $656,000 (55%) to $1,839,000 in the second
quarter of 1998 from $1,183,000 in the second quarter of 1997. Sales
increased $2,029,000 (86%) to $4,397,000 in the first six months of 1997 from
$2,368,000 in the first six months of 1996. The increases resulted primarily
from sales to 3M during the quarter and the first six months of this year.
There were no sales to 3M during the same periods in 1997. SEE OVERVIEW.
GROSS PROFIT. Cost of goods sold includes the cost of raw materials
needed to assemble the products, assembly and preparation by vendors and
direct and indirect costs associated with the procurement, testing,
scheduling and quality assurance functions performed by the Company. The
8
<PAGE>
Company's gross margin decreased to 39% in the second quarter of 1998 from
44% in the second quarter of 1997. The Company's gross margin also decreased
to 42% in the first six months of 1998 from 45% in the first six months of
1997. The decline in gross margins was due primarily to the high
concentration of sales into the Original Equipment Manufacturer (OEM)
channel. Sales into this channel traditionally have lower average selling
prices, and therefore lower margins, based on the potentially higher volumes
that are anticipated in an OEM relationship.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. These expenses increased $35,000 (17%) to $245,000 in
the second quarter of 1998 from $210,000 in the second quarter of 1997.
These expenses increased $27,000 (6%) to $455,000 in the first six months of
1998 from $429,000 in the first six months of 1997. These increases were due
primarily to increases in new product development. Research and development
expenses decreased as a percentage of sales to 13% in the first six months of
1998 from 18% in the first six months of 1997. The decrease was due
primarily to the higher level of Company revenue in the second quarter of
1998 compared to the second quarter of 1997.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased
$134,000 (20%) to $795,000 in the second quarter of 1998 from $661,000 in the
second quarter of 1997. These expenses decreased $12,000 (1%) to $1,431,000
in the first six months of 1998 from $1,419,000 in the first six months of
1997. The increase between quarters was due primarily to additional costs
associated with the creation and introduction of a new advertising program
and increased participation in trade shows during the quarter. Marketing and
sales expenses decreased as a percentage of sales to 33% in the first six
months of 1998 from 60% in the first six months of 1997 primarily due to the
higher sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $5,000 (2%) to $259,000 in the second quarter of 1998 from
$254,000 in the second quarter of 1997. These expenses increased $3,000 (1%)
to $469,000 in the first six months of 1998 from $466,000 in the first six
months of 1997. General and administrative expenses decreased as a percentage
of sales to 14% in the first six months of 1998 from 20% in the first six
months of 1997 primarily due to the higher sales volume.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income,
interest expense, and miscellaneous income. Other expense, net was ($7,000)
in the second quarter of 1998 compared to ($3,000) of other expense, net in
the second quarter of 1997. Other expense, net was $(32,000) in the first
six months of 1998 compared to $4,000 of other income, net in the first six
months of 1997. Interest expense increased as a result of increased levels
of borrowing under the Company's operating line of credit. Interest income
decreased as a result of lower cash balances in the first six months of 1998
compared to the first six months of 1997.
INCOME TAXES. The Company recorded losses from operations in the second
quarters of 1998 and 1997. Accordingly, no provision for income taxes, was
provided for in either of these periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through the private and public sale of equity securities, cash
from operations, and borrowings under operating lines of credit. At July 4,
1998, the Company had working capital of approximately $2.2 million and its
principal source of liquidity consisted of approximately $1.3 million in cash
and cash equivalents. Additionally, as of July 4, 1998, the Company had a
$2,000,000 line of credit with its bank, which bears interest monthly at
9
<PAGE>
prime (8.5 % at July 4, 1998). At July 4, 1998 $800,000 was outstanding
under the line of credit. Accounts receivable increased to $1,500,000 or
$505,000 from year end 1997 levels mainly due to increased shipments to 3M.
The Company has no commitments for capital expenditures in material
amounts.
The Company believes its existing cash and cash equivalents, cash
available under its operating line of credit, and cash from operations will
be sufficient to fund its operations for at least the next 12 months.
IMPACT OF THE YEAR 2000 ISSUE
The Company has made an assessment of the Year 2000 issue on its internal
systems and equipment, and also on its hardware and software products. Based
on this assessment, the Company believes that its internal systems have been
updated to address the Year 2000 issue, and that its hardware and software
products will properly recognize calendar dates beginning in the Year 2000.
Accordingly, the Company does not currently expect to incur material costs in
connection with the Year 2000 issue.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held on May 20, 1998 at which the
actions below were taken. At May 20, 1998, 3,626,280 shares of
Common Stock were issued and outstanding.
1. The following four nominees for directors to the Board of
Directors of the Company, all of whom were existing directors and
together constituted all of the directors of the issuer, received
the following number of votes and were properly elected to the
Board of Directors: John B. Conroy (3,023,385 shares for and
14,400 shares withheld), William P. Cargile (3,023,385 shares for
and 14,400 shares withheld), Herbert S. Shaw (3,020,685 shares for
and 17,100 shares withheld), and James P. Keane (3,023,135 shares
for and 14,650 shares withheld).
ITEM 5. OTHER INFORMATION
In accordance with amendments adopted on May 21, 1998 to Rule 14a-4
under the Securities and Exchange Act of 1934, if notice of a
shareholder proposal to be raised at the annual meeting of
shareholders is received at the principal executive offices of the
Company after March 9, 1999 (45 days prior to the month and date in
1999 corresponding to the date on which the Company mailed its
proxy materials for the 1998 annual meeting), proxy voting on that
proposal when and if raised at the 1999 annual meeting will be
subject to the discretionary voting authority of the designated
proxy holders. Any shareholder proposal to be considered for
inclusion in proxy materials for the Company's 1999 annual meeting
must be received at the principal executive offices of the Company
no later than December 21, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as part of this report is listed below:
EXHIBIT NO.
10.11 Restated 1995 Stock Incentive Plan dated May 11,
1998.
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 4, 1998.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act
of 1934, the issuer caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 18, 1998
MICROFIELD GRAPHICS, INC.
By:
---------------------------------
John B. Conroy
President and Chief Executive Officer
(Principal Executive Officer)
By:
---------------------------------
Randall R. Reed
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 18, 1998
MICROFIELD GRAPHICS, INC.
By:/s/JOHN B. CONROY
-----------------------------------------
John B. Conroy
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ RANDALL R. REED
-----------------------------------------
Randall R. Reed
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
13
<PAGE>
MICROFIELD GRAPHICS, INC.
RESTATED 1995 STOCK INCENTIVE PLAN
(Restated as of May 11, 1998)
1. PURPOSE. The purpose of this Stock Incentive Plan (the "Plan") is
to enable Microfield Graphics, Inc. (the "Company") to attract and retain the
services of (1) selected employees, officers and directors of the Company or
of any subsidiary of the Company and (2) selected nonemployee agents,
consultants, advisors, persons involved in the sale or distribution of the
Company's products and independent contractors of the Company or any
subsidiary.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided
below and in paragraph 13, the shares to be offered under the Plan shall
consist of Common Stock of the Company, and the total number of shares of
Common Stock that may be issued under the Plan shall not exceed 550,000
shares. The shares issued under the Plan may be authorized and unissued
shares or reacquired shares. If an option, stock appreciation right or
performance unit granted under the Plan expires, terminates or is cancelled,
the unissued shares subject to such option, stock appreciation right or
performance unit shall again be available under the Plan. If shares sold or
awarded as a bonus under the Plan are forfeited to the Company or repurchased
by the Company, the number of shares forfeited or repurchased shall again be
available under the Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective as of May 11,
1995. No option, stock appreciation right or performance unit granted under
the Plan to an officer who is subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended (an "Officer") or a director, and no
incentive stock option, shall become exercisable, however, until the Plan is
approved by the affirmative vote of the holders of a majority of the shares
of Common Stock represented at a shareholders meeting at which a quorum is
present and any such awards under the Plan prior to such approval shall be
conditioned on and subject to such approval. Subject to this limitation,
options, stock appreciation rights and performance units may be granted and
shares may be awarded as bonuses or sold under the Plan at any time after the
effective date and before termination of the Plan.
(b) DURATION. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions
on such
<PAGE>
shares have lapsed. The Board of Directors may suspend or terminate the Plan
at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall
not affect any outstanding options, any right of the Company to repurchase
shares or the forfeitability of shares issued under the Plan.
4. ADMINISTRATION.
(a) BOARD OF DIRECTORS. The Plan shall be administered by the
Board of Directors of the Company, which shall determine and designate from
time to time the individuals to whom awards shall be made, the amount of the
awards and the other terms and conditions of the awards. Subject to the
provisions of the Plan, the Board of Directors may from time to time adopt
and amend rules and regulations relating to administration of the Plan,
advance the lapse of any waiting period, accelerate any exercise date, waive
or modify any restriction applicable to shares (except those restrictions
imposed by law) and make all other determinations in the judgment of the
Board of Directors necessary or desirable for the administration of the Plan.
The interpretation and construction of the provisions of the Plan and related
agreements by the Board of Directors shall be final and conclusive. The
Board of Directors may correct any defect or supply any omission or reconcile
any inconsistency in the Plan or in any related agreement in the manner and
to the extent it shall deem expedient to carry the Plan into effect, and it
shall be the sole and final judge of such expediency.
(b) COMMITTEE. The Board of Directors may delegate to a committee
of the Board of Directors or specified officers of the Company, or both (the
"Committee") any or all authority for administration of the Plan. If
authority is delegated to a Committee, all references to the Board of
Directors in the Plan shall mean and relate to the Committee except (i) as
otherwise provided by the Board of Directors, (ii) that only the Board of
Directors may amend or terminate the Plan as provided in paragraphs 3 and 14
and (iii) that a Committee including officers of the Company shall not be
permitted to grant options to persons who are officers of the Company. If
awards are to be made under the Plan to Officers or directors, authority for
selection of Officers and directors for participation and decisions
concerning the timing, pricing and amount of a grant or award, if not
determined under a formula meeting the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, shall be delegated to a
committee consisting of two or more disinterested directors.
5. TYPES OF AWARDS; ELIGIBILITY. The Board of Directors may, from
time
2
<PAGE>
to time, take the following action, separately or in combination, under the
Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), as provided in
paragraphs 6(a) and 6(b); (ii) grant options other than Incentive Stock
Options ("Non-Statutory Stock Options") as provided in paragraphs 6(a) and
6(c); (iii) award stock bonuses as provided in paragraph 7; (iv) sell shares
subject to restrictions as provided in paragraph 8; (v) grant stock
appreciation rights as provided in paragraph 9; (vi) grant cash bonus rights
as provided in paragraph 10; (vii) grant performance units as provided in
paragraph 11 and (viii) grant foreign qualified awards as provided in
paragraph 12. Any such awards may be made to employees, including employees
who are officers or directors, and to other individuals described in
paragraph 1 who the Board of Directors believes have made or will make an
important contribution to the Company or any subsidiary of the Company;
provided, however, that only employees of the Company shall be eligible to
receive Incentive Stock Options under the Plan. The Board of Directors shall
select the individuals to whom awards shall be made and shall specify the
action taken with respect to each individual to whom an award is made. At
the discretion of the Board of Directors, an individual may be given an
election to surrender an award in exchange for the grant of a new award. No
employee may be granted options or stock appreciation rights under the Plan
for more than an aggregate of 200,000 shares of Common Stock in connection
with the hiring of the employee or 100,000 shares of Common Stock in any
calendar year otherwise.
6. OPTION GRANTS.
(a) GENERAL RULES RELATING TO OPTIONS.
(i) TERMS OF GRANT. The Board of Directors may grant
options under the Plan. With respect to each option grant, the Board of
Directors shall determine the number of shares subject to the option,
the option price, the period of the option, the time or times at which
the option may be exercised and whether the option is an Incentive Stock
Option or a Non-Statutory Stock Option. At the time of the grant of an
option or at any time thereafter, the Board of Directors may provide
that an optionee who exercised an option with Common Stock of the
Company shall automatically receive a new option to purchase additional
shares equal to the number of shares surrendered and may specify the
terms and conditions of such new options.
(ii) EXERCISE OF OPTIONS. Except as provided in
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paragraph 6(a)(iv) or as determined by the Board of Directors, no option
granted under the Plan may be exercised unless at the time of such
exercise the optionee is employed by or in the service of the Company or
any subsidiary of the Company and shall have been so employed or
provided such service continuously since the date such option was
granted. Absence on leave or on account of illness or disability under
rules established by the Board of Directors shall not, however, be
deemed an interruption of employment or service for this purpose.
Unless otherwise determined by the Board of Directors, vesting of
options shall not continue during an absence on leave (including an
extended illness) or on account of disability. Except as provided in
paragraphs 6(a)(iv) and 13, options granted under the Plan may be
exercised from time to time over the period stated in each option in
such amounts and at such times as shall be prescribed by the Board of
Directors, provided that options shall not be exercised for fractional
shares. Unless otherwise determined by the Board of Directors, if the
optionee does not exercise an option in any one year with respect to the
full number of shares to which the optionee is entitled in that year,
the optionee's rights shall be cumulative and the optionee may purchase
those shares in any subsequent year during the term of the option.
Unless otherwise determined by the Board of Directors, if an Officer
exercises an option within six months of the grant of the option, the
shares acquired upon exercise of the option may not be sold until six
months after the date of grant of the option.
(iii) NONTRANSFERABILITY. Each Incentive Stock Option and,
unless otherwise determined by the Board of Directors with respect to an
option granted to a person who is neither an Officer nor a director of
the Company, each other option granted under the Plan by its terms shall
be nonassignable and nontransferable by the optionee, either voluntarily
or by operation of law, except by will or by the laws of descent and
distribution of the state or country of the optionee's domicile at the
time of death.
(iv) TERMINATION OF EMPLOYMENT OR SERVICE.
(A) GENERAL RULE. Unless otherwise determined by the
Board of Directors, in the event the employment or service of the
optionee with the Company or a subsidiary terminates for any reason
other than because of physical disability or death as provided in
subparagraphs 6(a)(iv)(B) and (C), the option may be exercised at
any time prior to the expiration date of the option or the
expiration of 30 days after the date of such termination, whichever
is the shorter
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period, but only if and to the extent the optionee was entitled to
exercise the option at the date of such termination.
(B) TERMINATION BECAUSE OF TOTAL DISABILITY. Unless
otherwise determined by the Board of Directors, in the event of the
termination of employment or service because of total disability,
the option may be exercised at any time prior to the expiration
date of the option or the expiration of 12 months after the date of
such termination, whichever is the shorter period, but only if and
to the extent the optionee was entitled to exercise the option at
the date of such termination. The term "total disability" means a
medically determinable mental or physical impairment which is
expected to result in death or which has lasted or is expected to
last for a continuous period of 12 months or more and which causes
the optionee to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties as an
employee, director, officer or consultant of the Company and to be
engaged in any substantial gainful activity. Total disability
shall be deemed to have occurred on the first day after the Company
and the two independent physicians have furnished their opinion of
total disability to the Company.
(C) TERMINATION BECAUSE OF DEATH. Unless otherwise
determined by the Board of Directors, in the event of the death of
an optionee while employed by or providing service to the Company
or a subsidiary, the option may be exercised at any time prior to
the expiration date of the option or the expiration of 12 months
after the date of death, whichever is the shorter period, but only
if and to the extent the optionee was entitled to exercise the
option at the date of death and only by the person or persons to
whom such optionee's rights under the option shall pass by the
optionee's will or by the laws of descent and distribution of the
state or country of domicile at the time of death.
(D) AMENDMENT OF EXERCISE PERIOD APPLICABLE TO
TERMINATION. The Board of Directors, at the time of grant or, with
respect to an option that is not an Incentive Stock Option, at any
time thereafter, may extend the 30-day and 12-month exercise
periods any length of time not longer than the original expiration
date of the option, and may increase the portion of an option that
is exercisable, subject to such terms and conditions as the Board
of Directors may determine.
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(E) FAILURE TO EXERCISE OPTION. To the extent that
the option of any deceased optionee or of any optionee whose
employment or service terminates is not exercised within the
applicable period, all further rights to purchase shares pursuant
to such option shall cease and terminate.
(v) PURCHASE OF SHARES. Unless the Board of Directors
determines otherwise, shares may be acquired pursuant to an option
granted under the Plan only upon receipt by the Company of notice in
writing from the optionee of the optionee's intention to exercise,
specifying the number of shares as to which the optionee desires to
exercise the option and the date on which the optionee desires to
complete the transaction, and if required in order to comply with the
Securities Act of 1933, as amended, containing a representation that it
is the optionee's present intention to acquire the shares for investment
and not with a view to distribution. Unless the Board of Directors
determines otherwise, on or before the date specified for completion of
the purchase of shares pursuant to an option, the optionee must have
paid the Company the full purchase price of such shares in cash
(including, with the consent of the Board of Directors, cash that may be
the proceeds of a loan from the Company (provided that, with respect to
an Incentive Stock Option, such loan is approved at the time of option
grant)) or, with the consent of the Board of Directors, in whole or in
part, in Common Stock of the Company valued at fair market value,
restricted stock, performance units or other contingent awards
denominated in either stock or cash, promissory notes and other forms of
consideration. The fair market value of Common Stock provided in payment
of the purchase price shall be determined by the Board of Directors. If
the Common Stock of the Company is not publicly traded on the date the
option is exercised, the Board of Directors may consider any valuation
methods it deems appropriate and may, but is not required to, obtain one
or more independent appraisals of the Company. If the Common Stock of
the Company is publicly traded on the date the option is exercised, the
fair market value of Common Stock provided in payment of the purchase
price shall be the closing price of the Common Stock as reported in THE
WALL STREET JOURNAL on the last trading day preceding the date the
option is exercised, or such other reported value of the Common Stock as
shall be specified by the Board of Directors. No shares shall be issued
until full payment for the shares has been made. With the consent of
the Board of Directors (which, in the case of an Incentive Stock Option,
shall be given only at the time of option grant), an optionee may
request the Company to apply automatically the
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shares to be received upon the exercise of a portion of a stock option
(even though stock certificates have not yet been issued) to satisfy the
purchase price for additional portions of the option. Each optionee who
has exercised an option shall immediately upon notification of the
amount due, if any, pay to the Company in cash amounts necessary to
satisfy any applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required beyond
any amount deposited before delivery of the certificates, the optionee
shall pay such amount to the Company on demand. If the optionee fails
to pay the amount demanded, the Company may withhold that amount from
other amounts payable by the Company to the optionee, including salary,
subject to applicable law. With the consent of the Board of Directors
an optionee may satisfy this obligation, in whole or in part, by having
the Company withhold from the shares to be issued upon the exercise that
number of shares that would satisfy the withholding amount due or by
delivering to the Company Common Stock to satisfy the withholding
amount. Upon the exercise of an option, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares
issued upon exercise of the option.
(b) INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be
subject to the following additional terms and conditions:
(i) LIMITATION ON AMOUNT OF GRANTS. No employee may be
granted Incentive Stock Options under the Plan if the aggregate fair
market value, on the date of grant, of the Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by that
employee during any calendar year under the Plan and under all incentive
stock option plans (within the meaning of Section 422 of the Code) of
the Company or any parent or subsidiary of the Company exceeds $100,000.
(ii) LIMITATIONS ON GRANTS TO 10 PERCENT SHAREHOLDERS. An
Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power of
all classes of stock of the Company or of any parent or subsidiary of
the Company only if the option price is at least 110 percent of the fair
market value, as described in paragraph 6(b)(iv), of the Common Stock
subject to the option on the date it is granted and the option by its
terms is not exercisable after the expiration of five years from the
date it is granted.
(iii) DURATION OF OPTIONS. Subject to paragraphs 6(a)(ii)
and
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6(b)(ii), Incentive Stock Options granted under the Plan shall continue
in effect for the period fixed by the Board of Directors, except that no
Incentive Stock Option shall be exercisable after the expiration of 10
years from the date it is granted.
(iv) OPTION PRICE. The option price per share shall be
determined by the Board of Directors at the time of grant. Except as
provided in paragraph 6(b)(ii), the option price shall not be less than
100 percent of the fair market value of the Common Stock covered by the
Incentive Stock Option at the date the option is granted. The fair
market value shall be determined by the Board of Directors. If the
Common Stock of the Company is not publicly traded on the date the
option is granted, the Board of Directors may consider any valuation
methods it deems appropriate and may, but is not required to, obtain one
or more independent appraisals of the Company. If the Common Stock of
the Company is publicly traded on the date the option is exercised, the
fair market value shall be deemed to be the closing price of the Common
Stock as reported in THE WALL STREET JOURNAL on the day preceding the
date the option is granted, or, if there has been no sale on that date,
on the last preceding date on which a sale occurred or such other value
of the Common Stock as shall be specified by the Board of Directors.
(v) LIMITATION ON TIME OF GRANT. No Incentive Stock
Option shall be granted on or after the tenth anniversary of the
effective date of the Plan.
(vi) CONVERSION OF INCENTIVE STOCK OPTIONS. The Board of
Directors may at any time without the consent of the optionee convert an
Incentive Stock Option to a Non-Statutory Stock Option.
(c) NON-STATUTORY STOCK OPTIONS. Non-Statutory Stock Options
shall be subject to the following terms and conditions in addition to those
set forth in Section 6(a) above:
(i) OPTION PRICE. The option price for Non-Statutory
Stock Options shall be determined by the Board of Directors at the time
of grant and may be any amount determined by the Board of Directors.
(ii) DURATION OF OPTIONS. Non-Statutory Stock Options
granted under the Plan shall continue in effect for the period fixed by
the Board of Directors.
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7. STOCK BONUSES. The Board of Directors may award shares under the
Plan as stock bonuses. Shares awarded as a bonus shall be subject to the
terms, conditions, and restrictions determined by the Board of Directors.
The restrictions may include restrictions concerning transferability and
forfeiture of the shares awarded, together with such other restrictions as
may be determined by the Board of Directors. If shares are subject to
forfeiture, all dividends or other distributions paid by the Company with
respect to the shares shall be retained by the Company until the shares are
no longer subject to forfeiture, at which time all accumulated amounts shall
be paid to the recipient. The Board of Directors may require the recipient
to sign an agreement as a condition of the award, but may not require the
recipient to pay any monetary consideration other than amounts necessary to
satisfy tax withholding requirements. The agreement may contain any terms,
conditions, restrictions, representations and warranties required by the
Board of Directors. The certificates representing the shares awarded shall
bear any legends required by the Board of Directors. Unless otherwise
determined by the Board of Directors, shares awarded as a stock bonus to an
Officer may not be sold until six months after the date of the award. The
Company may require any recipient of a stock bonus to pay to the Company in
cash upon demand amounts necessary to satisfy any applicable federal, state
or local tax withholding requirements. If the recipient fails to pay the
amount demanded, the Company may withhold that amount from other amounts
payable by the Company to the recipient, including salary or fees for
services, subject to applicable law. With the consent of the Board of
Directors, a recipient may deliver Common Stock to the Company to satisfy
this withholding obligation. Upon the issuance of a stock bonus, the number
of shares reserved for issuance under the Plan shall be reduced by the number
of shares issued.
8. RESTRICTED STOCK. The Board of Directors may issue shares under
the Plan for such consideration (including promissory notes and services) as
determined by the Board of Directors. Shares issued under the Plan shall be
subject to the terms, conditions and restrictions determined by the Board of
Directors. The restrictions may include restrictions concerning
transferability, repurchase by the Company and forfeiture of the shares
issued, together with such other restrictions as may be determined by the
Board of Directors. If shares are subject to forfeiture or repurchase by the
Company, all dividends or other distributions paid by the Company with
respect to the shares shall be retained by the Company until the shares are
no longer subject to forfeiture or repurchase, at which time all accumulated
amounts shall be paid to the recipient. All Common Stock issued pursuant to
this paragraph 8 shall be subject to a purchase agreement, which shall be
executed by the Company and the prospective recipient of the shares prior to
the
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<PAGE>
delivery of certificates representing such shares to the recipient. The
purchase agreement may contain any terms, conditions, restrictions,
representations and warranties required by the Board of Directors. The
certificates representing the shares shall bear any legends required by the
Board of Directors. Unless otherwise determined by the Board of Directors,
shares issued under this paragraph 8 to an Officer may not be sold until six
months after the shares are issued. The Company may require any purchaser of
restricted stock to pay to the Company in cash upon demand amounts necessary
to satisfy any applicable federal, state or local tax withholding
requirements. If the purchaser fails to pay the amount demanded, the Company
may withhold that amount from other amounts payable by the Company to the
purchaser, including salary, subject to applicable law. With the consent of
the Board of Directors, a purchaser may deliver Common Stock to the Company
to satisfy this withholding obligation. Upon the issuance of restricted
stock, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued.
9. STOCK APPRECIATION RIGHTS.
(a) GRANT. Stock appreciation rights may be granted under the
Plan by the Board of Directors, subject to such rules, terms, and conditions
as the Board of Directors prescribes.
(b) EXERCISE.
(i) Each stock appreciation right shall entitle the
holder, upon exercise, to receive from the Company in exchange therefor
an amount equal in value to the excess of the fair market value on the
date of exercise of one share of Common Stock of the Company over its
fair market value on the date of grant (or, in the case of a stock
appreciation right granted in connection with an option, the excess of
the fair market value of one share of Common Stock of the Company over
the option price per share under the option to which the stock
appreciation right relates), multiplied by the number of shares covered
by the stock appreciation right or the option, or portion thereof, that
is surrendered. No stock appreciation right shall be exercisable at a
time that the amount determined under this subparagraph is negative.
Payment by the Company upon exercise of a stock appreciation right may
be made in Common Stock valued at fair market value, in cash, or partly
in Common Stock and partly in cash, all as determined by the Board of
Directors.
(ii) A stock appreciation right shall be exercisable only
at the
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time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, the
following rules shall apply: (1) the stock appreciation right shall be
exercisable only to the extent and on the same conditions that the
related option could be exercised; (2) the stock appreciation rights
shall be exercisable only when the fair market value of the stock
exceeds the option price of the related option; (3) the stock
appreciation right shall be for no more than 100 percent of the excess
of the fair market value of the stock at the time of exercise over the
option price; (4) upon exercise of the stock appreciation right, the
option or portion thereof to which the stock appreciation right relates
terminates; and (5) upon exercise of the option, the related stock
appreciation right or portion thereof terminates. Unless otherwise
determined by the Board of Directors, no stock appreciation right
granted to an Officer or director may be exercised during the first six
tmonths following the date it is granted.
(iii) The Board of Directors may withdraw any stock
appreciation right granted under the Plan at any time and may impose any
conditions upon the exercise of a stock appreciation right or adopt
rules and regulations from time to time affecting the rights of holders
of stock appreciation rights. Such rules and regulations may govern the
right to exercise stock appreciation rights granted prior to adoption or
amendment of such rules and regulations as well as stock appreciation
rights granted thereafter.
(iv) For purposes of this paragraph 9, the fair market
value of the Common Stock shall be determined as of the date the stock
appreciation right is exercised, under the methods set forth in
paragraph 6(b)(iv).
(v) No fractional shares shall be issued upon exercise of
a stock appreciation right. In lieu thereof, cash may be paid in an
amount equal to the value of the fraction or, if the Board of Directors
shall determine, the number of shares may be rounded downward to the
next whole share.
(vi) Each stock appreciation right granted in connection
with an Incentive Stock Option, and unless otherwise determined by the
Board of Directors with respect to a stock appreciation right granted to
a person who is neither an Officer nor a director of the Company, each
other stock appreciation right granted under the Plan by its terms shall
be nonassignable and nontransferable by the holder, either voluntarily
or by operation of law, except by will or by the laws of descent and
distribution of the state or
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country of the holder's domicile at the time of death, and each stock
appreciation right by its terms shall be exercisable during the holder's
lifetime only by the holder.
(vii) Each participant who has exercised a stock
appreciation right shall, upon notification of the amount due, pay to
the Company in cash amounts necessary to satisfy any applicable federal,
state and local tax withholding requirements. If the participant fails
to pay the amount demanded, the Company may withhold that amount from
other amounts payable by the Company to the participant including
salary, subject to applicable law. With the consent of the Board of
Directors a participant may satisfy this obligation, in whole or in
part, by having the Company withhold from any shares to be issued upon
the exercise that number of shares that would satisfy the withholding
amount due or by delivering Common Stock to the Company to satisfy the
withholding amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall
be reduced by the number of shares issued. Cash payments of stock
appreciation rights shall not reduce the number of shares of Common
Stock reserved for issuance under the Plan.
10. CASH BONUS RIGHTS.
(a) GRANT. The Board of Directors may grant cash bonus rights
under the Plan in connection with (i) options granted or previously granted,
(ii) stock appreciation rights granted or previously granted, (iii) stock
bonuses awarded or previously awarded and (iv) shares sold or previously sold
under the Plan. Cash bonus rights will be subject to rules, terms and
conditions as the Board of Directors may prescribe. Unless otherwise
determined by the Board of Directors with respect to a cash bonus right
granted to a person who is neither an Officer nor a director of the Company,
each cash bonus right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution
of the state or country of the holder's domicile at the time of death. The
payment of a cash bonus shall not reduce the number of shares of Common Stock
reserved for issuance under the Plan.
(b) CASH BONUS RIGHTS IN CONNECTION WITH OPTIONS. A cash bonus
right granted in connection with an option will entitle an optionee to a cash
bonus
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when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part if, in the sole discretion of the Board of Directors, the bonus right
will result in a tax deduction that the Company has sufficient taxable income
to use. If an optionee purchases shares upon exercise of an option and does
not exercise a related stock appreciation right, the amount of the bonus, if
any, shall be determined by multiplying the excess of the total fair market
value of the shares to be acquired upon the exercise over the total option
price for the shares by the applicable bonus percentage. If the optionee
exercises a related stock appreciation right in connection with the
termination of an option, the amount of the bonus, if any, shall be
determined by multiplying the total fair market value of the shares and cash
received pursuant to the exercise of the stock appreciation right by the
applicable bonus percentage. The bonus percentage applicable to a bonus
right, including a previously granted bonus right, may be changed from time
to time at the sole discretion of the Board of Directors but shall in no
event exceed 75 percent.
(c) CASH BONUS RIGHTS IN CONNECTION WITH STOCK BONUS. A cash
bonus right granted in connection with a stock bonus will entitle the
recipient to a cash bonus payable when the stock bonus is awarded or
restrictions, if any, to which the stock is subject lapse. If bonus stock
awarded is subject to restrictions and is repurchased by the Company or
forfeited by the holder, the cash bonus right granted in connection with the
stock bonus shall terminate and may not be exercised. The amount and timing
of payment of a cash bonus shall be determined by the Board of Directors.
(d) CASH BONUS RIGHTS IN CONNECTION WITH STOCK PURCHASES. A cash
bonus right granted in connection with the purchase of stock pursuant to
paragraph 8 will entitle the recipient to a cash bonus when the shares are
purchased or restrictions, if any, to which the stock is subject lapse. Any
cash bonus right granted in connection with shares purchased pursuant to
paragraph 8 shall terminate and may not be exercised in the event the shares
are repurchased by the Company or forfeited by the holder pursuant to
applicable restrictions. The amount of any cash bonus to be awarded and
timing of payment of a cash bonus shall be determined by the Board of
Directors.
(e) TAXES. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable
federal, state and local withholding requirements.
11. PERFORMANCE UNITS. The Board of Directors may grant performance
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units consisting of monetary units which may be earned in whole or in part if
the Company achieves certain goals established by the Board of Directors over
a designated period of time, but not in any event more than 10 years. The
goals established by the Board of Directors may include earnings per share,
return on shareholders' equity, return on invested capital, and such other
goals as may be established by the Board of Directors. In the event that the
minimum performance goal established by the Board of Directors is not
achieved at the conclusion of a period, no payment shall be made to the
participants. In the event the maximum corporate goal is achieved, 100
percent of the monetary value of the performance units shall be paid to or
vested in the participants. Partial achievement of the maximum goal may
result in a payment or vesting corresponding to the degree of achievement as
determined by the Board of Directors. Payment of an award earned may be in
cash or in Common Stock or in a combination of both, and may be made when
earned, or vested and deferred, as the Board of Directors determines.
Deferred awards shall earn interest on the terms and at a rate determined by
the Board of Directors. Unless otherwise determined by the Board of
Directors with respect to a performance unit granted to a person who is
neither an Officer nor a director of the Company, each performance unit
granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder, either voluntarily or by operation of law,
except by will or by the laws of descent and distribution of the state or
country of the holder's domicile at the time of death. Each participant who
has been awarded a performance unit shall, upon notification of the amount
due, pay to the Company in cash amounts necessary to satisfy any applicable
federal, state and local tax withholding requirements. If the participant
fails to pay the amount demanded, the Company may withhold that amount from
other amounts payable by the Company to the participant, including salary or
fees for services, subject to applicable law. With the consent of the Board
of Directors a participant may satisfy this obligation, in whole or in part,
by having the Company withhold from any shares to be issued that number of
shares that would satisfy the withholding amount due or by delivering Common
Stock to the Company to satisfy the withholding amount. The payment of a
performance unit in cash shall not reduce the number of shares of Common
Stock reserved for issuance under the Plan. The number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued
upon payment of an award.
12. FOREIGN QUALIFIED GRANTS. Awards under the Plan may be granted to
such officers and employees of the Company and its subsidiaries and such
other persons described in paragraph 1 residing in foreign jurisdictions as
the Board of Directors may determine from time to time. The Board of
Directors may adopt such supplements to the Plan as may be necessary to
comply with the applicable laws of
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such foreign jurisdictions and to afford participants favorable treatment
under such laws; provided, however, that no award shall be granted under any
such supplement with terms which are more beneficial to the participants than
the terms permitted by the Plan.
13. CHANGES IN CAPITAL STRUCTURE.
(a) STOCK SPLITS; STOCK DIVIDENDS. If the outstanding Common
Stock of the Company is hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company by reason of any stock split, combination of shares or dividend
payable in shares, recapitalization or reclassification appropriate
adjustment shall be made by the Board of Directors in the number and kind of
shares available for grants under the Plan. In addition, the Board of
Directors shall make appropriate adjustment in the number and kind of shares
as to which outstanding options, or portions thereof then unexercised, shall
be exercisable, so that the optionee's proportionate interest before and
after the occurrence of the event is maintained. Notwithstanding the
foregoing, the Board of Directors shall have no obligation to effect any
adjustment that would or might result in the issuance of fractional shares,
and any fractional shares resulting from any adjustment may be disregarded or
provided for in any manner determined by the Board of Directors. Any such
adjustments made by the Board of Directors shall be conclusive.
(b) MERGERS, REORGANIZATIONS, ETC. In the event of a merger,
consolidation, plan of exchange, acquisition of property or stock,
separation, reorganization or liquidation to which the Company or a
subsidiary is a party or a sale of all or substantially all of the Company's
assets (each, a "Transaction"), the Board of Directors shall, in its sole
discretion and to the extent possible under the structure of the Transaction,
select one of the following alternatives for treating outstanding options
under the Plan:
(i) Outstanding options shall remain in effect in
accordance with their terms.
(ii) Outstanding options shall be converted into options to
purchase stock in the corporation that is the surviving or acquiring
corporation in the Transaction. The amount, type of securities subject
thereto and exercise price of the converted options shall be determined
by the Board of Directors of the Company, taking into account the
relative values of the companies involved in the Transaction and the
exchange rate, if any, used in
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<PAGE>
determining shares of the surviving corporation to be issued to holders
of shares of the Company. Unless otherwise determined by the Board of
Directors, the converted options shall be vested only to the extent that
the vesting requirements relating to options granted hereunder have been
satisfied.
(iii) The Board of Directors shall provide a 30-day period
prior to the consummation of the Transaction during which outstanding
options may be exercised to the extent then exercisable, and upon the
expiration of such 30-day period, all unexercised options shall
immediately terminate. The Board of Directors may, in its sole
discretion, accelerate the exercisability of options so that they are
exercisable in full during such 30-day period.
(c) DISSOLUTION OF THE COMPANY. In the event of the dissolution of
the Company, options shall be treated in accordance with paragraph 13(b)(iii).
(d) RIGHTS ISSUED BY ANOTHER CORPORATION. The Board of Directors
may also grant options, stock appreciation rights, performance units, stock
bonuses and cash bonuses and issue restricted stock under the Plan having
terms, conditions and provisions that vary from those specified in this Plan
provided that any such awards are granted in substitution for, or in
connection with the assumption of, existing options, stock appreciation
rights, stock bonuses, cash bonuses, restricted stock and performance units
granted, awarded or issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
Transaction.
14. AMENDMENT OF PLAN. The Board of Directors may at any time, and
from time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for
any other reason. Except as provided in paragraphs 6(a)(iv), 9, 10 and 13,
however, no change in an award already granted shall be made without the
written consent of the holder of such award.
15. APPROVALS. The obligations of the Company under the Plan are
subject to the approval of state and federal authorities or agencies with
jurisdiction in the matter. The Company will use its best efforts to take
steps required by state or federal law or applicable regulations, including
rules and regulations of the Securities and Exchange Commission and any stock
exchange on which the Company's shares may then be listed, in connection with
the grants under the Plan. The foregoing notwithstanding, the Company shall
not be obligated to issue or deliver Common Stock under the Plan if such
issuance or delivery would violate
16
<PAGE>
applicable state or federal securities laws.
16. EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in
any way with the right of the Company or any subsidiary by whom such employee
is employed to terminate such employee's employment at any time, for any
reason, with or without cause, or to decrease such employee's compensation or
benefits, or (ii) confer upon any person engaged by the Company any right to
be retained or employed by the Company or to the continuation, extension,
renewal, or modification of any compensation, contract, or arrangement with
or by the Company.
17. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until
the date of issue to the recipient of a stock certificate for such shares.
Except as otherwise expressly provided in the Plan, no adjustment shall be
made for dividends or other rights for which the record date occurs prior to
the date such stock certificate is issued.
Adopted: May 11, 1995; amendments adopted February 1, 1996, January 27,
1997; restated May 8, 1998
Approved by Shareholders: June 8, 1995; amendments approved April 24, 1996,
June 3, 1997
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10-QSB FOR THE
THREE AND SIX MONTH PERIODS ENDED JULY 4, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
<CASH> 1,336
<SECURITIES> 0
<RECEIVABLES> 1,532
<ALLOWANCES> 25
<INVENTORY> 864
<CURRENT-ASSETS> 3,923
<PP&E> 1,158
<DEPRECIATION> 744
<TOTAL-ASSETS> 4,400
<CURRENT-LIABILITIES> 1,691
<BONDS> 0
0
0
<COMMON> 14,262
<OTHER-SE> (11,601)
<TOTAL-LIABILITY-AND-EQUITY> 4,400
<SALES> 4,397
<TOTAL-REVENUES> 4,397
<CGS> 2,555
<TOTAL-COSTS> 2,555
<OTHER-EXPENSES> 2,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> (545)
<INCOME-TAX> 1
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (546)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
