<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 29, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 000-24413
TROY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0807798
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA 92705
(Address of principal executive offices) (Zip code)
(949) 250-3280
(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 / /
As of April 12, 2000, there were 10,785,128 shares of our Common Stock
outstanding.
<PAGE>
TROY GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 29, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
February 29, 2000 and November 30, 1999.......................................................... 3
Consolidated Statements of Operations
for the Three Months ended February 29, 2000
and February 28, 1999............................................................................ 4
Consolidated Statements of Cash Flows
for the Three Months ended February 29, 2000
and February 28, 1999............................................................................ 5
Notes to Consolidated Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 15
Item 2. Changes in Securities and Use of Proceeds...................................................... 15
Item 3. Defaults Upon Senior Securities................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............................................ 16
Item 5. Other Information.............................................................................. 16
Item 6. Exhibits and Reports on Form 8-K............................................................... 16
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TROY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 29, NOVEMBER 30,
ASSETS 2000 1999
(Unaudited)
---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 5,342 $ 4,783
Investment in available-for-sale securities................................ 11,758 7,647
Accounts receivable, less allowance for doubtful accounts of $312,000, and
$294,000, respectively............................................... 7,825 12,530
Inventories................................................................ 5,896 5,082
Prepaid expenses and other................................................. 110 140
Deferred tax assets ...................................................... 1,160 1,160
---------------- -----------------
Total current assets.................................................. 32,091 31,342
Equipment and leasehold improvements, net..................................... 1,878 1,863
Other assets.................................................................. 8,029 3,853
---------------- -----------------
Total assets.......................................................... $41,998 $37,058
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 59 $ 64
Accounts payable........................................................... 3,819 2,495
Accrued expenses........................................................... 1,927 2,322
Income taxes payable....................................................... 1,426 1,208
Deferred service revenue................................................... 651 242
---------------- -----------------
Total current liabilities............................................. 7,882 6,331
---------------- -----------------
Long-term debt, net of current portion........................................ 320 331
---------------- -----------------
Deferred tax liabilities...................................................... 601 601
---------------- -----------------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000 shares, issued
2000 10,762,249 shares; and 1999 10,663,941 shares...................... 108 107
Preferred stock, no par value, authorized 5,000,000 shares, issued none.... --- ---
Additional paid-in capital................................................. 19,176 17,397
Retained earnings.......................................................... 13,911 12,291
---------------- -----------------
Total stockholders' equity............................................ 33,195 29,795
---------------- -----------------
Total liabilities and stockholders' equity............................ $ 41,998 $ 37,058
================ =================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
-------------- --------------
<S> <C> <C>
Net sales........................................... $ 13,886 $ 11,400
Cost of goods sold.................................. 7,190 6,799
-------------- --------------
Gross profit.................................. 6,696 4,601
-------------- --------------
Operating expenses:
Selling, general and administrative ............. 3,241 2,121
Research and development......................... 987 810
-------------- --------------
Operating income.............................. 2,468 1,670
Interest income..................................... 192 --
Interest expense.................................... (7) (78)
-------------- --------------
Income before income taxes....................... 2,653 1,592
Provision for income taxes.......................... 1,035 637
-------------- --------------
Net income.................................... $ 1,618 $ 955
============== ==============
Net income per share:
Basic ........................................... $ .15 $ .12
============== ==============
Diluted.......................................... $ .14 $ .12
============== ==============
Weighted-average shares outstanding:
Basic ........................................... 10,698 7,671
============== ==============
Diluted.......................................... 11,498 8,002
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 1,618 $ 955
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization...................... 344 224
Provision for doubtful accounts.................... 30 3
Amortization of investment discounts, net........ (73) --
Changes in working capital components,
net of effects from acquisition of American
Development, Inc.
(Increase) decrease in:
Accounts receivable........................... 4,852 (1,138)
Income taxes refund receivable................ -- 319
Inventories................................... (814) (157)
Prepaid expenses and other.................... 30 (6)
Increase (decrease) in:
Accounts payable.............................. 1,324 (153)
Accrued expenses.............................. (553) (783)
Income taxes payable.......................... 218 394
Deferred service revenue...................... 409 22
--------------- -------------
Net cash provided by (used in ) operating
activities.................................... 7,385 (320)
--------------- -------------
Cash flows from investing activities:
Acquisition of American Development, Inc.............. (1,233) --
Purchase of equipment and leasehold improvements...... (125) (136)
Purchase of available-for-sale securities............ (10,700) --
Redemption of available-for-sale securities........... 6,662 --
Increase in other assets.............................. (1,553) (57)
--------------- -------------
Net cash (used in) investing activities............ (6,949) (193)
--------------- -------------
Cash flows from financing activities:
Borrowings on notes payable........................... -- 5,503
Payments on notes payable............................. -- (6,197)
Proceeds from issuance of debt........................ -- 670
Principal payments on debt............................ (241) (240)
Increase in checks issued not presented
for payment........................................ -- 497
Proceeds from issuance of common stock............... 364 --
--------------- -------------
Net cash provided by financing
activities...................................... 123 233
--------------- -------------
Net increase (decrease) in cash and
cash equivalents ............................... 559 (280)
Cash and cash equivalents, beginning of period........... 4,783 308
--------------- -------------
Cash and cash equivalents, end of period................. $ 5,342 $ 28
=============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended February 29,
2000 are not necessarily indicative of the results that may be expected for the
year ended November 30, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for its fiscal year ended November 30, 1999 (File No. 000-24413).
NOTE 2. INVENTORIES
Inventories consisted of the following as of February 29, 2000 and November 30,
1999 (amounts in thousands):
<TABLE>
<CAPTION>
February 29, 2000 November 30, 1999
----------------- -----------------
<S> <C> <C>
Raw materials.......................... $ 3,871 $ 3,692
Work-in-process.......................... 388 187
Finished goods........................... 1,637 1,203
------- -------
Total............................... $ 5,896 $ 5,082
======= =======
</TABLE>
NOTE 3. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
As of February 29, 2000, the Company had approximately $11.8 million in
corporate debt and marketable equity securities with contractual maturity dates
of up to one year which management has determined should be classified as
available-for-sale. Market values approximated carrying values. Accordingly, no
unrealized gains or losses were recorded at February 29, 2000. There were no
gains or loss recognized for the three months ended February 29, 2000 or
February 28, 1999.
6
<PAGE>
NOTE 4. STOCK OPTION PLANS
During the three months ended February 29, 2000, the Company granted options to
acquire 25,000 shares of common stock at a weighted-average exercise price of
$13.38 per share. The following is a summary of total outstanding options at
February 29, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Weighted- Average Weighted-
Range of Number of Average Remaining Number of Average
Exercise Prices Options Exercise Price Contractual Life Options Exercise Price
- --------------- ------- -------------- ---------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.38 - 8.00 1,144,000 $ 6.88 9.5 years 210,000 $6.88
$13.16 - 14.25 25,000 $13.38 9.8 years -- --
------------
1,169,000
</TABLE>
At February 29, 2000, there were 47,341 shares remaining available for grant
under the plans. On April 6, 2000, the Company's stockholders approved an
increase in the number of shares available for grant under the plans by 1.5
million shares.
NOTE 5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Three Months Ended
------------------
(amounts in thousands, except per share data)
February 29, 2000 February 28, 1999
----------------- -----------------
<S> <C> <C>
NUMERATOR FOR BASIC AND DILUTED NET INCOME PER
SHARE:
Net income................................... $1,618 $955
====== ====
DENOMINATOR:
Denominator for basic net income per share -
weighted-average shares outstanding.......... 10,698 7,671
Effect of employee stock options and
warrants..................................... 800 331
------ -----
Denominator for diluted net income
per share.................................... 11,498 8,002
====== =====
NET INCOME PER SHARE:
Basic........................................ $0.15 $0.12
===== =====
Diluted...................................... $0.14 $0.12
===== =====
</TABLE>
7
<PAGE>
NOTE 6. BUSINESS COMBINATION
AMERICAN DEVELOPMENT, INC.
On February 18, 2000, the Company acquired certain assets and assumed certain
liabilities of American Development, Inc., a software development company, in
exchange for 42,654 shares of $0.01 par value common stock, $1,179,000 in cash
and $54,000 in direct expenses. The total acquisition cost was $2,652,000,
including $330,000 recorded in connection with warrants issued to a consultant,
and was preliminarily allocated as follows:
<TABLE>
<S> <C>
Current assets......................................................... $ 177,000
Equipment and leasehold improvements................................... 61,000
Other Assets..........................................................: 94,000
Intangible assets, including customer list, assembled
workforce, core technology and goodwill.............................. 2,703,000
Current liabilities assumed............................................ (383,000)
----------
$2,652,000
==========
</TABLE>
The acquisition has been accounted for as a purchase and results of operations
of American Development, Inc. since the date of acquisition are included in the
Company's consolidated financial statements.
Pro forma consolidated results of operations for the three months ended February
29, 2000 as though American Development, Inc. had been acquired as of December
1, 1999 are as follows (amounts in thousands, except per share data):
<TABLE>
<S> <C>
Sales.................................................................. $ 14,139
=========
Net income............................................................. 1,566
=========
Net income per share:
Basic................................................................ 0.15
=========
Diluted.............................................................. 0.14
=========
</TABLE>
The above amounts reflect pro forma adjustments for amortization of intangibles
and number of shares outstanding. This pro forma financial information does not
purport to be indicative of the results of operations had the American
Development, Inc. acquisition actually taken place at the earlier date.
NOTE 7. SEGMENT INFORMATION
The following tables summarize revenues and net income (loss) by operating
segment and unallocated corporate for the three months ended February 29, 2000
and February 28, 1999:
<TABLE>
<CAPTION>
Three Months Ended
------------------
(amounts in thousands)
February 29, 2000 February 28, 1999
----------------- -----------------
<S> <C> <C>
Revenues:
Financial Payment Solutions.................. $ 9,572 $ 9,293
Connectivity................................. 4,314 2,107
-------- --------
$ 13,886 $ 11,400
======== ========
Net income (loss):
Financial Payment Solutions.................. $ 1,019 $ 1,164
Connectivity................................. 1,199 144
Unallocated Corporate........................ (600) (353)
-------- --------
$ 1,618 $ 955
======== ========
</TABLE>
8
<PAGE>
NOTE 8. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information
Acquisition of American Development, Inc., including assets acquired and
liabilities assumed (amounts in thousands):
<TABLE>
<CAPTION>
Three months ended
February 29, 2000
-----------------
<S> <C>
Cash paid during the period for:
Interest.......................................... $ 2
======
Income taxes...................................... $ 787
======
Supplemental schedule of noncash investing and
financing activities
Purchase of American Development, Inc.
Total purchase price............................ $2,652
Less fair value of common stock and stock
warrants issued in connection with the
acquisitions................................. 1,419
------
Cash purchase price............................. $1,233
======
</TABLE>
9
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our Consolidated Financial Statements and related Notes included in this
report. This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform act of 1995. The statements contained
in this report that are not historical in nature, particularly those that
utilize terminology such as "may," "will," "should," "expects," "anticipates,"
"estimates," "believes" or "plans," or comparable terminology, are
forward-looking statements based on current expectations and assumptions.
Various risks and uncertainties could cause actual results to differ
materially from those expressed in such forward-looking statements. These risks
and uncertainties include those related to the continued growth in acceptance of
eCheck Secure by e-merchants and e-consumers; our ability to integrate and offer
ACH solutions with our eCheck Secure software; the timely and successful
development and integration of the Bluetooth standard with the JetSend protocol;
the market acceptance of products incorporating wireless printing technologies;
the ability to continue to develop and market other e-commerce payment,
networked payment and wireless and other connectivity technologies; our ability
to refocus our management and resources on the emerging eCheck Secure-TM- and
wireless printing technologies; the ability to hire and retain qualified
management, technology and other personnel; the impact of competition from
existing and new technologies and companies; the ability to identify and
assimilate acquired companies and technologies, the continued demand for printed
financial documents; and the other factors set forth in our periodic reports and
other documents filed with the Securities and Exchange Commission from time to
time.
BACKGROUND
Our products consist of financial payment solutions and connectivity
products that serve a wide variety of industries including e-commerce retailers,
online brokerages, telecommunications, financial services, insurance, computer
hardware, automotive, personnel and others.
We are a leading worldwide provider of financial payment solutions. Our
software, firmware and hardware solutions enable businesses to electronically
transmit and output financial payment information across computer networks and
the Internet.
Our financial payment solutions consist of e-commerce payment solutions
and networked computer payment solutions. Our e-commerce payment solutions
enable Internet merchants to accept payments from their customers' checking
accounts as an alternative to credit cards. Our networked computer payment
solutions include software, firmware, hardware and imaging supplies that enable
standard laser printers to print MICR lines, graphics, barcodes and forms and to
perform additional functions such as auditing, status checking and security.
On February 18, 2000, we acquired certain assets and assumed certain
liabilities of American Development, Inc. (AMDev), a leading software developer
and processor of Automatic Clearing House (ACH) solutions which is now known as
Troy AMDev. We are currently working towards integrating the AMDev solution with
our eCheck Secure-TM- Internet software to provide e-merchants with a complete
electronic payment settlement system, which we believe should expand the number
of applications for ECheck Secure-TM-.
10
<PAGE>
Our connectivity products enhance the connectivity of devices that
transmit information over computer networks and the Internet.
In early April 2000, we announced our initiatives to realign staff and
resources to more aggressively pursue our ECheck Secure(TM) opportunity. During
the next several months, we intend to hire additional engineering and sales and
marketing professionals as a part of these initiatives. We also have announced
that Hewlett-Packard selected us to integrate the Bluetooth wireless standard
into its JetSend communications protocol. We believe that these business
opportunities will be a substantial part of our future growth
OVERVIEW
Net sales are generated from the sale of our connectivity and financial
payment solutions and services. We recognize revenue from the sale of our
products when the goods are shipped to the customer, we recognize service
revenue over the period of the contract on a straight-line basis and during the
three months ended February 29, 2000 we recognized revenue from the sale of a
software license agreement by the percentage of completion method. In the three
months ended February 29, 2000 and the fiscal year ended November 30, 1999, a
reseller of our imaging supplies, Cannon IV Inc., accounted for 10.4% and 11.4%,
respectively, of our net sales, of which we believe a significant portion was
sold to a single customer. In addition, a reseller of our laser printers and
connectivity products, Comark, Inc. also sold products to this same customer
which accounted for 1.0% and 19.9%, respectively, of our net sales for the three
months ended February 29, 2000 and the fiscal year ended November 30, 1999,
although the percentage of net sales for fiscal 1999 was due to a significant
replacement order of laser printers during that year and is not believed to be
indicative of percentages of net sales for future periods. We also sell our
products directly to the significant customer of Cannon IV and Comark. Direct
sales to these resellers' significant customer were 1.3% and 2.6% of our net
sales for the three months ended February 29, 2000 and the fiscal year ended
November 30, 1999, respectively. We do not have a written or oral contract with
Cannon IV, Comark or their significant customer. All sales are made through
purchase orders.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from our consolidated statements of operations expressed as
a percentage of net sales
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
February 29, February 28,
2000 1999
------ ------
<S> <C> <C>
Net sales................................................ 100.0% 100.0%
Cost of goods sold....................................... 51.8 59.6
------ ------
Gross Profit............................................. 48.2 40.4
Selling, general and administrative expenses............. 23.3 18.6
Research and development expenses........................ 7.1 7.1
------ ------
Operating income......................................... 17.8 14.7
Interest income.......................................... 1.4 --
Interest expense......................................... (0.1) (0.7)
------ ------
Income before income taxes .............................. 19.1 14.0
Provision for income taxes .............................. 7.5 5.6
------ ------
Net income............................................... 11.6% 8.4%
====== ======
</TABLE>
11
<PAGE>
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1999
NET SALES. Our net sales were $13.9 million for the three months ended
February 29, 2000, with $9.6 million attributable to output enhancement products
and $4.3 million attributable to connectivity products and software. This
represented an increase in net sales of $2.5 million or 21.8% from $11.4 million
in the three months ended February 28, 1999. This increase was due primarily to
an increase of $2.2 million in sales of connectivity products, and an increase
of $1.1 million in sales of our proprietary imaging supplies. These increases
were offset by an $800,000 decrease in sales of our laser printers, impact
printers and services. Net sales were not significantly affected by price
changes.
COST OF GOODS SOLD. Cost of goods sold increased by $400,000 or 5.8% to
$7.2 million in the three months ended February 29, 2000 from $6.8 million in
the three months ended February 28, 1999. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales decreased
to 51.8% in the first quarter of 2000 from 59.6% in the first quarter of 1999.
This decrease was primarily due to the sale of a significant amount of
connectivity software during the first quarter of 2000 at an increased profit
margin.
GROSS PROFIT. As a result of the above factors, gross profit increased
by $2.1 million or 45.5% to $6.7 million in the three months ended February 29,
2000 from $4.6 million in the three months ended February 28, 1999. Gross profit
as a percentage of net sales increased to 48.2% in the first quarter of 2000
from 40.4% in the first quarter of 1999. This increase was also primarily due to
the sale of a significant amount of connectivity software during the first
quarter of 2000 at an increased profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.1 million or 52.8% to $3.2 million in
the three months ended February 29, 2000 from $2.1 million in the three months
ended February 28, 1999. This increase was due primarily to additional operating
expenses of $200,000 as a result of the acquisitions of Troy Telgate and Troy
AMDev, an increase of $900,000 due to increases in personnel, amortization of
intangible assets due to the acquisitions, promotions and other expenses.
Selling, general and administrative expenses as a percentage of net sales
increased to 23.3% in the first quarter of 2000 from 18.6% in the first quarter
of 1999, due to our acquisition strategy and our associated growth requirements.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $177,000 or 21.9% to $987,000 in the three months ended February
29, 2000 from $810,000 in the three months ended February 28, 1999. Of this
increase, $120,000 was due to additional research and development expenses as a
result of the acquisitions of Troy Telgate and Troy AMDev. Research and
development expenses as a percentage of net sales was 7.1% in both the first
quarter of 2000 and the first quarter of 1999.
OPERATING INCOME. As a result of the above factors, operating income
increased by $800,000 or 47.8% to $2.5 million in the three months ended
February 29, 2000 from $1.7 million in the three months ended February 28, 1999.
Operating income as a percentage of net sales increased to 17.8% in the first
quarter of 2000 from 14.7% in the first quarter of 1999.
INTEREST INCOME. Interest income was $192,000 in the three months ended
February 29, 2000. This income was due to our investment of proceeds from our
initial public offering. We did not have interest income in the three months
ended February 28, 1999.
INTEREST EXPENSE. Interest expense decreased by $71,000 to $7,000 in
the three months ended February 29, 2000 from $78,000 in the three months ended
February 28, 1999. This decrease was due to decreased borrowings under our line
of credit and term debt.
12
<PAGE>
INCOME TAXES. Income taxes increased to $1.0 million in the three
months ended February 29, 2000 from $637,000 in the three months ended February
28, 1999. This increase is a result of increased income before income taxes.
Income taxes as a percentage of pretax income decreased to 39.0% in the first
quarter of 2000 from 40.0% in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $7.4 million in the
three months ended February 29, 2000 compared to $300,000 used in operating
activities in the three months ended February 28, 1999. The cash flows provided
by operating activities in the three months ended February 29, 2000 were
comparatively greater than in the three months ended February 28, 1999 due
primarily to a decrease in accounts receivable and an increase in accounts
payable, partially offset by an increase in inventories and a decrease in
accrued expenses. The receivable decrease resulted primarily from collections.
The increase in inventories resulted primarily from increased levels to meet
anticipated sales. The decrease in accrued expenses is primarily the result of
payment of incentive compensation for the fiscal year ended November 30, 1999.
Cash flows used in investing activities were $6.9 million in the three
months ended February 29, 2000 compared to $193,000 in the three months ended
February 28, 1999. Included in cash flows used in investing activities in the
three months ended February 29, 2000 was $4.0 million in net purchases of
available-for-sale securities, $1.2 million for our acquisition of Troy AMDev
and $1.3 million for prepaid licensing fees.
Cash flows provided by financing activities were $123,000 in the three
months ended February 29, 2000 compared to cash flows provided by financing
activities of $233,000 in the three months ended February 28, 1999.
We currently have a $5,000,000 general line of credit and a $10,000,000
acquisition line of credit with a bank. Both lines of credit are secured by
substantially all of our assets and are subject to certain financial covenants.
In connection with the general line-of-credit agreement, we have a $650,000
standby letter of credit sublimit agreement of which approximately $380,000 was
outstanding at February 29, 2000. There were no borrowings outstanding against
either line of credit on February 29, 2000, and as of that date approximately
$4,620,000 was available under the general line of credit and all $10,000,000
was available under the acquisition line of credit. The acquisition line of
credit expires October 1, 2000 and the general line of credit has no expiration
date.
We believe that cash generated by operating activities, the net
proceeds from our initial public offering and funds available under our credit
facility will be sufficient to finance our operating activities for at least the
next 12 months. To the extent that the funds generated from these sources are
insufficient to finance our operating activities, we would need to raise
additional funds through public or private financing. We cannot assure you that
additional financing will be available on terms favorable to us, or at all.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or
to future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes. Market risk is attributed to all market sensitive
financial instruments, including long term debt.
We do not utilize derivative financial instruments. Accordingly, our
exposure to market risk is through our investments in available-for-sale
securities and our bank debt which bears interest at variable rates.
Available-for-sale securities consist of corporate debt and marketable equity
securities with contractual maturity dates of up to one year. At February 29,
2000, market values approximated carrying values. Due to the short-term
maturities of these securities, management believes that there is no significant
market risk. At February 29, 2000, we had approximately $17.1 million in cash,
cash equivalents and investments in available-for-sale securities, and,
accordingly, a sustained decrease in the rate of interest earned of 1% would
cause a decrease in the amount of interest earned of $170,000. The bank debt is
a revolving line of credit. All borrowings bear interest based upon the
reference rate per annum as announced by the bank (8.75% at February 29, 2000).
At February 29, 2000, there were no amounts outstanding under the line of credit
agreement and, accordingly, a sustained increase in the reference rate of 1%
would not cause our annual interest expense to change.
14
<PAGE>
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
SALE OF UNREGISTERED SECURITIES
During the three months ended February 29, 2000, we issued an aggregate
of 20,000 shares of common stock in connection with exercises of warrants by a
consultant. In addition, on February 18, 2000 we issued an aggregate of 42,654
shares of common stock in connection with our acquisition of certain assets and
the assumption of certain liabilities of American Development, Inc. Each
issuance was made without registration in reliance on Regulation D, Section 4(2)
or Rule 701 under the Securities Act of 1933, as amended. In relying upon these
exemptions we made certain inquiries and received certain assurances to
establish that the exemptions were available for the issuance. In particular,
with respect to our reliance on Regulation D or Section 4(2) we confirmed that:
(i) the offers of sales and sales were made by personal contact from our
officers or directors or other persons closely associated with us; (ii) each
investor made representations that he or she was sophisticated in relation to
this investment and had reviewed certain information made available by us (and
we have no reason to believe such representations were incorrect); (iii) each
purchaser gave assurance of investment intent and the certificates for the
shares bear a legend accordingly; and (iv) offers and sales were made to a
limited number of persons.
USE OF PROCEEDS
In May 1998, we initially filed a Registration Statement on Form S-1
(File No. 333-51523) with the Securities and Exchange Commission for our initial
public offering. Under this Registration Statement, as amended, we registered
the offer and sale under the federal securities laws of up to $25,875,000 in
shares of our common stock. The SEC declared our Registration Statement
effective on July 21, 1999 and the closing of our initial public offering was
held on July 27, 1999. The managing underwriters were Cruttenden Roth
Incorporated, Pennsylvania Merchant Group and H.C. Wainwright & Co., Inc.
The aggregate offering price of the shares offered was $17,500,000. All
of the offered shares were sold and the net proceeds to Troy from the offering
were $14,943,000, after deducting the underwriting discount of $1,575,000 and
the estimated offering expenses of approximately $982,000, of which
approximately $54,000 was incurred from the effective date through February 29,
2000. All of the expenses incurred in connection with the initial public
offering were paid to unrelated parties or entities.
From July 27, 1999 to February 29, 2000, we have spent the net proceeds
from the offering as follows:
<TABLE>
<S> <C>
Repayment of long-term debt $2,965,000
Repayment of line of credit 1,354,000
----------
$4,319,000
==========
</TABLE>
All payments of the net proceeds were paid to unrelated parties or
entities.
15
<PAGE>
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 1998 Stock Incentive Plan, as amended
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TROY GROUP, INC.
/s/ Patrick J. Dirk
-----------------------------
April 14, 2000 Patrick J. Dirk
Chairman, President and
Chief Executive Officer
/s/ Del L. Conrad
-----------------------------
Del L. Conrad
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item No. Description Method of Filing
-------- ----------- ----------------
<S> <C> <C>
10.1 1998 Stock Incentive Plan, as amended Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
</TABLE>
18
<PAGE>
TROY GROUP, INC.
1998 STOCK INCENTIVE PLAN
1. PURPOSE OF PLAN.
The purpose of the Troy Group, Inc. 1998 Stock Incentive Plan (the
"Plan") is to advance the interests of Troy Group, Inc. (the "Company") and its
stockholders by enabling the Company and its Subsidiaries to attract and retain
persons of ability to perform services for the Company and its Subsidiaries by
providing an incentive to such individuals through equity participation in the
Company and by rewarding such individuals who contribute to the achievement by
the Company of its economic objectives.
2. DEFINITIONS.
The following terms will have the meanings set forth below, unless the
context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to which
a Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or any
related withholding tax obligations and remit such sums to the Company and
directs the Company to deliver stock certificates to be issued upon such
exercise directly to such broker or dealer.
2.3 "CHANGE IN CONTROL" means an event described in Section 9.1 of
the Plan.
2.4 "CODE" means the Internal Revenue Code of 1986, as amended.
2.5 "COMMITTEE" means the group of individuals administering
the Plan, as provided in Section 3 of the Plan.
2.6 "COMMON STOCK" means the common stock of the Company, $.01 par
value, or the number and kind of shares of stock or other securities into which
such common stock may be changed in accordance with Section 4.3 of the Plan.
2.7 "DISABILITY" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to the
long-term disability plan of the Company or Subsidiary then covering the
Participant or, if no such plan exists or is applicable to the Participant, the
permanent and total disability of the Participant within the meaning of Section
22(e)(3) of the Code.
2.8 "ELIGIBLE RECIPIENTS" means all employees of the Company or any
Subsidiary and any non-employee directors, consultants and independent
contractors of the Company or any Subsidiary.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of
any date (or, if no shares were traded or quoted on such date, as of the next
preceding date on which there was such a trade or quote) (a) the mean between
the reported high and low sale prices of the Common Stock if the Common Stock is
listed, admitted to unlisted trading privileges or reported on any foreign or
national securities exchange or on the Nasdaq National Market or an equivalent
foreign market on which sale prices are reported; (b) if the Common Stock is not
so listed, admitted to unlisted trading privileges or
<PAGE>
reported, the closing bid price as reported by the Nasdaq SmallCap Market, OTC
Bulletin Board or the National Quotation Bureau, Inc. or other comparable
service; or (c) if the Common Stock is not so listed or reported, such price as
the Committee determines in good faith in the exercise of its reasonable
discretion.
2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation Right,
Restricted Stock Award, Performance Unit or Stock Bonus granted to an Eligible
Recipient pursuant to the Plan.
2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common
Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that
does not qualify as an Incentive Stock Option.
2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more
Options under the Plan.
2.16 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient
pursuant to Section 9 of the Plan to receive a payment from the Company, in the
form of stock, cash or a combination of both, upon the achievement of
established employment, service, performance or other goals.
2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are
already owned by the Participant or, with respect to any Option, that are to be
issued upon the exercise of such Option.
2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to
an Eligible Recipient pursuant to Section 8 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 8.
2.19 "RETIREMENT" means termination of employment or service pursuant
to and in accordance with the regular (or, if approved by the Board for purposes
of the Plan, early) retirement/pension plan or practice of the Company or
Subsidiary then covering the Participant, provided that if the Participant is
not covered by any such plan or practice, the Participant will be deemed to be
covered by the Company's plan or practice for purposes of this determination.
2.20 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.21 "STOCK APPRECIATION RIGHT" means a right granted to an Eligible
Recipient pursuant to Section 7 of the Plan to receive a payment from the
Company, in the form of stock, cash or a combination of both, equal to the
difference between the Fair Market Value of one or more shares of Common Stock
and the exercise price of such shares under the terms of such Stock Appreciation
Right.
2.22 "STOCK BONUS" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 10 of the Plan.
2.23 "SUBSIDIARY" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a significant
equity interest, as determined by the Committee.
2.24 "TAX DATE" means the date any withholding tax obligation arises
under the Code or other applicable tax statute for a Participant with respect to
an Incentive Award.
2
<PAGE>
3. PLAN ADMINISTRATION.
3.1 THE COMMITTEE. The Plan will be administered by the Board or by a
committee of the Board. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, any committee
administering the Plan will consist solely of two or more members of the Board
who are "non-employee directors" within the meaning of Rule 16b-3 under the
Exchange Act and, if the Board so determines in its sole discretion, who are
"outside directors" within the meaning of Section 162(m) of the Code. Such a
committee, if established, will act by majority approval of the members (but may
also take action with the written consent of all of the members of such
committee), and a majority of the members of such a committee will constitute a
quorum. As used in the Plan, "Committee" will refer to the Board or to such a
committee, if established. To the extent consistent with corporate law, the
Committee may delegate to any officers of the Company the duties, power and
authority of the Committee under the Plan pursuant to such conditions or
limitations as the Committee may establish; provided, however, that only the
Committee may exercise such duties, power and authority with respect to Eligible
Recipients who are subject to Section 16 of the Exchange Act. The Committee may
exercise its duties, power and authority under the Plan in its sole and absolute
discretion without the consent of any Participant or other party, unless the
Plan specifically provides otherwise. Each determination, interpretation or
other action made or taken by the Committee pursuant to the provisions of the
Plan will be final, conclusive and binding for all purposes and on all persons,
including, without limitation, the Company, the stockholders of the Company, the
participants and their respective successors-in-interest. No member of the
Committee will be liable for any action or determination made in good faith with
respect to the Plan or any Incentive Award granted under the Plan.
3.2 AUTHORITY OF THE COMMITTEE.
(a) In accordance with and subject to the provisions of the
Plan, the Committee will have the authority to determine all provisions
of Incentive Awards as the Committee may deem necessary or desirable
and as consistent with the terms of the Plan, including, without
limitation, the following: (i) the Eligible Recipients to be selected
as Participants; (ii) the nature and extent of the Incentive Awards to
be made to each Participant (including the number of shares of Common
Stock to be subject to each Incentive Award, the exercise price and the
manner in which Incentive Awards will become exercisable) and the form
of written agreement, if any, evidencing such Incentive Award; (iii)
the time or times when Incentive Awards will be granted; (iv) the
duration of each Incentive Award; and (v) the restrictions and other
conditions to which the Incentive Awards may be subject. In addition,
the Committee will have the authority under the Plan in its sole
discretion to pay the economic value of any Incentive Award in the form
of cash, Common Stock or any combination of both.
(b) The Committee will have the authority under the Plan to
amend or modify the terms of any outstanding Incentive Award in any
manner, including, without limitation, the authority to modify the
number of shares or other terms and conditions of an Incentive Award,
extend the term of an Incentive Award, accelerate the exercisability or
otherwise terminate any restrictions relating to an Incentive Award,
accept the surrender of any outstanding Incentive Award or, to the
extent not previously exercised or vested, authorize the grant of new
Incentive Awards in substitution for surrendered Incentive Awards;
provided, however that the amended or modified terms are permitted by
the Plan as then in effect and that any Participant adversely affected
by such amended or modified terms has consented to such amendment or
modification. No amendment or modification to an Incentive Award,
however, whether pursuant to this Section 3.2 or any other provisions
of the Plan, will be deemed to be a re-grant of such Incentive Award
for purposes of this Plan.
(c) In the event of (i) any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares, rights offering,
3
<PAGE>
extraordinary dividend or divestiture (including a spin-off) or any
other change in corporate structure or shares, (ii) any purchase,
acquisition, sale or disposition of a significant amount of assets or a
significant business, (iii) any change in accounting principles or
practices, or (iv) any other similar change, in each case with respect
to the Company or any other entity whose performance is relevant to the
grant or vesting of an Incentive Award, the Committee (or, if the
Company is not the surviving corporation in any such transaction, the
board of directors of the surviving corporation) may, without the
consent of any affected Participant, amend or modify the conditions to
the exercisability of any outstanding Incentive Award that is based in
whole or in part on the financial performance of the Company (or any
Subsidiary or division thereof) or such other entity so as equitably to
reflect such event, with the desired result that the criteria for
evaluating such financial performance of the Company or such other
entity will be substantially the same (in the sole discretion of the
Committee or the board of directors of the surviving corporation)
following such event as prior to such event; provided, however, that
the amended or modified terms are permitted by the Plan as then in
effect.
4. SHARES AVAILABLE FOR ISSUANCE.
4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as
provided in Section 4.3 of the Plan, the maximum number of shares of Common
Stock that will be available for issuance under the Plan will be 2,700,000
shares of Common Stock, plus any shares of Common Stock which, as of the date
the Plan is approved by the stockholders of the Company, are reserved for
issuance under the Company's 1996 Stock Option Plan and which are not thereafter
issued or which have been issued but are subsequently forfeited and which would
otherwise have been available for further issuance under such plan. Shares
available for issuance may either be authorized but unissued shares or shares
held by the Company in its treasury. Notwithstanding any other provisions of the
Plan to the contrary, no Participant in the Plan may be granted any Options or
Stock Appreciation Rights, or any other Incentive Awards with a value based
solely on an increase in the value of the Common Stock after the date of grant,
relating to more than 200,000 shares of Common Stock in the aggregate in any
fiscal year of the Company (subject to adjustment as provided in Section 4.3 of
the Plan); provided, however, that a Participant who is first appointed or
elected as an officer, hired as an employee or retained as a consultant by the
Company or who receives a promotion that results in an increase in
responsibilities or duties may be granted, during the fiscal year of such
appointment, election, hiring, retention or promotion, Options, Stock
Appreciation Rights or such other Incentive Awards relating to up to 300,000
shares of Common Stock (subject to adjustment as provided in Section 4.3 of the
Plan).
4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive Awards will
be applied to reduce the maximum number of shares of Common Stock remaining
available for issuance under the Plan. Any shares of Common Stock that are
subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised and any shares of Common Stock that are subject
to an Incentive Award that is settled or paid in cash or any form other than
shares of Common Stock will automatically again become available for issuance
under the Plan. Any shares of Common Stock that constitute the forfeited portion
of a Restricted Stock Award, however, will not become available for further
issuance under the Plan.
4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities or other property (including cash) available for issuance or payment
under the Plan and, in order to prevent dilution or enlargement of the rights of
Participants (a) the number and kind of securities or other
4
<PAGE>
property (including cash) subject to outstanding Incentive Awards, and (b) where
applicable, the exercise price of outstanding Incentive Awards.
5. PARTICIPATION.
Participants in the Plan will be those Eligible Recipients who, in the
judgment of the Committee, have contributed, are contributing or are expected to
contribute to the achievement of economic objectives of the Company or its
Subsidiaries. Eligible Recipients may be granted from time to time one or more
Incentive Awards as may be determined by the Committee in its sole discretion.
Incentive Awards will be deemed to be granted as of the date specified in the
grant resolution of the Committee, which date will be the date of any related
agreement with the Participant.
6. OPTIONS.
6.1 GRANT. An Eligible Recipient may be granted one or more Options
under the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option.
To the extent that any Incentive Stock Option granted under the Plan ceases for
any reason to qualify as an "incentive stock option" for purposes of Section 422
of the Code, such Incentive Stock Option will continue to be outstanding for
purposes of the Plan but will thereafter be deemed to be a Non-Statutory Stock
Option.
6.2 EXERCISE PRICE. The per share price to be paid by a Participant
upon exercise of an Option will be determined by the Committee in its discretion
at the time of the Option grant; provided, however, that (a) such price will not
be less than 100% of the Fair Market Value of one share of Common Stock on the
date of grant with respect to an Incentive Stock Option (110% of the Fair Market
Value if, at the time the Incentive Stock Option is granted, the Participant
owns, directly or indirectly, more than 10% of the total combined voting power
of all classes of stock of the Company or any parent or subsidiary corporation
of the Company), and (b) such price will not be less than 85% of the Fair Market
Value of one share of Common Stock on the date of grant with respect to a
Non-Statutory Stock Option.
6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at
such times and in such installments as may be determined by the Committee in its
sole discretion at the time of grant; provided, however, that no Option may be
exercisable prior to three months from its date of grant (other than in
connection with a Participant's death or Disability) and no Incentive Stock
Option may be exercisable after 10 years from its date of grant (five years from
its date of grant if, at the time the Incentive Stock Option is granted, the
Participant owns, directly or indirectly, more than 10% of the total combined
voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company).
6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares
to be purchased upon exercise of an Option must be paid entirely in cash
(including check, bank draft or money order); provided, however, that the
Committee, in its sole discretion and upon terms and conditions established by
the Committee, may allow such payments to be made, in whole or in part, by
tender of a Broker Exercise Notice, Previously Acquired Shares, a promissory
note (on terms acceptable to the Committee in its sole discretion) or by a
combination of such methods.
6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in the
Plan and in the agreement evidencing such Option, by delivery in person, by
facsimile or electronic transmission or through the mail of written notice of
exercise to the Company (Attention: Chief Financial Officer) at its principal
executive office in Santa
5
<PAGE>
Ana, California and by paying in full the total exercise price for the shares of
Common Stock to be purchased in accordance with Section 6.4 of the Plan.
6.6 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS.
To the extent that the aggregate Fair Market Value (determined as of the date an
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by a Participant during any calendar year
(under the Plan and any other incentive stock option plans of the Company or any
subsidiary or parent corporation of the Company (within the meaning of the
Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code
from time to time), such excess Options will be treated as Non-Statutory Stock
Options. The determination will be made by taking incentive stock options into
account in the order in which they were granted. If such excess only applies to
a portion of an Incentive Stock Option, the Committee, in its discretion, will
designate which shares will be treated as shares to be acquired upon exercise of
an Incentive Stock Option.
7. STOCK APPRECIATION RIGHTS
7.1 GRANT. An Eligible Recipient may be granted one or more Stock
Appreciation Rights under the Plan, and such Stock Appreciation Rights will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion.
7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation Right
will be determined by the Committee, in its discretion, at the date of grant but
may not be less than 100% of the Fair Market Value of one share of Common Stock
on the date of grant.
7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right will become
exercisable at such time and in such installments as may be determined by the
Committee in its sole discretion at the time of grant; provided, however, that
no Stock Appreciation Right may be exercisable prior to three months from its
date of grant (other than in connection with a Participant's death or
disability) or after 10 years from its date of grant. A Stock Appreciation Right
will be exercised by giving notice in the same manner as for Options, as set
forth in Section 6.5 of the Plan.
8. RESTRICTED STOCK AWARDS.
8.1 GRANT. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee in its sole discretion. The Committee may
impose such restrictions or conditions, not inconsistent with the provisions of
the Plan, to the vesting of such Restricted Stock Awards as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Company or a Subsidiary for a certain period
or that the Participant or the Company (or any Subsidiary or division thereof)
satisfy certain performance goals or criteria.
8.2 RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in
Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting,
dividend, liquidation and other rights with respect to shares of Common Stock
issued to the Participant as a Restricted Stock Award under this Section 8 upon
the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines
otherwise in its sole discretion (either in the agreement evidencing the
Restricted Stock Award at the time of grant or at any time after the grant of
the Restricted Stock Award), any dividends or distributions (including regular
6
<PAGE>
quarterly cash dividends) paid with respect to shares of Common Stock subject to
the unvested portion of a Restricted Stock Award will be subject to the same
restrictions as the shares to which such dividends or distributions relate. In
the event the Committee determines not to pay such dividends or distributions
currently, the Committee will determine in its sole discretion whether any
interest will be paid on such dividends or distributions. In addition, the
Committee in its sole discretion may require such dividends and distributions to
be reinvested (and in such case the Participants consent to such reinvestment)
in shares of Common Stock that will be subject to the same restrictions as the
shares to which such dividends or distributions relate.
8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred
to in this Section 8, the Committee may place a legend on the stock certificates
referring to such restrictions and may require the Participant, until the
restrictions have lapsed, to keep the stock certificates, together with duly
endorsed stock powers, in the custody of the Company or its transfer agent or to
maintain evidence of stock ownership, together with duly endorsed stock powers,
in a certificateless book-entry stock account with the Company's transfer agent.
9. PERFORMANCE UNITS.
An Eligible Recipient may be granted one or more Performance Units
under the Plan, and such Performance Units will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee in its sole discretion. The Committee may impose
such restrictions or conditions not inconsistent with the provisions of the
Plan, to the vesting of such Performance Units as it deems appropriate,
including, without limitation, that the Participant remain in the continuous
employ or service of the Company or any Subsidiary for a certain period or that
the Participant or the Company (or any Subsidiary or division thereof) satisfy
certain performance goals or criteria. The Committee will have the sole
discretion to determine the form in which payment of the economic value of
vested Performance Units will be made to the Participant (i.e., cash, Common
Stock or any combination thereof) or to consent to or disapprove the election by
the Participant of the form of such payment.
10. STOCK BONUSES.
An Eligible Recipient may be granted one or more Stock Bonuses under
the Plan, and such Stock Bonuses will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee. The Participant will have all voting, dividend, liquidation and other
rights with respect to the shares of Common Stock issued to a Participant as a
Stock Bonus under this Section 10 upon the Participant becoming the holder of
record of such shares; provided, however, that the Committee may impose such
restrictions on the assignment or transfer of a Stock Bonus as it deems
appropriate.
11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event a
Participant's employment or other service with the Company and all Subsidiaries
is terminated by reason of death, Disability or Retirement:
7
<PAGE>
(a) All outstanding Options and Stock Appreciation Rights then
held by the Participant will remain exercisable, to the extent
exercisable as of the date of such termination, for a period of one
year after such termination (but in no event after the expiration date
of any such Option or Stock Appreciation Right);
(b) All Restricted Stock Awards then held by the Participant
that have not vested will be terminated and forfeited; and
(c) All Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined
by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses.
11.2 Termination for Reasons Other than Death, Disability or
Retirement.
(a) Unless otherwise provided by the Committee in its sole
discretion in the agreement evidencing an Incentive Award, in the event
a Participant's employment or other service is terminated with the
Company and all Subsidiaries for any reason other than death,
Disability or Retirement, or a Participant is in the employ or service
of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the
Company (unless the Participant continues in the employ or service of
the Company or another Subsidiary), all rights of the Participant under
the Plan and any agreements evidencing an Incentive Award will
immediately terminate without notice of any kind, and no Options or
Stock Appreciation Rights then held by the Participant will thereafter
be exercisable, all Restricted Stock Awards then held by the
Participant that have not vested will be terminated and forfeited and
all Performance Units and Stock Bonuses then held by the Participant
will vest and/or continue to vest in the manner determined by the
Committee set forth in the agreement evidencing the Performance Units
or Stock Bonuses; provided, however, that if such termination is due to
any reason other than termination by the Company or any Subsidiary for
"cause," all outstanding Options or Stock Appreciation Rights then held
by such Participant will remain exercisable, to the extent exercisable
as of such termination, for a period of three months after such
termination (but in no event after the expiration date of any such
Option or Stock Appreciation Rights).
(b) For purposes of this Section 11.2, "cause" (as determined
by the Committee) will be as defined in any employment or other
agreement or policy applicable to the Participant or, if no such
agreement or policy exists, will mean (i) dishonesty, fraud,
misrepresentation, embezzlement or deliberate injury or attempted
injury, in each case related to the Company or any Subsidiary, (ii) any
unlawful or criminal activity of a serious nature, (iii) any
intentional and deliberate breach of a duty or duties that,
individually or in the aggregate, are material in relation to the
Participant's overall duties, or (iv) any material breach of any
employment, service, confidentiality or non-compete agreement entered
into with the Company or any Subsidiary.
11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other
provisions of this Section 11, upon a Participant's termination of employment or
other service with the Company and all Subsidiaries, the Committee may, in its
sole discretion (which may be exercised at any time on or after the date of
grant, including following such termination), cause Options and Stock
Appreciation Rights (or any part thereof) then held by such Participant to
become or continue to become exercisable and/or remain exercisable following
such termination of employment or service and Restricted Stock Awards,
Performance Units and Stock Bonuses then held by such Participant to vest and/or
continue to vest or become free of transfer restrictions, as the case may be,
following such termination of employment or service in each case in the manner
determined by the Committee; provided, however, that no Option may become
exercisable prior to three months from its date of grant (other than in
connection with a Participant's death or Disability) or remain exercisable
beyond its expiration date.
8
<PAGE>
11.4 EXERCISE OF INCENTIVE STOCK OPTIONS FOLLOWING TERMINATION. Any
Incentive Stock Option that remains unexercised more than one year following
termination of employment by reason of Disability or more than three months
following termination for any reason other than death or Disability will
thereafter be deemed to be a Non-Statutory Stock Option.
11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to have
terminated on the date recorded on the personnel or other records of the Company
or the Subsidiary for which the Participant provides employment or other
service, as determined by the Committee in its sole discretion based upon such
records.
12. PAYMENT OF WITHHOLDING TAXES.
12.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct
from future wages of the Participant (or from other amounts that may be due and
owing to the Participant from the Company or a Subsidiary), or make other
arrangements for the collection of, all legally required amounts necessary to
satisfy any and all foreign, federal, state and local withholding and
employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant or exercise of an Incentive Award or a
disqualifying disposition of stock received upon exercise of an Incentive Stock
Option, or (b) require the Participant promptly to remit the amount of such
withholding to the Company before taking any action, including issuing any
shares of Common Stock, with respect to an Incentive Award.
12.2 SPECIAL RULES. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or
employment-related tax obligation described in Section 12.1 of the Plan by
electing to tender Previously Acquired Shares, a Broker Exercise Notice or a
promissory note (on terms acceptable to the Committee in its sole discretion),
or by a combination of such methods.
13. CHANGE IN CONTROL.
13.1 CHANGE IN CONTROL. For purposes of this Section 13, a "Change in
Control" of the Company will mean any of the following:
(a) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or
entity that is not controlled by the Company;
(b) the approval by the stockholders of the Company of
any plan or proposal for the liquidation or dissolution of the
Company;
(c) any person becomes after the effective date of the Plan
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of (i) 20% or more, but less than 50%, of
the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Continuity Directors (as defined in Section 13.2 below),
or (ii) 50% or more of the combined voting power of the Company's
outstanding securities ordinarily having the right to vote at elections
of directors (regardless of any approval by the Continuity Directors);
(d) a merger or consolidation to which the Company is a party
if the stockholders of the Company immediately prior to effective date
of such merger or consolidation have "beneficial ownership" (as defined
in Rule 13d-3 under the Exchange Act), immediately following the
effective date of such merger or consolidation, of securities of the
surviving corporation
9
<PAGE>
representing (i) less than 80%, but more than 50%, of the combined
voting power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors, unless
such merger or consolidation has been approved in advance by the
Continuity Directors, or (ii) 50% or less of the combined voting power
of the surviving corporation's then outstanding securities ordinarily
having the right to vote at elections of directors (regardless of any
approval by the Continuity Directors); or
(e) the Continuity Directors cease for any reason to
constitute at least a majority of the Board.
Notwithstanding anything in this Section 13.1 to the contrary, the
transfer by a Dirk Stockholder (as defined below) of shares of Common Stock or
rights to acquire shares of Common Stock to the following persons or entities,
without consideration in money or money's worth (such as by gift, bequest or
devise), and the exercise or conversion of any such transferred rights to
acquire shares, will not, in and of itself, be deemed to constitute a Change in
Control for purposes of this Section 13: (i) transfers to any spouse, child,
heir, legate or successor of such Dirk Stockholder; (ii) transfers to any trust
created for the benefit of such Dirk Stockholder or any such spouse, child,
heir, legate or successor, and amendments of or distributions from any such
trust; or (iii) transfers to any other Dirk Stockholder. A "Dirk Stockholder"
will mean Patrick J. Dirk, Mary J. Dirk, Brian P. Dirk, Suzanne M. Anderson,
Kristine L. Gigerich, Lorrie A. Brown, The Dirk 1997 Education Trust, The Dirk
Family Trust UTD March 6, 1990 or The Dirk 1998 Alaska Trust.
13.2 CONTINUITY DIRECTORS. For purposes of this Section 13, "Continuity
Directors" of the Company will mean any individuals who are members of the Board
on the effective date of the Plan and any individual who subsequently becomes a
member of the Board whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least a majority of the Continuity
Directors (either by specific vote or by approval of the Company's proxy
statement in which such individual is named as a nominee for director without
objection to such nomination).
13.3 ACCELERATION OF EXERCISABILITY. Without limiting the authority of
the Committee under Sections 3.2 and 4.3 of the Plan, if a Change in Control of
the Company occurs, then, unless otherwise provided by the Committee in its sole
discretion either in the agreement evidencing an Incentive Award at the time of
grant or at any time after the grant of an Incentive Award, (a) all Options and
Stock Appreciation Rights that have been outstanding for at least three months
will become immediately exercisable in full and will remain exercisable for the
remainder of their terms, regardless of whether the Participant to whom such
Options or Stock Appreciation Rights have been granted remains in the employ or
service of the Company or any Subsidiary; (b) all outstanding Restricted Stock
Awards will become immediately fully vested and non-forfeitable; and (c) all
outstanding Performance Units and Stock Bonuses then held by the Participant
will vest and/or continue to vest in the manner determined by the Committee and
set forth in the agreement evidencing such Performance Units or Stock Bonuses.
13.4 CASH PAYMENT. If a Change in Control of the Company occurs, then
the Committee, if approved by the Committee in its sole discretion either in an
agreement evidencing an Incentive Award at the time of grant or at any time
after the grant of an Incentive Award, and without the consent of any
Participant effected thereby, may determine that some or all Participants
holding outstanding Options will receive, with respect to some or all of the
shares of Common Stock subject to such Options, as of the effective date of any
such Change in Control of the Company, cash in an amount equal to the excess of
the Fair Market Value of such shares immediately prior to the effective date of
such Change in Control of the Company over the exercise price per share of such
Options.
13.5 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything
in Section 13.3 or 13.4 of the Plan to the contrary, if, with respect to a
Participant, the acceleration of the exercisability of an Incentive Award as
provided in Section 13.3 or the payment of cash in exchange for all or part of
an
10
<PAGE>
Incentive Award as provided in Section 13.4 (which acceleration or payment
could be deemed a "payment" within the meaning of Section 280G(b)(2) of the
Code), together with any other "payments" that such Participant has the right to
receive from the Company or any corporation that is a member of an "affiliated
group" (as defined in Section 1504(a) of the Code without regard to Section
1504(b) of the Code) of which the Company is a member, would constitute a
"parachute payment" (as defined in Section 280G(b)(2) of the Code), then the
"payments" to such Participant pursuant to Section 13.3 or 13.4 of the Plan will
be reduced to the largest amount as will result in no portion of such "payments"
being subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that if a Participant is subject to a separate agreement with the
Company or a Subsidiary that expressly addresses the potential application of
Sections 280G or 4999 of the Code (including, without limitation, that
"payments" under such agreement or otherwise will be reduced, that the
Participant will have the discretion to determine which "payments" will be
reduced, that such "payments" will not be reduced or that such "payments" will
be "grossed up" for tax purposes), then this Section 13.5 will not apply, and
any "payments" to a Participant pursuant to Section 13.3 or 13.4 of the Plan
will be treated as "payments" arising under such separate agreement.
14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of any Eligible Recipient or Participant at any time, nor
confer upon any Eligible Recipient or Participant any right to continue in the
employ or service of the Company or any Subsidiary.
14.2 RIGHTS AS A STOCKHOLDER. As a holder of Incentive Awards (other
than Restricted Stock Awards and Stock Bonuses), a Participant will have no
rights as a stockholder unless and until such Incentive Awards are exercised
for, or paid in the form of, shares of Common Stock and the Participant becomes
the holder of record of such shares. Except as otherwise provided in the Plan,
no adjustment will be made for dividends or distributions with respect to such
Incentive Awards as to which there is a record date preceding the date the
Participant becomes the holder of record of such shares, except as the Committee
may determine in its discretion.
14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or
the laws of descent and distribution or as otherwise expressly permitted by the
Plan, unless approved by the Committee in its sole discretion, no right or
interest of any Participant in an Incentive Award prior to the exercise of such
Incentive Award will be assignable or transferable, or subjected to any lien,
during the lifetime of the Participant, either voluntarily or involuntarily,
directly or indirectly, by operation of law or otherwise. A Participant will,
however, be entitled to designate a beneficiary to receive an Incentive Award
upon such Participant's death, and in the event of a Participant's death,
payment of any amounts due under the Plan will be made to, and exercise of
Options (to the extent permitted pursuant to Section 11 of the Plan) may be made
by, the Participant's legal representatives, heirs and legatees.
14.4 BREACH OF CONFIDENTIALITY OR NON-COMPETE AGREEMENTS.
Notwithstanding anything in the Plan to the contrary, in the event that a
Participant materially breaches the terms of any confidentiality or non-compete
agreement entered into with the Company or any Subsidiary, whether such breach
occurs before or after termination of such Participant's employment or other
service with the Company or any Subsidiary, the Committee in its sole discretion
may immediately terminate all rights of the Participant under the Plan and any
agreements evidencing an Incentive Award then held by the Participant without
notice of any kind. In such event, the Committee will also have the authority in
its sole discretion to rescind the exercise or vesting of any Incentive Awards
of the Participant that has occurred since a date commencing six months prior to
the date of such employment or service termination and require the Participant
to disgorge any profits (however defined by the Committee) made by the
Participant relating to such Incentive Awards or any shares issuable upon the
exercise or vesting of such Incentive Awards.
11
<PAGE>
14.5 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to modify or rescind any previously approved compensation plans or
programs of the Company or create any limitations on the power or authority of
the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.
15. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any agreements
entered into pursuant to the Plan, the Company will not be required to issue any
shares of Common Stock under this Plan, and a Participant may not sell, assign,
transfer or otherwise dispose of shares of Common Stock issued pursuant to
Incentive Awards granted under the Plan, unless (a) there is in effect with
respect to such shares a registration statement under the Securities Act and any
applicable state or foreign securities laws or an exemption from such
registration under the Securities Act and applicable state or foreign securities
laws, and (b) there has been obtained any other consent, approval or permit from
any other regulatory body which the Committee, in its sole discretion, deems
necessary or advisable. The Company may condition such issuance, sale or
transfer upon the receipt of any representations or agreements from the parties
involved, and the placement of any legends on certificates representing shares
of Common Stock, as may be deemed necessary or advisable by the Company in order
to comply with such securities law or other restrictions.
16. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at
any time, and may amend the Plan from time to time in such respects as the Board
may deem advisable in order that Incentive Awards under the Plan will conform to
any change in applicable laws or regulations or in any other respect the Board
may deem to be in the best interests of the Company; provided, however, that no
amendments to the Plan will be effective without approval of the stockholders of
the Company if stockholder approval of the amendment is then required pursuant
to Section 422 of the Code or the rules of any stock exchange or Nasdaq or
similar regulatory body. No termination, suspension or amendment of the Plan may
adversely affect any outstanding Incentive Award without the consent of the
affected Participant; provided, however, that this sentence will not impair the
right of the Committee to take whatever action it deems appropriate under
Sections 3.2, 4.3 and 13 of the Plan.
17. EFFECTIVE DATE AND DURATION OF THE PLAN.
The Plan is effective as of April 21, 1998, the date it was adopted by
the Board. The Plan will terminate at midnight on April 21, 2008, and may be
terminated prior to such time to by Board action, and no Incentive Award will be
granted after such termination. Incentive Awards outstanding upon termination of
the Plan may continue to be exercised in accordance with their terms.
18. MISCELLANEOUS.
18.1 GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Delaware, notwithstanding the conflicts of laws
principles of any jurisdictions.
18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to
the benefit of the successors and permitted assigns of the Company and the
Participants.
12
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