<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----- -----
COMMISSION FILE NUMBER 000-28473
TRUETIME, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER 94-3343279
JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
2835 DUKE COURT
SANTA ROSA, CALIFORNIA 95407
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(707) 528-1230
(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 [ ] No [X]
There were 5,950,000 shares of the Registrant's Common Stock
outstanding as of the close of business on February 11, 2000.
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TRUETIME, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
NUMBER
-------
<S> <C> <C>
Item 1. Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS AND NOTES
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
TrueTime, Inc.
We have reviewed the accompanying balance sheet of TrueTime, Inc. as of December
31, 1999, and the related statement of operations, of stockholders' equity and
of cash flows for the three months ended December 31, 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the aforementioned financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of September 30, 1999, and the related
statements of operations, of changes in stockholders' equity, and of cash flows
for the year then ended (not presented herein) and, in our report dated November
2, 1999, except for footnote 8, as to which the date is December 1, 1999, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of September 30,
1999, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
3
San Francisco, California
February 10, 2000
<PAGE> 4
TrueTime, Inc.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 3,539 $ 10,291
Receivable from OYO Corporation U.S.A. ................. 433 409
Accounts receivable
Trade ................................................ 4,281 4,221
Less allowance ....................................... (10) (25)
Other accounts receivable ............................ 43
Deferred income tax .................................... 173 190
Inventories ............................................ 5,065 5,660
Prepaid expenses and other assets ...................... 24 289
---------- ----------
Total current assets ................................. 13,547 21,036
Property and equipment, net ............................................... 1,128 1,472
Goodwill, net of accumulated amortization of $215 and $221 ................ 817 810
---------- ----------
Total assets ......................................... $ 15,491 $ 23,317
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable ................................. $ 767 $ 2,081
Accrued expenses ....................................... 1,971 1,424
Total current liabilities ............................ 2,738 3,505
---------- ----------
Commitments and contingencies
Stockholder's equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding ........... -- --
Common stock, $.01 par value, 20,000,000
authorized; 4,000,000 and 5,500,000 shares issued
and outstanding, respectively .......................... 40 55
Additional paid-in capital ............................. 4,690 11,239
Additional paid-in capital - Warrants and options ...... 0 43
Retained earnings ...................................... 8,023 8,475
---------- ----------
Total stockholder's equity ........................... 12,753 19,812
---------- ----------
Total liabilities and stockholder's equity ........... $ 15,491 $ 23,317
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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TrueTime, Inc.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
December 31, 1998 December 31, 1999
<S> <C> <C>
Sales ................................................. $ 3,304 $ 5,556
Cost of Sales ......................................... 1,733 2,582
------------- -------------
Gross Profit .......................................... 1,571 2,975
Operating Expenses
Sales, General and
Administrative ................ 843 1,539
Research & Development ........ 559 777
------------- -------------
Total operating expenses ... 1,402 2,316
------------- -------------
Income from Operations ................................ 169 658
Interest Income ....................................... 71 108
Other Income (Expense) ................................ (12) 0
------------- -------------
Income before taxes ................................... 228 767
Income taxes .......................................... 92 314
------------- -------------
Net Income ............................................ $ 136 $ 452
============= =============
Weighted average shares outstanding - Basic ........... 4,000,000 4,228,261
Weighted average shares outstanding - Diluted ......... 4,000,000 4,301,523
Basic Earnings Per Share .............................. $ 0.034 $ 0.107
Diluted Earnings Per Share ............................ $ 0.034 $ 0.105
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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TrueTime, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
----------------- Capital Earnings Total
Shares Amount
<S> <C> <C> <C> <C> <C>
Stockholders' equity as of October 1, 1999 ............. 4,000,000 $ 40 $ 4,690 $ 8,023 $ 12,753
Issuance of common stock ............................... 1,500,000 15 6,549 $ 6,564
Issuance of warrants and options ....................... 43 43
Issuance of options and warrants to underwriters ....... -- -- -- -- --
Net income ............................................. 452 452
------------ --------- --------- --------- ----------
Stockholders' equity as of December 31, 1999 .......... 5,500,000 $ 55 $ 11,282 $ 8,475 $ 19,812
============ ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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TrueTime, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
ended December ended December
31, 1998 31, 1999
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 135 $ 452
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes .............................. 57 (17)
Depreciation and amortization ...................... 82 104
Compensation expense related to options
granted ............................................ 0 43
Effects of changes in operating assets and
liabilities
Receivables ............................ 982 118
Inventories ............................ 26 (595)
Prepaid expenses and other
current assets ......................... (42) (265)
Trade accounts payable ................. (42) 1,314
Accrued expenses ....................... (552) (547)
----------- -----------
Net cash provided by operating activities ..................... 646 606
Cash flows from investing activities:
Decrease (increase) in receivable from OYO Corporation
U.S.A. .......................................................... (232) 23
Capital expenditures ............................................ (50) (441)
----------- -----------
Net cash used in investing activities ......................... (282) (418)
Cash flows from financing activities
Proceeds of Initial Public Offering
Common stock, $.01 par value, 1,500,000 shares .................. 0 15
Additional paid in capital, net of commissions .................. 0 6,960
Costs of Offering ............................................... 0 (411)
----------- -----------
Net cash provided by financing activities ..................... 0 6,564
----------- -----------
Increase in cash and cash equivalents ............................................... 364 6,752
Cash and cash equivalents, beginning of period ...................................... 38 3,539
----------- -----------
Cash and cash equivalents, end of period ............................................ $ 402 $ 10,291
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
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TRUETIME, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet of TrueTime, Inc. at September 30, 1999 has been derived from
the Company's audited financial statements at that date. The balance sheet at
December 31, 1999, the statement of operations, the statement of shareholders'
equity and the statement of cash flows for the three months ended December 31,
1999 and 1998 have been prepared by the Company, without audit. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows have been made. The results of operations for the three months ended
December 31, 1999 and 1998 are not necessarily indicative of the operating
results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been omitted. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's Prospectus dated December 16, 1999.
2. EARNINGS PER COMMON SHARE
The following table summarizes the calculation of net earnings and weighted
average common shares and common equivalent shares outstanding for purposes of
the computation of earnings per share:
TrueTime, Inc.
EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended Three months ended
December 31, 1998 December 31, 1999
<S> <C> <C>
Net earnings available to common stockholders
(in thousands) ........................................ $ 136 $ 452
========== ==========
Weighted average common shares outstanding ............ 4,000,000 4,228,261
Weighted average common share equivalents
Outstanding ........................................... 0 73,262
---------- ----------
Weighted average common shares and common share
equivalents outstanding ............................... 4,000,000 4,301,523
========== ==========
Basic earnings per common share ....................... $ 0.03 $ 0.11
========== ==========
Diluted earnings per common share ..................... $ 0.03 $ 0.11
========== ==========
</TABLE>
3. INVENTORIES
Inventories consisted of the following (in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1999
<S> <C> <C>
Finished goods $ 948 $ 1,085
Work in process 1,376 1,567
Raw material 2,741 3,008
---------- ----------
$ 5,065 $ 5,660
========== ==========
</TABLE>
4. INITIAL PUBLIC OFFERING
On November 1, 1999, the Company was reincorporated in Delaware with 4,000,000
shares of common stock outstanding. On December 16, 1999, the Company completed
its Initial Public Offering (the "IPO") in which the Company sold 1,500,000
shares of common stock at $5.00 per share and the Company's owner, OYO
Corporation U.S.A. sold 1,500,000 shares of common stock at $5.00 per share. The
Company received $6,564,118 after commissions of $525,000 and expenses of
$410,882. See PART II: OTHER INFORMATION, ITEM 2. Changes in Securities and Use
of Proceeds.
8
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5. SUBSEQUENT EVENT
On January 6, 2000, the Company's underwriters exercised their overallotment
option and purchased an additional 450,000 shares of the Company's common stock
at $5.00 per share. The Company received $2,250,000 in gross proceeds from this
exercise. The proceeds from this exercise and the dilution in earnings per share
will be reflected in future financial statements.
6. STOCK OPTIONS
The Company's employees participate in the TrueTime, Inc. Key Employee Stock
Option Plan (the "Employee Plan") and the non-employee directors and consultants
participate in the TrueTime, Inc. 1999 Non-Employee Director Plan (the "Director
Plan"). The Employee Plan covers substantially all eligible employees in the
United States.
The Employee Plan is administered by a committee of no fewer than two persons
appointed by the board. Under the Employee Plan, options to purchase common
stock and restricted stock awards up to an aggregate of 1,500,000 shares of
common stock may be granted by the committee. Under the Director Plan, options
to purchase common stock and restricted stock awards up to an aggregate of
150,000 shares of common stock may be granted.
In connection with its IPO, the Company granted the underwriters a 30-day option
to purchase up to 450,000 additional shares at $5.00 per share to cover
over-allotments. Such option was exercised and the 450,000 additional shares
were issued on January 6, 2000. As additional underwriting compensation, the
Company issued to C.E. Unterberg, Towbin warrants to purchase up to 200,000
shares of common stock at an initial exercise price for each share of $5.50.
A summary of activity with respect to stock options and warrants is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
--------- ------------
<S> <C> <C>
Outstanding at October 1, 1999 -- --
Granted 1,460,000 $ 5.07
Exercised -- --
Forfeited -- --
Outstanding at December 31, 1999 1,460,000 $ 5.07
</TABLE>
The following table summarizes information about stock options and warrants
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Term Exercise Exercise
Exercise Price Shares (in years) Price Shares Price
-------------- --------- ---------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$5.00 - $5.50 1,460,000 6.08 $5.07 60,000 $5.00
</TABLE>
The Company accounts for these options and warrants in accordance with Statement
of Financial Accounting Standards (FAS) Number 123, Accounting for Stock Based
Compensation. As permitted by FAS 123, the Company has chosen has to apply APB
Opinion Number 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its Employee Plan. Accordingly, no
compensation cost has been recognized for options granted under this plan.
9
<PAGE> 10
7. INCOME TAXES
Prior to the offering, the Company joined in the consolidated U.S. income tax
return of its parent, OYO Corporation U.S.A. which included all wholly owned
U.S. subsidiaries of OYO Corporation (Japan) and in the consolidated California
state income tax return, which included all subsidiaries that are included in
the consolidated U.S. income tax return. Federal and state income taxes were
provided by the Company as if it filed separate income tax returns.
After the Offering, the Company will be filing independent U.S. income tax and
California income tax returns.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition and results of operations of
TrueTime, Inc. should be read in conjunction with the Financial Statements and
Notes related thereto included elsewhere in this Form 10-Q.
GENERAL
TrueTime designs, develops, manufactures and markets precision time and
precision frequency products that are essential components used in
telecommunications, computer networking, e-commerce, aerospace and various other
commercial markets. Our products use a variety of external timing references,
including most importantly the Global Positioning System, or GPS, together with
advanced electronic circuitry and software to provide high quality signals and
precise time. We offer a wide variety of products, which can be divided into the
following broad categories:
o precise time and frequency products
o computer plug-in cards with precise timing capabilities
o computer network time servers
o time code products
o time displays
Our products, incorporated as components in complex systems, allow customers to
o improve clarity and quality of voice, video and data in wireline,
wireless and satellite communications,
o authenticate the time of stock market and other e-commerce
transactions,
o monitor and control the frequency of electric utility power grids to
prevent power black-outs and quickly locate power line faults,
o transmit television signals at designated frequencies to meet
regulatory requirements,
o meet requirements for secure communications, particularly in national
defense and security contexts, and
o time high resolution data collected in military ranges and in space
launches with a high degree of accuracy.
During the past decade, we have strived to produce state-of-the-art
precise time and frequency technology. We have developed and implemented five
generations of precision time products based on Global Positioning System, or
GPS, technology through the use of our significant technology resources in the
areas of GPS, frequency control, real-time operating systems and computer
networking. Our increased investments in research and development have allowed
us to develop a new platform -- a combination of new hardware and software --
for many products, decrease time to market for new products and improve product
quality and robustness. Our new platform also provides a means through which
TrueTime can enter new markets. Advanced technologies also offer opportunities
to reduce manufacturing costs and support expenses by increasing volumes of
common products.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth for three months ended December 31, 1999
and 1998, the percentage of income statement items to total sales:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
<S> <C> <C>
Sales .................................................... 100.0% 100.0%
Cost of sales ............................................ 46.5 52.5
Gross profit ............................................. 53.5 47.5
Operating expenses:
Selling, general and administrative .................. 27.7 25.5
Research and development ............................. 14.0 16.9
Total operating expenses ......................... 41.7 42.4
Income from operations ................................... 11.8 5.1
Interest and other income, net ........................... 2.0 1.8
Income before income taxes ............................... 13.8 6.9
Provision for income taxes ............................... 5.7 2.8
Net income ............................................... 8.1% 4.1%
</TABLE>
Three Months Ended December 31, 1999 compared to Three Months Ended December 31,
1998
Sales. Sales for the quarter ended December 31, 1999 were $5.6 million,
an increase of $2.3 million, or 68.2%, from $3.3 million for the quarter ended
December 31, 1998. This increase in sales is attributed to the large amount of
existing orders ($4.5 million) which was carried into the fiscal year 2000,
reflecting the fact that shipments and, therefore, revenue recognized are not
linear on a quarterly basis for our business. In particular, a large U.S.
government communications order increased the sales in the fourth fiscal quarter
of fiscal 1999 and helped increase the outstanding orders as of September 30,
1999. The long procurement cycles for government and institutional orders and
the ordering and approval processes for government orders continue to produce
irregular order patterns including the high level of orders in the fourth
quarter of fiscal 1999.
Cost of Sales. Cost of sales for the quarter ended December 31, 1999
was $2.6 million, an increase of $0.9 million, or 49.0%, from $1.7 million for
the quarter ended December 31, 1998. Cost of sales decreased as a percentage of
total sales to 46.5% in the quarter ended December 31, 1999 from 52.5% in the
quarter ended December 31, 1998. Such percentage decrease is the result of the
efficiencies of the increased sales volumes which enabled the company to obtain
cost of sales closer to its long-term averages.
Operating Expenses. Operating expenses for the quarter ended December
31, 1999 were $2.3 million, an increase of $0.9 million, or 65.2%, from $1.4
million for the quarter ended December 31, 1998. Operating costs decreased as a
percentage of total sales to 41.7% in the quarter ended December 31, 1999 from
42.4% in the quarter ended December 31, 1998. Such percentage decrease is the
result of the sales volumes which increased faster than the operating expenses
increased.
Interest and Other Income. Interest and Other Income for the quarter
ended December 31, 1999 were $108,000, an increase of $49,000, or 83.0% from
$59,000 for the quarter ended December 31, 1998. Interest and Other Income
increased as a percentage of total sales to 2.0% in the quarter ended December
31, 1999 from 1.8% in the quarter ended December 31, 1998. Such percentage
increase is the result of increased interest income from increased cash deposits
as a result of the IPO proceeds.
Income Taxes. Income taxes for the quarter ended December 31, 1999 were
40.9% of income before tax compared to 40.4% of income before tax for the
quarter ended December 31, 1998. Income taxes include federal and state income
taxes and are included on an estimated basis. Our effective income tax rate
differs from the statutory federal rate of 34% primarily as a result of the
effect of state income taxes.
LIQUIDITY AND SOURCES OF CAPITAL
TrueTime completed its initial public offering (the "Offering") of its
common stock on December 22, 1999. As of December 31, 1999, the gross proceeds
to TrueTime were $7,500,000; $6,975,000 after commissions; and $6,564,000 after
commissions and expenses. Proceeds from the sale of the over-allotment option
in January 2000 is not included.
11
<PAGE> 12
Net cash flow excluding the proceeds from the Offering resulted in a
increase in cash of $188,000. Operating activities produced cash flow of
$606,000. Cash was produced primarily by net income of $452,000, increases in
accounts payable of $1,314,000, decreases in accounts receivable of $118,000,
and increases in accrued income taxes payable of $314,000. Cash was used
primarily by increased inventories of $595,000, increased prepaid expenses of
$265,000, and reduced other accrued expenses including bonuses and accrued
payroll expenses of $861,000.
Investing activities used cash in the amount of $418,000. This was
mostly spent on capital expenditures of $441,000.
SUBSEQUENT EVENT
On January 6, 2000, TrueTime's underwriters exercised their
overallotment option and purchased an additional 450,000 shares of the Company's
common stock at $5.00 per share. Gross proceeds to TrueTime were $2,250,000 and
$2,092,500 after commissions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS is effective for all fiscal quarters of fiscal years beginning after June
15, 2000 and is not expected to have a material impact on the Company's
financial statements.
YEAR 2000 READINESS
At the transition between December 31, 1999 and January 1, 2000, there
were concerns that certain computers and information technology equipment might
not continue to work properly. In particular, there were concerns that programs
and data using six-digit dates such as 12/31/99, which should convert to
01/01/00, would fail to do so or would fail to properly process data
thereafter. Similar problems were suspected at the GPS Week Number Roll-Over
(WNRO) which occurred August 21, 1999 when the GPS week counter rolled over from
1024 to 0000 as it was designed to do, and on September 9, 1999 which was a
common program test date. February 29, 2000, which is an unusual leap day, is
also of some concern. Most century years such as 1800, 1900 and 2100 do not have
leap days. These groups of problems are known collectively as Y2K. Three of
these dates have already occurred without significant effects to the company.
GPS WNRO. No significant problems were found with the GPS WNRO. A small
number of customers who had older TrueTime products and had not checked their
equipment did later report their products failed to report the proper date and
have contacted TrueTime to have their products updated. There were no claims
against us and the cost of servicing the customers was not material.
9/9/99 Test Date. No problems have been reported related to the 9/9/99
test date.
Y2K Rollover. A small number of customers with older equipment who had
not checked their equipment and some time code equipment reported that their
equipment did not have the correct date as of January 1, 2000. These customers
have contacted TrueTime to have their equipment updated. There were no claims
against us and the cost of servicing the customers was not material.
2/29/2000 Leap Day. We do not anticipate any serious problems on
February 29, 2000.
State of Readiness. We have completed extensive efforts related to
operations and products for Y2K.
Products. Our Y2K product effort has included the purchase of a GPS
simulator, the staffing of dedicated test program, testing of new and old
products, notification on the Internet of the status of each of our products,
and the modification and upgrade of products as appropriate. In some cases, we
provide modifications and upgrades at no charge. In other cases, a modest charge
for the modifications and upgrades is made to the customer. We have been
conducting our Y2K product program since November 1997 and believe all
significant products have been tested and the results have been reported.
Modifications and upgrades to old products will continue into the fiscal year
2000 as customers request their units be adjusted.
12
<PAGE> 13
Product Costs. We have spent approximately $200,000 in each of fiscal
years 1998 and 1999 on our Y2K product efforts. We estimate that we will spend
$200,000 in fiscal year 2000 on our Y2K product efforts. Such costs are
accounted for in the selling, general and administrative costs.
Insurance. We have reviewed our guarantee and warranty provisions and
determined that our exposure is limited to the original purchase prices of
equipment bought by our customers. We have specifically declined to indemnify,
hold harmless or be responsible for consequential damages when requested by
customers. We have evaluated our liability insurance and determined that Y2K
liability is explicitly excluded from insurance coverage and cannot be
reasonably added to our insurance coverages.
Operations. Our Y2K operations efforts have included supplier
assessments, internal information technology (or IT) assessments and
modifications and upgrades, IT vendor assessments and internal systems
assessments.
We have surveyed key suppliers and have received assurances that we
will continue to receive our uninterrupted supplies of goods and services.
We have, or have had, evaluated our internal information systems,
including network hardware and software and user hardware and software. Numerous
components were found to be non-Y2K compliant. We have purchased and installed
upgrades, modifications and replacements. A small number of non-critical
workstations were planned for replacement. The hardware has been purchased and
the installation is now complete.
IT vendors such as our value added reseller that provides electronic
data interchange services, its Internet service provider and payroll processing
provider have been surveyed and assure us that we will continue to receive
uninterrupted services.
Internal systems including heating, ventilation and air conditioning,
alarm systems and process controls have been evaluated and found not to have Y2K
problems. The compliance of test equipment was completely evaluated during
October 1999.
We maintain a disaster recovery program, including tape back-up on IT
systems and other measures, that is applicable to any Y2K problems or other
disaster. We believe the program is adequate to prevent unrecoverable losses
from any disaster.
Operations Costs. We estimate we have spent about $100,000 in the
fiscal year 1998 and $200,000 in the fiscal year 1999 on our Y2K operations
efforts. We estimate that we will spend less than $100,000 in the fiscal year
2000 on our Y2K operations efforts. The costs of our Y2K operations efforts are
accounted for in selling, general and administrative costs.
International Risks. We have about 15% of our installed base in
international locations and receive approximately 5% of our materials directly
from international locations. From our evaluations, the risks in the
international locations are similar to those in domestic locations because our
customers in these areas have up-to-date equipment and we do not have many
international vendors.
Risks. Should we not fully complete our efforts related to operations
and products, the results could include disruptions in business, lost revenue,
increased operating costs, loss of customers and other business interruptions,
any of which could have a material adverse effect on our business, financial
condition and results of operations.
The foregoing statements of this subsection are intended to be and are
hereby designated "Year 2000 Readiness Disclosure" statements within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
FORWARD LOOKING STATEMENTS
This Form 10-Q includes "forward-looking" statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included herein, including statements regarding potential future products and
markets, the Company's future financial position, business strategy and other
plans and objectives for future operations, are forward-looking statements. We
can give no assurance that such expectations will prove to have been correct,
and actual results may differ materially from such forward-looking statements.
Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed below and in the Company's Registration
Statement on Form S-1 (Reg. No. 333-90269), as amended, filed with the
Securities and Exchange Commission under the heading "Risk Factors" and
elsewhere. Further, all written and verbal forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
13
<PAGE> 14
Our business will suffer if we are unable to keep up with rapid technological
change and product obsolescence.
If we fail to maintain our technological leadership and good reputation
with our customers in the areas of GPS, real-time operating systems and network
technologies, the value of your investment will decrease. The markets for timing
and frequency products are characterized by continual and rapid technological
developments that have resulted in, and will likely continue to result in,
substantial improvements in product function and performance. Our success will
depend on our ability to anticipate changes in technology and industry
requirements and to respond to technological developments on a timely basis,
either internally or through strategic alliances.
We will likely be constantly threatened by current competitors or new
market entrants who may develop new technologies or products or establish new
standards that could render our products obsolete and unmarketable. Thus, we can
offer no assurances that we will be successful in developing and marketing, on a
timely and cost effective basis, product enhancements or new products that
respond to technological developments, that are accepted in the marketplace or
that comply with industry standards.
We rely on a limited number of suppliers for certain critical components, and we
use a single supplier for virtually all of one of our GPS-based components,
making us subject to supply and quality control problems.
Most of our products incorporate certain components or technology
supplied in part by third parties. From time to time, we experience delays and
disruptions in our supply chain, including some such disruptions in recent
periods. To date, these delays and disruptions have not materially adversely
affected our business. Wherever possible, we try to develop multiple sources of
supply, but we do not always succeed. To the extent that we experience
significant supply or quality control problems with our vendors, these problems
can cause us to have difficulty in controlling our quality and can have a
significant adverse effect on our ability to meet future production and delivery
commitments to our customers.
Currently, Trimble Navigation Limited provides virtually all of a key
component for our GPS-based products. In addition, we believe that Trimble has
begun competing in markets similar to our own. While we have attempted to
address this single-supplier risk by entering into purchase agreements with
Trimble that will secure our supply of the components for the next year or so,
by attempting to establish alternative supply arrangements and by taking steps
to develop our own proprietary products in this area, there can be no assurances
that we will be able to obtain adequate supplies of this component in the
future. If we are unable to obtain adequate supplies of this component for any
reason, we will likely experience delays or reductions in production and
increased expenses while we redesign our GPS-based products or accelerate the
introduction of new GPS-based products that do not use this component. Our
operations will be negatively affected if we experience inadequate supplies of
any key components.
Our trade secrets, trademarks and patents may not be adequate or enforceable and
others may use our proprietary technology.
Historically, we have not filed patents to protect our intellectual
property. While we hope our intellectual property is adequately protected by our
confidential trade-secret protection plans and programs, we cannot be sure that
our competitors will be prevented from gaining access to our proprietary and
confidential technologies. Furthermore, although we have applied for a patent
related to a computer network timing product, we can offer no assurances that a
patent will be issued for this patent application or other future applications
and, if issued, that any patents will be enforceable. If the protection of our
intellectual property proves to be inadequate or unenforceable, others may use
our proprietary developments without compensation to us and in competition
against us, giving cost advantages to our competitors.
We face the risk of litigation alleging our infringement of other people's
intellectual property rights.
We do not know of any instances where our products violate the
intellectual property rights of others or inappropriately use their technology.
However, technology-based companies are often very litigious. Therefore, we face
the risk of adverse claims and litigation alleging infringement of other
people's intellectual property rights. These claims could result in costly
litigation and divert management's attention from other matters. Alternatively,
these claims could practically require us to obtain licenses in order to use,
manufacture and sell certain of our products, regardless of the merits of the
infringement claims, in order to maintain business levels or we could otherwise
be excluded from participation in certain markets. We cannot be certain that any
necessary licenses will be available or that, if available, they can be obtained
on reasonable terms acceptable to us.
14
<PAGE> 15
Our competitors may use their greater resources and broader product offerings to
increase competition and reduce our sales and profitability.
Many of our existing and potential competitors have substantially
greater marketing, financial and technical resources than we have. In addition,
some of our competitors have broader product offerings and manufacture
internally certain critical components of time and frequency products.
Currently, we do not have a complete offering of precise time and frequency
products nor do we manufacture internally certain critical components, placing
us at a disadvantage to some of our competitors. In addition, we believe that
some of our competitors have obtained and maintained business that loses money -
"loss leading" - in order to maintain a competitive advantage with regard to
specific customers or products. If our competitors were to use such tactics in
the future, we would be unable to maintain our market position without incurring
a negative impact on our profitability.
The race for a leading position in new technological advances is always
very competitive. Advances in technology may reduce the cost for potential
competitors to gain market entry, particularly for less expensive time and
frequency products. We cannot assure you that sales of our products will
continue at current volumes or prices in any event, but especially if our
current competitors or new market entrants introduce new products with better
features, better performance or lower prices or having other characteristics
that are more attractive than our own. Competitive pressures or other factors
also may result in significant price competition that could have a material
adverse effect on our results of operations.
Our industry may not grow as forecasted and our revenues and operating results
may be diminished.
Our future successful performance is inextricably tied to the growth of
our industry. Even if our industry grows as forecast, there can be no assurance
that we will be able to grow consistently with our industry.
Our relationships with our sales representatives could be impaired and cause us
to lose orders.
More than 80% of our orders come through our 26 domestic and worldwide
sales representative organizations. Many of these representatives act as
relationship brokers and the loss of any key representatives could have a
negative effect on our sales.
We may be unable to attract and retain key employees, delaying product
development and manufacturing.
Our success depends upon attracting and retaining highly skilled
professionals. A number of our employees are highly skilled engineers and other
technical professionals, and our failure to continue to attract and retain such
individuals could adversely affect our ability to compete in the industry. In
addition, our success will depend to a significant extent upon the abilities and
efforts of several members of our senior management.
Because many of our key customers are units of the U.S. government and entities
that are dependent upon U.S. government funding for purchases, decreased
government spending could adversely affect our business.
Our defense, military and aerospace based business depends largely on
U.S. government expenditures, whether directly with us or indirectly with our
customers who contract with the U.S. government. In recent years, units of the
U.S. government have collectively accounted for approximately 21% to 28% of our
annual revenues. There can be no assurances as to whether future governmental
spending will adequately support our business in those areas, and substantial
decreases in government spending or loss of U.S. governmental customers could
materially and adversely affect our operations.
Our marked is segmented into a limited number of customer groups, the loss or
change of which could significantly decrease our sales.
While we sell our products to a large number of individual customers,
the number of customer groups is limited. These groups include
telecommunications, computer networking, aerospace, military, satellite, U.S.
government and power utility customers. The loss, or changes in the purchasing
behavior, of one or more of these groups of customers could cause a material
decrease in the sale of our products.
The failure of GPS and other time and frequency references would cause our
products to fail to perform to specification.
The time and frequency products that we manufacture rely upon the
availability of highly accurate timing refernces, primarily GPS operated by the
U.S. Department of Defense, and to a lesser degree, other timing references
operated by the U.S. National Institute of Science and Technology and other
outside signal sources. The failure of these timing references, particularly
GPS, would create many problems for our products and our customers and seriously
disrupt the sale of our products.
15
<PAGE> 16
Our products could fail to perform according to specification or prove to be
unreliable, causing damage to our customer relationships and industry reputation
and resulting in loss of sales.
Our customers require demanding specifications for product performance
and reliability. Because our precision time and frequency products are complex
and often use state-of-the-art components, processes and techniques, undetected
errors and design flaws may occur. Product defects result in higher product
service and warranty and replacement costs and may cause serious damage to our
customer relationships and industry reputation, all of which will negatively
impact our sales and business.
If we are unable to expand our production capacity to maintain competitive
delivery times, we will likely lose customers.
Our production capacity and ability to fill orders for our customers on
a timely basis is limited by our equipment, the size of our production
facilities, the ability of our suppliers to meet our needs and our human
resources. These resources in turn are limited by the availability of capital
and the time required to increase capacity, particularly to construct additional
facilities and to hire and train employees. We cannot assure you that we will
have sufficient capital and resources to expand our production capacity and to
maintain delivery times which our customers consider appropriate. Further, an
increase in our delivery times may result in loss of customers.
Our results of operations will be adversely affected if we do not have enough
demand for our products to justify our increased capacity.
To meet our goals for future growth, we plan to move into new, larger
manufacturing and office facilities in fiscal 2000, using a portion of our
working capital to build out and equip the new facilities. The additional
manufacturing capacity provided by the new facilities and equipment will allow
us to more than double our output given sufficient market demand. However, after
increasing our production capacity, we may find that demand for our products
does not remain sufficiently high for us to realize a satisfactory return on the
capital we have spent to increase capacity.
Fluctuations in quarterly performance can result in increases in our inventory
and related carrying costs, can diminish our operating results and cash flow and
can result in a lower TrueTime stock price.
Historically, the rate of incoming orders for our products has varied
substantially from quarter to quarter. In past fiscal years, our highest sales
quarter has been as much as 250% of our lowest sales quarter. This quarter to
quarter variation is not seasonal or predictable. We attempt to accurately
forecast orders for our products and commence purchasing and manufacturing prior
to the receipt of such orders. However, it is highly unlikely that we will
consistently accurately forecast the timing and rate of orders. This aspect of
our business makes our planning inexact and, in turn, affects our shipments,
costs, inventories, operating results and cash flow for any given quarter. In
addition, our quarterly operating results are affected by competitive pricing,
announcements regarding new product developments and cyclical conditions in the
industry. Accordingly, we may experience wide quarterly fluctuations in our
operating performance and profitability, which may adversely affect our stock
price even if our year to year performance is more stable, which it also may not
be. In addition, many of our products require significant manufacturing time,
making it difficult to increase production on short notice. If we are unable to
satisfy unexpected customer orders, our business and customer relationships
could suffer.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We will be exposed to market risks related to changes in interest rates
in the future. Proceeds from our initial public offering are invested in short
term financial instruments, the value of which is subject to interest rate risk
and could fall if interest rates rise. Additionally, while we have no plans for
future borrowings, any future borrowings will likely have a variable rate
component that will fluctuate as interest rates change. If market interest rates
were to increase immediately and uniformly by 10%, there would not be a material
effect on the results of operations or on our balance sheet because we currently
have no debt.
16
<PAGE> 17
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company is a party to legal proceedings arising
in the ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the results
of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) The Company commenced an initial public offering (the "Offering")
of its common stock, par value $.01 per share ("Common Stock") on December 16,
1999 pursuant to a Registration Statement on Form S-1 (Registration No.
333-90269) (the "Registration Statement"), which was declared effective by the
Securities and Exchange Commission on December 16, 1999. The Offering was
terminated upon the sale of all of the securities covered by the Registration
Statement. The managing underwriters in the Offering were C.E. Unterberg,
Towbin, Cruttenden Roth Incorporated and Pennsylvania Merchant Group. In the
Offering, an aggregate of 3,450,000 shares of Common Stock were registered,
1,950,000 for the account of the Company and 1,500,000 for the account of OYO
Corporation U.S.A. ("OYO"). All of the securities registered in the Offering
have been sold at an initial public offering price of $5.00 per share for gross
proceeds to the Company of $9,750,000 and gross proceeds of $7,500,000 to OYO.
From the effective date of the Registration Statement through December 31, 1999,
the Company incurred approximately $935,882 in expenses in connection with the
issuance and distribution of the securities registered in the Offering,
including approximately $229,251 paid to Fulbright & Jaworski L.L.P., counsel to
the Company, and approximately $525,000 paid to C.E. Unterberg, Towbin. In
addition, during the three months ended December 31, 1999, the Company paid
Fulbright & Jaworski L.L.P. approximately $3,682 for services not related to the
Offering. Mr. Charles H. Still, a partner of Fulbright & Jaworski L.L.P., and
Mr. A. Robert Towbin, the Co-Chairman of C.E. Unterberg, Towbin, are each a
director of the Company.
$7,500,000 in gross proceeds of the Offering was received by the Company as of
December 31, 1999. The approximate expenses of the Offering to the Company as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions $ 525,000
Finders' fees 0
Expenses paid to or for underwriters 0
Other expenses 410,882
----------
Total expenses to the Company $ 935,882
----------
Net Offering proceeds to the Company $6,564,118
----------
</TABLE>
An additional $2,250,000 in gross proceeds of the Offering was received
in January 2000.
From the effective date of the Registration Statement through December
31, 1999, the Company invested the net proceeds of the Offering in short-term
money market investments. Future uses of the proceeds include expansion of
capacity and funding working capital requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this Quarterly Report.
Exhibit Number Description
-------------- -----------
10.1 TrueTime, Inc. 1999 Non-Employee Director
Plan, as amended as of December 16, 1999
11.1 Statement re Computation of Earnings per
Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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<PAGE> 19
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 hereunto duly authorized.
TRUETIME, INC.
By: /s/ ELIZABETH A. WITHERS
-------------------------------------
Elizabeth A. Withers
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ MICHAEL P. VON DER PORTEN
-------------------------------------
Michael P. Von der Porten
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 14, 2000
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.1 TrueTime, Inc. 1999 Non-Employee Director Plan, as amended as
of December 16, 1999
11.1 Statement re Computation of Earnings per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
As amended as of December 16, 1999
TRUETIME, INC.
1999 NON-EMPLOYEE DIRECTOR PLAN
<PAGE> 2
TRUETIME, INC. 1999 NON-EMPLOYEE DIRECTOR PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section
<S> <C>
PURPOSE................................................................ 1
ADMINISTRATION......................................................... 2
AVAILABLE SHARES....................................................... 3
AUTHORITY TO GRANT OPTIONS AND STOCK................................... 4
ELIGIBILITY FOR OPTIONS AND STOCK...................................... 5
OPTION GRANT SIZE AND GRANT DATES...................................... 6
OPTION PRICE........................................................... 7
FAIR MARKET VALUE...................................................... 8
DURATION OF OPTIONS.................................................... 9
WHEN EXERCISABLE...................................................... 10
EXERCISE OF OPTIONS................................................... 11
TRANSFERABILITY OF OPTIONS............................................ 12
TERMINATION OF DIRECTORSHIP OF OPTIONEE............................... 13
ISSUANCE OF SHARES IN LIEU OF PAYMENT OF RETAINER FEE................. 14
REQUIREMENTS OF LAW................................................... 15
NO RIGHTS AS STOCKHOLDERS............................................. 16
NO EMPLOYMENT OR NOMINATION OBLIGATION................................ 17
CHANGES IN THE COMPANY'S CAPITAL STRUCTURE............................ 18
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
TERMINATION AND AMENDMENT OF PLAN..................................... 19
WRITTEN AGREEMENT..................................................... 20
COMPLIANCE WITH SEC REGULATIONS....................................... 21
GENDER................................................................ 22
HEADINGS.............................................................. 23
GOVERNING LAW......................................................... 24
</TABLE>
<PAGE> 4
TRUETIME, INC.
1999 Non-Employee Director Plan
1. PURPOSE. The 1999 Non-Employee Director Plan (the "Plan")
is a plan for non-employee directors and advisors to the Board of Directors (the
"Board") of TrueTime, Inc. (the "Company") and its subsidiary corporations and
is intended to advance the best interests of the Company, its subsidiaries and
its stockholders by providing the Company's non-employee directors and advisors
to the Board an opportunity to obtain or increase their proprietary interest in
the success of the Company and its subsidiaries by becoming owners of the common
stock, $.01 par value, of the Company (the "Stock") or, in the event that the
outstanding shares of common stock are later changed into or exchanged for a
different class of stock or securities of the Company or another corporation,
that other stock or security.
2. ADMINISTRATION. The Plan shall be administered by the
Board. Subject to the terms of the Plan, the Board shall have the power to
construe the provisions of the Plan, or of options granted hereunder (the
"Options") or Stock issued hereunder, to determine all questions arising
thereunder, and to adopt and amend such rules and regulations for administering
the Plan as the Board deems desirable.
3. AVAILABLE SHARES. The total amount of the Stock with
respect to with Options and Stock paid in lieu of the directors' annual
retainers that may be granted under this Plan shall not exceed in the aggregate
150,000 shares; provided, that the class and aggregate number of shares of Stock
which may be granted hereunder shall be subject to adjustment in accordance with
the provisions of Paragraph 18 hereof. Such shares of Stock may be treasury
shares or authorized but unissued shares of Stock. In the event that any
outstanding Option for any reason shall expire or is terminated or cancelled,
the shares of Stock allocable to the unexercised portion of such Option may
again be subject to an Option or Options or Stock issuance under the Plan.
4. AUTHORITY TO GRANT OPTIONS AND STOCK. All Options granted
under the Plan shall be non-qualified stock options which are not intended to be
governed by section 422 of the Internal Revenue Code of 1986, as amended. No
Options or Stock shall be granted under the Plan subsequent to December 9, 2009.
5. ELIGIBILITY FOR OPTIONS AND STOCK. The individuals who
shall be eligible to receive Options under the Plan shall be (1) the
non-employee directors ("Non-Employee Directors"), (2) persons who have, with
their consent, been named in the Company's Registration Statement (the
"Registration Statement") on Form S-1 (Reg. No. 333-90269) as being about to
become a director in connection with the Company's initial public offering of
the Stock of the Company (the "IPO") and (3) those Board advisors as the Board
shall from time to time determine (collectively, the "Eligible Directors") of
the Company.
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<PAGE> 5
6. OPTION GRANT SIZE AND GRANT DATES. (a) An Option to
purchase 10,000 shares of Stock (as adjusted pursuant to Paragraph 18) shall be
granted to each Eligible Director on the date the Registration Statement is
declared effective by the Securities and Exchange Commission at an exercise
price equal to the IPO per share price to the public. (b) Thereafter, an Option
to purchase 3,000 shares of Stock (as adjusted pursuant to Paragraph 18) shall
be granted each year to each Eligible Director who continues to serve the
Company in that capacity on the date following the Annual Meeting of the
stockholders of the Company ("Annual Grants"). (c) Subject to the availability
under the Plan of a sufficient number of shares of Stock that may be issued upon
the exercise of outstanding options, each person who shall become a Non-Employee
Director after the closing date of the IPO shall be granted, on the date of his
election, whether by the stockholders of the Company or the Board in accordance
with applicable law, an Option under the Plan to purchase 10,000 shares of
Stock. Notwithstanding the foregoing, no Non-Employee Director who has received
an Option pursuant to subsection (a) of this Paragraph shall be eligible to
receive an Option pursuant to this subsection (c).
7. OPTION PRICE. The price at which shares of Stock may be
purchased by an Eligible Director pursuant to an Option (the "Optionee") shall
be the fair market value of the shares of Stock on the date the Option is
granted.
8. FAIR MARKET VALUE. With respect to the initial option grant
described in Section 6(a), fair market value shall mean the IPO price. Fair
market value of the Stock as of any date thereafter means (a) the closing price
of the Stock on that date on the principal securities exchange on which the
Stock is listed; or (b) if the Stock is not listed on a securities exchange, the
average of the high and low sale prices of the Stock on that date as reported on
the National Association of Securities Dealers Automated Quotation National
Market System (or successor system); or (c) if the Stock is not listed on the
National Association of Securities Dealers Automated Quotation National Market
System (or successor system), the average of the high and low bid quotations for
the Stock on that date as reported by the National Quotation Bureau
Incorporated; or (d) if none of the foregoing is applicable, an amount at the
election of the Board equal to (x) the average between the closing bid and ask
prices per share of Stock on the last preceding date on which those prices were
reported or (y) that amount as determined by the Board.
9. DURATION OF OPTIONS. The term of each Option hereunder
shall be until the the last day of the ten year period commencing on the date
the Option is granted, and no Option shall be exercisable after the expiration
of ten years from the date such Option is granted.
10. WHEN EXERCISABLE. Unless otherwise stated in the Option
Agreement (as defined in Section 20), an Option shall be fully exercisable from
the date of grant for all purposes of this Plan.
11. EXERCISE OF OPTIONS. Options shall be exercised by the
delivery of written notice to the Company setting forth the number of shares of
Stock with respect to which the Option
2
<PAGE> 6
is to be exercised, together with cash, wire transfer, certified check, bank
draft or postal or express money order payable to the order of the Company (the
"Acceptable Funds") for an amount equal to the Option price of such shares of
Stock, or at the election of the Optionee, by exchanging shares of Stock owned
by the Optionee, so long as the total fair market value (determined in
accordance with Paragraph 8, as of the date of exercise) of the exchanged shares
of Stock plus the Acceptable Funds paid, if any, equals the purchase price of
the shares to be acquired upon exercise of that Option, and specifying the
address to which the certificates for such shares are to be mailed. Whenever an
Option is exercised by exchanging shares of Stock theretofore owned by the
Optionee: (1) no shares of Stock received upon exercise of that Option
thereafter may be exchanged to pay the Option price for additional shares of
Stock within the following six months; (2) the aggregate fair market value of
the shares of Stock tendered must be equal to or less than the aggregate
exercise price of the shares being purchased upon exercise of the Option, and
any difference must be paid in Acceptable Funds; and (3) the Optionee shall
deliver to the Company certificates registered in the name of such Optionee
representing a number of shares of Stock legally and beneficially owned by such
Optionee, free of all liens, claims, and encumbrances of every kind, accompanied
by stock powers duly endorsed in blank by the record holder of the share
represented by such certificates, with signature guaranteed by a commercial bank
or trust company or by a brokerage firm having a membership on a registered
national stock exchange. Such notice may be delivered in person to the Secretary
of the Company, or may be sent by mail to the Secretary of the Company, in which
case delivery shall be deemed made on the date such notice is received. As
promptly as practicable after receipt of such written notification and payment,
the Company shall deliver to the Optionee certificates for the number of shares
with respect to which such Option has been so exercised, issued in the
Optionee's name; provided, that such delivery to the Optionee shall be deemed
effected for all purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to the
Optionee, at the address specified by the Optionee. The delivery of certificates
upon the exercise of Options is subject to the condition that the person
exercising such Option provide the Company with such information as the Company
may reasonably request to such exercise, sale or other disposition.
12. TRANSFERABILITY OF OPTIONS. (a) Except as set forth in
this Section 12, Options shall not be transferable by the Optionee other than by
will or under the laws of decent and distribution, and shall be exercisable,
during the Optionee's lifetime, only by the Optionee or his legal guardian or
representative.
(b) The Board may, in its discretion, permit an Optionee to
transfer all or any part of an Option, or may grant an Option with terms that
expressly permit all or any part of that Option to be transferred by the
Optionee, in either case to (i) the spouse, children, stepchildren,
grandchildren, parents, grandparents, siblings (including half brothers and
sisters), and individuals who are family members by adoption, of the Optionee
("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit
of one or more of the Optionee's Immediate Family Members, or (iii) a
partnership or other legal entity in which only the Optionee's Immediate Family
Members have equity or ownership interests (collectively, "Permitted
Transferees"); provided that (x) there may be
3
<PAGE> 7
no consideration for any such transfer and (y) subsequent transfers of Options
so transferred (other than transfers by will or under the laws of decent and
distribution, transfers back to the Optionee to whom the Option was originally
granted and transfers to other Permitted Transferees of such Optionee) shall be
void.
(c) Following the transfer of any Option pursuant to paragraph
(b) above, that Option shall continue to have the same terms and provisions and
be subject to the same restrictions as were applicable immediately before that
transfer, except that references in the Plan and in the Option Agreement
applicable to such Optionee shall be deemed to be references to the Permitted
Transferee or Permitted Transferees; provided that any provision of Section 13
that would have been triggered by the cessation of the Optionee to whom the
Option was originally granted acting as a director or advisor to the Board will
continue to be triggered by such cessation.
13. TERMINATION OF DIRECTORSHIP OF OPTIONEE. If, before the
date of expiration of the Option, the Optionee shall cease to be a director of
the Company or an advisor to the Board (as determined by the Board), the Option
shall terminate on the earlier of the date of expiration or three years after
the date the Optionee ceases to be a director or advisor to the Board. In such
event, the Optionee shall have the right prior to the termination of such Option
to exercise all or any part of such Option, subject to Paragraph 10, if
applicable.
14. ISSUANCE OF SHARES IN LIEU OF PAYMENT OF RETAINER FEE. At
the Company's option, all or any portion of each Non-Employee Director's annual
retainer fee for service as a member of the Company's Board may be paid in Stock
(a "Stock Award"). If the Company elects to pay all or any portion of the annual
retainer fees in Stock, the shares of the Stock shall be issued the day
following each Annual Meeting of the stockholders of the Company, to each
Non-Employee Director who continues to serve on that date. The number of shares
to be issued shall be that number equal to (i) the lesser of all or that portion
of the annual retainer fee then in effect for service as a member of the
Company's Board to be paid in Stock divided by (ii) the fair market value of the
Stock on that date, as determined pursuant to Paragraph 8 above. No fractional
shares shall be issued, but the number of shares shall be rounded up to the
nearest whole share.
15. REQUIREMENTS OF LAW. The Company shall not be required to
issue any shares under any Option or as partial payment for annual retainer fees
if the issuance of such shares would result in a violation by the Optionee or
the Company of any provisions of any law or regulation of any governmental
authority. Specifically, in connection with any applicable statute or regulation
relating to the registration of securities, upon exercise of any Option or
pursuant to any Stock Award, the Company shall not be required to issue any
Stock unless the Board has received evidence satisfactory to it to the effect
that the holder of that Option or Stock Award will not transfer the Stock except
in accordance with applicable law, including receipt of an opinion of counsel
satisfactory to the Company to the effect that any proposed transfer complies
with applicable law. The determination by the Board on this matter shall be
final, binding and conclusive. The Company may, but shall in no event be
obligated to, register any Stock covered by the Plan pursuant to
4
<PAGE> 8
applicable securities laws of any country or any political subdivision. In the
event the Stock issuable on exercise of an Option or pursuant to a Stock Award
is not registered, the Company may imprint on the certificate evidencing the
Stock any legend that counsel for the Company considers necessary or advisable
to comply with applicable law. The Company shall not be obligated to take any
other affirmative action in order to cause the exercise of an Option or vesting
under a Stock Award, or the issuance of shares under either of them, to comply
with any law or regulation of any governmental authority.
16. NO RIGHTS AS STOCKHOLDERS. No Optionee shall have rights
as a stockholder with respect to shares covered by an Option until the date of
issuance of a stock certificate for such shares; and, except as otherwise
provided in Paragraph 18 hereof, no adjustment for dividends, or otherwise,
shall be made if the record date thereof is prior to the date of issuance of
such certificate.
17. NO EMPLOYMENT OR NOMINATION OBLIGATION. The granting of
any Option shall not require the Company or its stockholders to retain any
Optionee or to continue to nominate any Optionee for election as a director of
the Company.
18. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence
of outstanding Options or Stock Awards shall not affect in any way the right or
power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Stock or its rights, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Stock outstanding, without receiving
compensation for it in money, services or property, then (a) the number, class,
and per share price of shares of Stock subject to outstanding Options under this
Plan shall be appropriately adjusted in such a manner as to entitle an Eligible
Director to receive upon exercise of an Option, for the same aggregate cash
consideration, the equivalent total number and class of shares he would have
received had he exercised his Option in full immediately prior to the event
requiring the adjustment; and (b) the number and class of shares of Stock then
reserved to be issued under the Plan shall be adjusted by substituting for the
total number and class of shares of Stock then reserved, that number and class
of shares of Stock that would have been received by the owner of an equal number
of outstanding shares of each class of Stock as the result of the event
requiring the adjustment.
If while unexercised Options remain outstanding under the Plan (i) the
Company shall not be the surviving entity in any merger, consolidation or other
reorganization (or survives only as a subsidiary of an entity other than an
entity that was wholly-owned by the Company immediately
5
<PAGE> 9
prior to such merger, consolidation or other reorganization), (ii) the Company
sells, leases or exchanges or agrees to sell, lease or exchange all or
substantially all of its assets to any other person or entity (other than an
entity wholly-owned by the Company), (iii) the Company is to be dissolved, or
(iv) the Company is a party to any other corporate transaction (as defined under
section 424(a) of the Code and applicable Treasury Regulations) that is not
described in clauses (i), (ii) or (iii) of this sentence (each such event is
referred to herein as a "Corporate Change"), then (x) except as otherwise
provided in an Option Agreement or as a result of the Board's effectuation of
one or more of the alternatives described below, there shall be no acceleration
of the time at which any Option then outstanding may be exercised, and (y) no
later than ten days after the approval by the stockholders of the Company of
such Corporate Change, the Board, acting in its sole and absolute discretion
without the consent or approval of any Optionee, shall act to effect one or more
of the following alternatives, which may vary among individual Optionees and
which may vary among Options held by any individual Optionee:
(1) accelerate the time at which some or all of the Options
then outstanding may be exercised so that such Options may be exercised
in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Board, after which
specified date all such Options that remain unexercised and all rights
of Optionees thereunder shall terminate,
(2) require the mandatory surrender to the Company by all or
selected Optionees of some or all of the then outstanding Options held
by such Optionees (irrespective of whether such Options are then
exercisable under the provisions of this Plan or the Option Agreements
evidencing such Options) as of a date, before or after such Corporate
Change, specified by the Board, in which event the Board shall
thereupon cancel such Options and the Company shall pay to each such
Optionee an amount of cash per share equal to the excess, if any, of
the per share price offered to stockholders of the Company in
connection with such Corporate Change over the exercise price(s) under
such Options for such shares,
(3) with respect to all or selected Optionees, have some or
all of their then outstanding Options (whether vested or unvested)
assumed or have a new Option substituted for some or all of their then
outstanding Options (whether vested or unvested) by an entity which is
a party to the transaction resulting in such Corporate Change and of
which he is a director or advisor to the Board, or a parent or
subsidiary of such entity, provided that (A) such assumption or
substitution is on a basis where the excess of the aggregate fair
market value of the shares subject to the Option immediately after the
assumption or substitution over the aggregate exercise price of such
shares is equal to the excess of the aggregate fair market value of all
shares subject to the Option immediately before such assumption or
substitution over the aggregate exercise price of such shares, and (B)
the assumed rights under such existing Option or the substituted rights
under such new Option as the case may be
6
<PAGE> 10
will have the same terms and conditions as the rights under the
existing Option assumed or substituted for, as the case may be,
(4) provide that the number and class of shares of Stock
covered by an Option (whether vested or unvested) theretofore granted
shall be adjusted so that such Option when exercised shall thereafter
cover the number and class of shares of stock or other securities or
property (including, without limitation, cash) to which the Optionee
would have been entitled pursuant to the terms of the agreement and/or
plan relating to such Corporate Change if, immediately prior to such
Corporate Change, the Optionee had been the holder of record of the
number of shares of Stock then covered by such Option, or
(5) make such adjustments to Options then outstanding as the
Board deems appropriate to reflect such Corporate Change (provided,
however, that the Board may determine in its sole and absolute
discretion that no such adjustment is necessary).
In effecting one or more of alternatives (3), (4) or (5)
above, and except as otherwise may be provided in an Option Agreement,
the Board, in its sole and absolute discretion and without the consent
or approval of any Optionee, may accelerate the time at which some or
all Options then outstanding may be exercised.
In the event of changes in the outstanding Stock by reason of
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the date
of the grant of any Option and not otherwise provided for by this Section 18,
any outstanding Options and any agreements evidencing such Options shall be
subject to adjustment by the Board in its sole and absolute discretion as to the
number and price of shares of stock or other consideration subject to such
Options. In the event of any such change in the outstanding Stock, the aggregate
number of shares available under this Plan may be appropriately adjusted by the
Board, whose determination shall be conclusive.
The issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe for them, or upon conversion of shares or obligations of
the Company convertible into shares or other securities, shall not affect, and
no adjustment by reason of such issuance shall be made with respect to, the
number, class, or price of shares of Stock then subject to outstanding Options
or Stock Awards.
19. TERMINATION AND AMENDMENT OF PLAN. The Board of Directors
of the Company may amend, terminate or suspend the Plan at any time, in its sole
and absolute discretion.
7
<PAGE> 11
20. WRITTEN AGREEMENT. Each Option granted hereunder shall be
embodied in a written agreement (an "Option Agreement"), which shall be subject
to the terms and conditions prescribed above and shall be signed by the Optionee
and by the Chairman of the Board, the President or any Vice President of the
Company for and in the name and on behalf of the Company.
21. COMPLIANCE WITH SEC REGULATIONS. It is the Company's
intent that the Plan comply in all respects with Rule 16b-3 of the Exchange Act,
and any successor rule pursuant thereto. If any provision of this Plan is later
found not to be in compliance with the Rule, the provision shall be deemed null
and void or shall be reformed by the Board in such manner so as to comply. All
grants of Options and issuance of Stock and all exercises of Options under this
Plan shall be executed in accordance with the requirements of Section 16 of the
Exchange Act and any regulations promulgated thereunder, so as to avoid the
consequences of noncompliance to the Eligible Directors.
22. GENDER. If the context requires, words of one gender when
used in this Plan shall include the others and words used in the singular or
plural shall include the other.
23. HEADINGS. Headings of Articles and Sections are included
for convenience of reference only and do not constitute part of the Plan and
shall not be used in construing the terms of the Plan.
24. GOVERNING LAW. This Plan and all determinations made and
actions taken pursuant hereto shall be governed by the laws of the State of
Delaware, without reference to principles of conflict of laws, and shall be
construed accordingly.
8
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Weighted average shares outstanding ..................... 4,228,261
Weighted average shares and common stock equivalents .... 4,228,261
==========
Net income .............................................. $ 452
==========
Basic earnings per share ................................ $ 0.11
==========
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding ..................... 4,228,261
Dilutive impact of stock options, as determined by the
application of the treasury stock method .............. 76,262
----------
Weighted average shares and common stock equivalents .... 4,301,523
==========
Net income .............................................. $ 452
==========
Diluted earnings per share .............................. $ 0.11
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN 10-Q, BALANCE SHEET AND INCOME STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,700
<SECURITIES> 0
<RECEIVABLES> 4,221
<ALLOWANCES> 25
<INVENTORY> 5,660
<CURRENT-ASSETS> 21,036
<PP&E> 1,978
<DEPRECIATION> 998
<TOTAL-ASSETS> 23,317
<CURRENT-LIABILITIES> 3,505
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,317
<SALES> 5,556
<TOTAL-REVENUES> 5,556
<CGS> 2,582
<TOTAL-COSTS> 2,301
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 767
<INCOME-TAX> 314
<INCOME-CONTINUING> 767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 767
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
