-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NLxh8JJ1DaV/dExotZGnBaoIBW3d5qgTfuv+tBRsWoNtHYr38CzQIfDYRSBWbzs0 BvogEBN6c+o19C0mIpynwQ== 0000704914-97-000003.txt : 19970812 0000704914-97-000003.hdr.sgml : 19970812 ACCESSION NUMBER: 0000704914-97-000003 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAKEY INC CENTRAL INDEX KEY: 0000704914 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 411291472 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-11447 FILM NUMBER: 97655564 BUSINESS ADDRESS: STREET 1: 407 W TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 BUSINESS PHONE: 6128906850 MAIL ADDRESS: STREET 1: 407 WEST TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 10QSB 1 FORM 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 28, 1997 Commission File Number 0-11447 DATAKEY, INC. (Exact name of small business issuer as specified in its charter) MINNESOTA 41-1291472 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 407 WEST TRAVELERS TRAIL, BURNSVILLE, MN 55337 Issuer's telephone number: (612) 890-6850 _________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 / / APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's common equity, as of August 11, 1997, is 2,887,235. Transitional Small Business Disclosure Format (check one): Yes / / No /x/ 1 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
June 28, December 31, 1997 1996 ------------ ----------- (UNAUDITED) ASSETS ------ CURRENT ASSETS Cash and cash equivalents $1,324,361 $140,030 Investment in held-to-maturity securities 1,589,644 5,993,228 Trade receivables, less allowance for doubtful accounts of $46,700 and $45,000 1,215,295 634,538 Inventories 1,799,969 1,128,907 Prepaid and other 99,381 46,962 ----------- ---------- Total current assets 6,028,650 7,943,665 ----------- ---------- OTHER ASSETS Deferred taxes 325,000 325,000 Prepaid licenses at cost,less amort of $21,580 in 1997 1,060,085 129,750 Patents at cost, less amortization of $123,739 and $105,531 100,897 99,236 ----------- ---------- 1,485,982 553,986 ----------- ---------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tooling 1,188,149 1,179,021 Equipment 2,965,463 2,561,659 Furniture and fixtures 276,407 267,482 Leasehold improvements 276,904 234,452 ----------- ---------- 4,706,923 4,242,614 Less accumulated depreciation (3,078,546) (2,840,909) ----------- ---------- 1,628,377 1,401,705 $9,143,009 $9,899,356 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accounts payable $925,222 $559,280 Accrued severance obligation 243,400 332,000 Accrued license fees-current portion 439,000 0 Accrued expenses 552,689 315,549 Total current liabilities 2,160,311 1,206,829 ----------- ---------- Accrued license fees, less current portion 219,500 0 SHAREHOLDERS' EQUITY Convertible preferred stock, voting, stated value $2.50 per share; authorized 400,000 shares; issued and outstanding 150,000 375,000 375,000 Common stock, par value $.05 per share; authorized 10,000,000 shares;issued and outstanding 2,887,235 and 2,882,069 144,362 144,103 Additional paid-in capital 4,089,283 4,070,815 Retained earnings 2,154,553 4,102,609 ----------- ---------- 6,763,198 8,692,527 ----------- ---------- $9,143,009 $9,899,356 =========== ==========
See Notes to Consolidated Financial Statements 2 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 ------ ----- ----- ----- Revenue $1,934,129 $1,912,123 $3,343,930 $3,647,840 Cost of goods sold 1,195,375 1,203,841 2,130,247 2,241,176 ---------- ---------- ---------- ---------- Gross Profit 738,754 708,282 1,213,683 1,406,664 Operating expenses: Research, development and engineering 1,047,175 525,432 2,063,527 800,008 Marketing and sales 393,625 340,310 788,000 622,566 General and administrative 217,810 233,953 429,366 442,928 ---------- ---------- ---------- ---------- Total operating expenses 1,658,610 1,099,695 3,280,893 1,865,502 ---------- ---------- ---------- ---------- Operating loss (919,856) (391,413) (2,067,210) (458,838) Interest income 43,537 91,431 119,154 185,412 ---------- ---------- ---------- ---------- Loss before income taxes (876,319) (299,982) (1,948,056) (273,426) Income tax expense 0 (107,600) 0 (97,600) ---------- ---------- ---------- ---------- Net loss ($876,319) ($192,382) ($1,948,056) ($175,826) ========== ========== ========== ========== Net loss per common share ($0.30) ($0.07) ($0.67) ($0.06) ========== ========== ========== ========== Weighted average number of common shares outstanding 2,887,235 2,879,087 2,886,023 2,841,788 ========== ========== ========== ==========
See Notes to Consolidated Financial Statements 3 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($ 876,319) ($ 192,382) ($1,948,056) ($ 175,826) Adjustments to reconcile net loss to net cash provided by (used) in operating activities: Depreciation 122,575 115,158 237,637 225,530 Amortization 30,827 35,226 39,788 69,793 Change in assets and liabilities (Increase) decrease: Trade receivables (453,579) (133,063) (580,757) (196,890) Inventories (166,338) 85,824 (671,062) 64,859 Prepaid expenses and other 6,399 10,992 (52,419) (31,697) Prepaid license fees (103,665) 0 (183,665) 0 Refundable income taxes 0 46,642 0 46,642 Increase (decrease) in: Accounts payable 4,887 91,714 365,942 27,220 Accrued expenses (7,258) 90,436 237,140 44,977 Accrued license fees (109,750) 0 (109,750) 0 Accrued severance (47,100) 0 (88,600) 0 Deferred taxes 0 (68,531) 0 (68,531) Income taxes payable 0 (9,586) 0 0 ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities (1,599,321) 72,430 (2,753,802) 6,077 ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of tooling and equipment (200,446) (211,361) (464,309) (259,780) Purchase of held-to-maturity securities (41,192) (1,335,029) (113,999) (2,592,125) Proceeds from maturity of held-to-maturity securities 2,502,421 2,091,000 4,517,583 3,269,000 Patent license costs (19,457) (24,353) (19,869) (30,424) ---------- ---------- ---------- ---------- Net cash provided by investing activities 2,241,326 520,257 3,919,406 386,671 ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock 0 164,918 18,727 166,730 ---------- ---------- ---------- ---------- Net cash provided by financing activities 0 164,918 18,727 166,730 ---------- ---------- ---------- ---------- Increase in cash and cash equivalents 642,005 757,605 1,184,331 559,478 CASH AND CASH EQUIVALENTS Beginning 682,356 515,133 140,030 713,260 ---------- ---------- ---------- ---------- Ending $1,324,361 $1,272,738 $1,324,361 $1,272,738 ========== ========== ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Obligation recorded in connection with prepaid license fees $0 $0 $768,250 $0 ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements 4 DATAKEY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GENERAL In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly Datakey's financial position as of June 28, 1997 and December 31, 1996 and results of its operations and cash flows for the three- month and six-month periods ended June 28, 1997 and June 29, 1996. The adjustments that have been made are of a normal recurring nature. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in the 1996 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 1996. INVESTMENT IN HELD-TO-MATURITY SECURITIES The Company held marketable debt securities with an amortized cost of $1,589,644 as of June 28, 1997. As it is the intention of the Company to hold these securities to maturity, they are accounted for as "Held-to-Maturity Securities" as defined in FASB Statement No. 115. The market value of these U.S. Treasury Bill securities is $1,589,282. The unrealized loss, therefore, is $362. All of the Securities have a maturity date of less than twelve months. The Company has no marketable debt securities which are classified as Available-For-Sale Securities or Trading Securities. RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which is effective for interim and annual reporting periods ending after December 15, 1997. The implementation of SFAS No. 128 is expected to change earnings per share by an immaterial amount. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share, and replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation for all entities with complex capital structures and provides guidance on other computational changes. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION DATAKEY, INC. AND SUBSIDIARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS REVENUE - Net sales for the three-month period ended June 28, 1997 increased by $22,006, or 1%, compared to the comparable 1996 period, while net sales for the six-month period declined by $303,910, or 8%, due to a reduction in shipments to OEM product customers in the first quarter of 1997. Revenue in the OEM products business continues to be volatile from quarter to quarter and may be soft again in the third quarter. The Company is continuing its development of advanced system-level products for the information security market. The initial versions of end-user products for the information security marketplace are either currently available for sale or will be available in the third quarter and, based upon current expectations, are expected to result in additional revenue during the second half of 1997. As with any new product line, revenue will depend on customer acceptance, the extent of which is difficult to assess at this time. If revenue from the new product line meets the Company's present expectations, the total revenue in 1997 will exceed the 1996 level. GROSS PROFIT MARGINS - Gross profit as a percentage of revenue increased to 38% in the three-month period ended June 28, 1997 from 37% in the comparable period but declined to 36% in the six-month period compared to 39% in the 1996 period. The increase in margin percentage in the three-month period and decrease in the six-month period are primarily related to absorption of fixed factory overhead which is favorable when sales increase and unfavorable when sales decline. OPERATING EXPENSES - Operating expenses increased by $558,915 and $1,415,391, or 51% and 76%, in the three-month and six-month periods ended June 28, 1997, as compared to the same periods in 1996. The increased expenses are primarily attributable to a substantial increase in research and development and marketing expenses necessary to accelerate the market introduction of sophisticated electronic token-based systems targeted at the rapidly emerging corporate information security marketplace. Research and development expenses are expected to decline during the second half as compared to the first half but will exceed the amounts from the second half of 1996. Marketing and sales expenses are expected to increase by 15 to 20 percent in the second half of 1997, compared to the first half, to support new product introductions and the expected increase in revenue. General and administrative expenses in 1997 are expected to decrease slightly from the 1996 level and will remain at approximately the quarterly rate reflected in the second quarter. 6 INTEREST INCOME - Interest income during the three-month and six-month periods ended June 28, 1997, decreased $47,894 and $66,258, or 52% and 36% respectively, from the comparable periods in 1996. The lower level of interest income is a direct result of a reduced level of investment in held-to-maturity securities and interest bearing cash and cash equivalents. Interest income is expected to remain lower in 1997 as the Company intends to continue using the proceeds from maturing investments to fund continuing product development and marketing activities to support the Company's advanced information security products. INCOME TAXES - As of December 31,1996 the Company recorded an income tax asset of $325,000 related to its net operating loss carryforwards. Management believes it is more likely than not that the Company will realize income in the future from its existing OEM products business, as well as income from its new advanced information security products business that will allow the Company to utilize a portion of the net operating loss carryforward to reduce future taxable income. However, the net deferred tax asset could be increased or reduced in the future if management's estimates of taxable income during the carryforward period change. The Company has not recorded a tax benefit in the current quarter, related to current operating losses, and does not plan to record a tax benefit in future quarters until such time as the profitability outlook in future periods justifies the resumption of income tax benefits. FINANCIAL CONDITION - During the six-month period ended June 28, 1997, the Company had a net increase in cash and cash equivalents of $1,184,331, compared to an increase of $559,478 in the comparable 1996 period. Investment in held-to-maturity securities decreased $4,403,584 in the 1997 period compared to a decrease of $676,905 in the 1996 period. Cash, cash equivalents and investment in held-to-maturity securities were $2,914,005 at June 28, 1997, compared to $6,133,258 at December 31, 1996. The decrease of $3,219,253 is primarily the result of funding operating losses and other operating activities equal to $2,753,802 and $464,309 in purchases of tooling and equipment for the six months ended June 28, 1997. Datakey's balance sheet continues to reflect a strong financial position, with $3,868,339 in working capital and a current assets to current liabilities ratio of 2.8 to 1 as of June 28, 1997. The Company plans to continue new product development and marketing activities during the remainder of 1997 and expects to spend about $2.0 to $2.2 million on these activities in the second half. Inventory levels increased $670,000 in the first half primarily as a result of acquiring components to support sales of newly developed products which have not yet sold in material quantities. Trade receivables increased by $580,000 in the six-month period ended June 28, 1997, due to a substantial increase in revenue in June, 1997, compared to December, 1996. 7 The inventory levels are expected to level out in the second half of 1997 as the new products are sold. Investments in equipment and maintenance of licenses and patents in the second half of 1997 are expected to be about $250,000 primarily related to prepaid license fees for client and server software to be bundled with the Company's information security products. This spending has been and will continue to be funded by a reduction in the Company's marketable debt securities. The Company's working capital and investments are sufficient to fund its planned operations and continued development and promotional activities in 1997. The Company's ability to fund its business in 1998 with its own cash resources will depend primarily on the successful introduction and marketing of its end-user products. In the event that the Company's end-user products do not receive the market acceptance currently projected, or such market acceptance is slow to develop, the Company will require debt or equity financing to fund its business. Such financing may or may not be available depending on the success of its new product line. EXPECTED LOSS - The Company expects to report a loss in 1997. Although the Company expects to have several end-user products available for sale in the second half of 1997, the marketability of these products will not be known until at least late 1997. The extent of the Company's loss will depend directly on product availability and market acceptance. CAUTIONARY STATEMENTS This Management's Discussion and Analysis contains certain forward looking statements relating primarily to the introduction of the Company's information security end-user products and the anticipated generation of revenue from such products. These statements are subject to certain risks and uncertainties which could cause results to differ from those projected. These risks and uncertainties, in addition to those discussed above, include: (i) the ability of the Company to successfully develop all of the new products under development; (ii) the capability of the new products to function as currently anticipated; and (iii) market acceptance of the new products. 8 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS DATAKEY, INC. AND SUBSIDIARY The Company held its Annual Meeting on Wednesday, June 4, 1997. Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the Company's proxy statement, and all nominees were elected. By a vote of 2,583,265 shares in favor, with 163,825 shares opposed and 3,185 shares abstaining, the shareholders set the number of directors to be elected at six (6). The following persons were elected to serve as directors of the Company, by the votes indicated, until the next annual meeting of shareholders: NUMBER OF NUMBER OF NOMINEE VOTES FOR VOTES WITHHELD __________________ ___________ ________________ John H. Underwood 2,579,572 170,703 Terrence W. Glarner 2,587,972 162,303 Thomas R. King 2,587,972 162,303 Gary R. Holland 2,587,972 162,303 Eugene W. Courtney 2,587,972 162,303 Carl P. Boecher 2,587,972 162,303 The shareholders approved, by a vote of 1,360,839 for, 646,356 against, 8,200 abstaining and 734,880 broker non-votes, the Company's 1997 Stock Option Plan. The shareholders also ratified the appointment of McGladrey & Pullen, LLP, as independent auditors for the Company for the fiscal year ending December 31, 1997, by a vote of 2,737,700 shares in favor, 7,000 shares opposing and 5,575 shares abstaining. 9 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits Exhibit 10 Amended 1997 Management Incentive Plan Exhibit 27 Financial Data Schedule (only filed with electronic copy) (b) The Company was not required to and did not file a Form 8-K during the quarter ended June 28, 1997. 10 SIGNATURES In accordance with the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated August 11, 1997 DATAKEY, INC. BY: /s/ Carl P. Boecher Carl P. Boecher President & Chief Executive Officer (Principal Executive Officer) BY: /s/ Alan G. Shuler Alan G. Shuler Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) 11 DATAKEY, INC. EXHIBIT INDEX TO FORM 10-QSB FOR QUARTER ENDED JUNE 28, 1997 EXHIBIT NO. DESCRIPTION ___________ ________________________________ 10 Amended 1997 Management Incentive Plan 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1997 JUN-28-1997 1,324,361 1,589,644 1,261,995 46,700 1,799,969 6,028,650 4,706,923 3,078,546 9,143,009 2,160,311 0 0 375,000 144,362 6,243,836 9,143,009 1,934,129 1,934,129 1,195,375 1,195,375 1,658,610 0 0 (1,948,056) 0 (1,948,056) 0 0 0 (1,948,056) (.67) (.67)
EX-10 3 AMENDED 1997 MGMT INCENTIVE PLAN 1997 MANAGEMENT INCENTIVE PLAN February 27, 1997 Amended March 10, 1997 SECTION I: LONG TERM INCENTIVE PLAN (LTIP) OPTION GRANTS 1. The LTIP applies to the Management team and other recommended employees who are key contributors including sales personnel. Options will be granted on an annual basis. 2. The LTIP is based on corporate revenue growth and RONAEBIT (the metrics). RONAEBIT is defined as: earnings before interest and taxes/average net assets employed, and is calculated using the financial results from the two fiscal years ending just prior to the grants. 3. The individual's target participation units are based on his/her contribution to these metrics. 4. The Company will grant LTIP benefits in the form of Datakey incentive stock options under the Company's 1997 Stock Option Plan. The number of shares underlying the options for each participant and the exercise price will be defined at the beginning of a fiscal year, using the Company's financial performance figures from the previous two years. The actual vesting schedule will depend on the Company's financial results during the two fiscal years. 5. The LTIP option grants will be made based on the following formula: Individual target participation units x LTIP performance factor (from table below). 6. RONAEBIT is calculated after all incentives are paid.
LTIP PERFORMANCE FACTOR TABLE Revenue Growth for 2 Year Period RONAEBIT <25% 25% 50% 75% 100% 125% or > <15% 0 0 0 0 0 0 15% 0 0 0.25 0.5 .75 1 25% 0 0.25 0.5 1 1.5 2 35% or > 0 0.5 0.75 1.5 2.25 3
This table may be interpolated for incentive payout calculation. SECTION 2: LTIP NOTES AND ASSUMPTIONS The RONAEBIT calculation for the previous two-year period is determined using operating income after deductive the short-term bonus accrual expense. Since the stock options will be granted at the fair market value on the date of grant with a fixed number of options and fixed term, no compensation expense will be recorded during the operating periods. The only accounting transactions that will take place during the two-year period after the grant include (i) the footnote disclosure for FAS123 and (ii) the common stock equivalent calculation that is taken into account in determining primary and fully diluted shares for EPS calculations. Early in each fiscal year, each manager will be granted an option to purchase such number of shares equal to three times the "LTIP financial performance figure" for such person. Based on year-end financial results of the following two years, if the company's performance during such two-year period qualifies for a "1 times payout," the first set of options will vest immediately. If the performance qualifies for "2 times payout," the second set will vest, and if it qualifies for "3 times payout," the third set of options will vest. In the event none of the performance criteria are met for such two-year period, all the options will vest at the end of 5 years. Since the number of shares and the price must be determined at the time the option is granted in order for compensation expense to be avoided, there is no provision for interpolation of the number of shares. In other words, if the base number of shares (the LTIP financial performance figure) is 5,000, then the individual gets early vesting of 5,000, 10,000 or 15,000 shares and no intervals in between. If the minimum level is not reached, all 15,000 shares will vest at the end of five years. To accommodate the same result as interpolation of shares, the vesting schedule will reflect the financial performance level. For example, at a performance level of .25 in the above LTIP table (50% revenue growth and 15% RONAEBIT or 25% revenue growth and 25% RONAEBIT), the number of shares in this example will be as follows: (At .50 the first set is vested in 3.50 years and at .75 level the first set is vested at 2.75 years). 5,000 shares vested in 4.25 years first set 5,000 shares vested in 5.00 years second set 5,000 shares vested in 5.00 years third set ----- 15,000 Total At performance level of 1, the number of shares and the vesting is as follows: 5,000 shares vested in 2.00 years first set 5,000 shares vested in 5.00 years second set 5,000 shares vested in 5.00 years third set ----- 15,000 Total At performance level of 2, the number of shares and the vesting is as follows: 5,000 shares vested in 2.00 years first set 5,000 shares vested in 2.00 years second set 5,000 shares vested in 5.00 years third set ----- 15,000 Total At performance level of 3, the number of shares and the vesting is as follows: 5,000 shares vested in 2.00 years first set 5,000 shares vested in 2.00 years second set 5,000 shares vested in 2.00 years third set ----- 15,000 Total To determine the vesting if performance falls in between levels 1, 2 and 3, the number of years for vesting is determined by using the following vesting schedule for the fractional performance and adding that to the shares with full performance: .25 4.25 years .50 3.50 years .75 2.75 years At a performance level of 2.25, for example, the vesting is as follows: 5,000 shares vested in 2.00 years first set 5,000 shares vested in 2.00 years second set 5,000 shares vested in 4.25 years third set ----- 15,000 Total SECTION 3: ANNUAL INCENTIVE PLAN (AIP) 1. The AIP applies to the Management team (as selected by the Company's Board of Directors) and other key contributors except sales personnel (who participate under a separate plan). 2. The AIP rewards corporate revenue growth and reduced operating losses before tax. (See table below). 3. Participation level (target bonus percentage) is based on the individual's planned contribution to these metrics. 4. The Individual Performance Coefficient is a numerical rating of 0.5-1.0 recommended by the President and approved by the Compensation Committee on the individual's actual contribution to the measurement metrics. 5. The Plan formula is: Base compensation x financial performance coefficient x target bonus percentage x individual performance coefficient. 6. Pre-tax operating loss for calculation purposes is defined as the loss before incentive payout. Financial Performance Coefficient Table REVENUE PRETAX OPERATING LOSS 110% plan plan to 75% plan to >110% plan to plan 75% plan 50% plan <50% plan <90% plan 0 0 0 0 0 90% plan to 100% plan 0 .25 .5 .75 1 100% plan to 120% plan 0 .5 1 1.2 1.4 120% plan to 140% plan 0 .75 1.2 1.5 1.8 >140% plan 0 1 1.4 1.8 2.2
This table may not be interpolated for incentive payout calculation. -----END PRIVACY-ENHANCED MESSAGE-----