<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998
REGISTRATION NO. 333-51523
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
TROY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3570 33-0807798
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA 92705
(949) 250-3280
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
PATRICK J. DIRK
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
TROY GROUP, INC.
2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA 92705
(949) 250-3280
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS C. THOMAS, ESQ. OBY T. BREWER III, ESQ.
KRISTINE L. GABEL, ESQ. MICHAEL S. WACHHOLZ, ESQ.
Oppenheimer Wolff & Donnelly LLP Morris, Manning & Martin, L.L.P.
10 Almaden Boulevard, Suite 600 1600 Atlanta Financial Center
San Jose, California 95113-2237 3343 Peachtree Road, N.E.
(408) 795-3000 Atlanta, Georgia 30326
(404) 233-7000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value per share....................... $20,240,000 $5,980
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a).
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 4, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,200,000 SHARES
[TROY GROUP, INC. LOGO]
COMMON STOCK
------------
All of the 2,200,000 shares of Common Stock offered hereby are being sold by
Troy Group, Inc. (the "Company"). Prior to this offering (the "Offering"), there
has been no public market for the common stock, $0.01 par value (the "Common
Stock") of the Company. It is currently estimated that the initial public
offering price will be between $6.00 and $8.00 per share. See "Underwriting" for
the factors to be considered in determining the initial public offering price.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "TROY."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total(3)........................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting." The Company has agreed to sell to Cruttenden
Roth Incorporated and Josephthal & Co. Inc. (the "Representatives"), for
nominal consideration, a five-year warrant (the "Representatives' Warrant")
to purchase shares of Common Stock equal to 10% of the shares sold in the
Offering, exercisable at a price per share equal to 120% of the per share
Price to Public. The Company has also agreed to pay the Underwriters a
nonaccountable expense allowance equal to 0.75% of the total Price to Public
for all shares purchased.
(2) Before deducting expenses payable by the Company estimated at $950,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
330,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of the certificates representing such
shares will be made available at the offices of Cruttenden Roth Incorporated,
Irvine, California, on or about , 1998.
[CRUTTENDEN ROTH INC. LOGO] [JOSEPHTAL & CO. INC. LOGO]
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[LOGO]
ON-DEMAND DISTRIBUTIVE
PRINTING SOLUTIONS
TROY'S FINANCIAL DOCUMENT PRINTERS
[picture of Troy's financial document printers]
FINANCIAL DOCUMENTS ON-DEMAND
Including checks and other
documents containing Magnetic
Ink Character Recognition (MICR)
[picture of a check illustrating the MICR line]
TROY'S PROPRIETARY RIBBONS AND TONERS
[picture of Troy's ribbon and toner products]
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT-POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND COMBINED FINANCIAL STATEMENTS, AND THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED HEREIN, ALL
INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION, SEE "UNDERWRITING," AND (II) REFLECTS CHANGES TO THE
COMPANY'S CAPITAL STRUCTURE EFFECTED PRIOR TO THE CONSUMMATION OF THE OFFERING,
INCLUDING A 910.7468-FOR-ONE STOCK SPLIT AND A SHARE EXCHANGE IN CONNECTION WITH
THE REINCORPORATION OF THE COMPANY IN DELAWARE. ALL REFERENCES IN THIS
PROSPECTUS TO "TROY" OR THE "COMPANY" REFER COLLECTIVELY TO TROY GROUP, INC. AND
ITS WHOLLY-OWNED SUBSIDIARIES.
THE COMPANY
The Company provides on-demand distributive printing solutions to Fortune
1000 and other large and mid-sized domestic and international businesses. Troy's
current product offering consists of proprietary laser printers, impact
printers, related consumables, including toners and ribbons, and services. The
Company's products enable businesses to distribute and print magnetic ink
character recognition ("MICR") encoded financial documents such as checks, money
orders, payment coupons and deposit and withdrawal slips.
Businesses have traditionally purchased pre-printed financial document forms
from commercial printers and maintained inventories of these forms until needed
for printing and distribution. These inventories are expensive to maintain,
subject companies to security risk associated with storing, printing and
delivering financial document forms and are subject to obsolescence. The advent
and growth of client server computing, cross platform computing, networks, team
workgroups, database sharing and intranets have effectively enabled
organizations to electronically distribute financial documents and print the
documents at the required locations. At the same time, printer manufacturers
have introduced significant technological advancements in the speed, quality and
finishing options of laser printers at drastically reduced costs. The merger of
these technological enhancements in computing and printing has created a new
opportunity termed on-demand distributive printing.
On-demand distributive printing gives an enterprise the ability to
electronically distribute and print documents on a cost-effective basis at
locations where the documents are required, when they are needed and in the
actual quantities needed. The movement to on-demand distributive printing has
revolutionized the entire printing industry. As a result, there has been a
significant transition away from the use of commercial printers to corporate
in-house printing. On-demand distributive printing represents a market segment
within the on-demand digital printing market. Based on the Company's review of
market estimates of third parties it believes are reliable, the Company believes
the market for on-demand digital printing will grow at a compound annual rate of
27% per year from 1995 to 2000 or from approximately $2.6 billion in 1995 to
approximately $8.6 billion in 2000. Management believes that the market for on-
demand distributive printing will continue to grow at rates consistent with the
growth of the on-demand digital printing market; however, there can be no
assurance that the growth rate of the on-demand distributive printing market
will be equal to or in excess of the growth rate of the on-demand digital
printing market.
The Company was the first to develop desktop, laser financial document
printers and has developed products that take advantage of this growth in
on-demand distributive printing. On-demand distributive printing has served as a
catalyst for increased sales of the Company's current solutions and created an
opportunity for new products and solutions such as forms design and management,
forms finishing and Internet related products. The Company's current solutions
offer: (i) convenience and flexibility through the ability to print financial
documents where they are required, when they are needed and in the actual
quantities needed; (ii) cost savings through the elimination of the requirement
to purchase and maintain inventories of pre-printed forms; and (iii) enhanced
software, hardware and document security.
Through an exclusive original equipment manufacturing ("OEM") relationship
with Hewlett-Packard Company ("Hewlett-Packard"), Troy purchases Hewlett-Packard
laser printers and installs various proprietary hardware, firmware and software
into the printers. The Company then repackages and relabels the
1
<PAGE>
printers and sells them as MICR-enabled financial document printers under the
Troy-Registered Trademark- name. Hewlett-Packard assists the Company in the
marketing of Troy's MICR-enabled printers by introducing the Company to
Hewlett-Packard's customers who may require a MICR printing solution. In
addition, the Company has a relationship with International Business Machines
Company ("IBM"), whereby IBM has agreed to purchase from Troy all of IBM's
requirements of MICR toner and developer for the IBM 3900 and InfoPrint 4000
family of high speed laser printers.
The Company markets its products to Fortune 1000 companies through its
direct sales force, while it markets to other large and mid-sized businesses
through a network of dealers and value-added resellers. The Company markets
internationally in 55 countries primarily through a distributor network. Troy
has sold its printing systems and related consumables to more than 9,000
customers including AT&T Corporation, BankAmerica Corporation, Farmer's
Insurance Group, Ford Motor Company, Manpower, Inc., State Farm Mutual
Automobile Insurance Company ("State Farm Insurance") and Wells Fargo & Company.
The Company's objective is to become the leading worldwide provider of
on-demand distributive printing and imaging solutions. In order to achieve this
objective, the Company will continue to implement the following strategies: (i)
expand solutions for Hewlett-Packard based products; (ii) expand existing and
seek new OEM relationships; (iii) leverage strategic alliances; (iv) maintain
its technological leadership position; (v) expand distribution channels to
increase its focus on selling to smaller businesses; and (vi) seek acquisitions
of products, technologies and businesses in the on-demand distributive printing
and imaging market in areas such as forms design management, forms finishing,
networking, the Internet, financial software and service.
The Company, originally incorporated in California in 1996, was
reincorporated in Delaware in May 1998. The Company is the result of various
mergers and acquisitions through a company originally founded in 1982 by the
existing stockholders. The Company's principal executive offices are located at
2331 South Pullman Street, Santa Ana, California 92705, and its telephone number
at that location is (949) 250-3280. "TROY-Registered Trademark-,"
"CHECKTRACE-TM-," "MICRTONE-Registered Trademark-,"
"MULTITONE-Registered Trademark-," "MICROSS-Registered Trademark-" and
PERMABOND-TM-" are trademarks of the Company.
THIS PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WHICH INVOLVE
RISKS AND UNCERTAINTIES AND WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INCLUDED IN SUCH FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................ 2,200,000 shares
Common Stock to be outstanding after the
Offering.................................. 9,700,000 shares(1)
Use of proceeds............................. To repay indebtedness, to pay S corporation
distributions and for working capital and
general corporate purposes, including possible
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... TROY
</TABLE>
SUMMARY COMBINED AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................ $ 20,306 $ 17,583 $ 21,477 $ 28,161 $ 33,434 $ 17,112 $ 18,322
Gross profit......................... 7,721 7,017 7,917 10,753 13,837 6,889 7,566
Operating income..................... 1,519 581 575 3,478 4,694 2,341 2,914
Net income........................... $ 1,301 $ 327 $ 313 $ 3,067 $ 4,397 $ 2,195 $ 2,802
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income(2).............. $ 803 $ 218 $ 140 $ 1,870 $ 2,659 $ 1,328 $ 1,707
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma diluted net income per
share(2)........................... $ 0.11 $ 0.03 $ 0.02 $ 0.25 $ 0.34 $ 0.17 $ 0.22
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average diluted shares
outstanding(1)..................... 7,500 7,500 7,500 7,500 7,759 7,735 7,807
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1998
---------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(3) ADJUSTED(4)
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 40 $ 40 $ 12,656
Working capital.......................................................... 5,951 4,651 18,291
Total assets............................................................. 13,480 13,870 26,246
Short-term notes payable................................................. 615 615 --
Current portion of long-term debt........................................ 402 402 59
Long-term debt, net of current portion................................... 771 771 428
Stockholders' equity..................................................... 7,252 6,142 19,885
</TABLE>
- ------------------------------
(1) Excludes: (i) 1,564,298 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which options to acquire 326,957 shares
are outstanding at a weighted average exercise price of $0.42 per share and
options to acquire 380,000 shares will be granted upon completion of the
Offering at an exercise price equal to the price per share to the public in
the Offering; (ii) up to 350,000 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of $3.50 per share;
and (iii) shares of Common Stock equal to 10% of the shares sold in the
Offering, issuable upon exercise of the Representatives' Warrants. See
"Management--Stock Option and Incentive Plans," "Description of Capital
Stock" and "Underwriting."
(2) Pro forma net income and pro forma diluted net income per share data give
effect to the conversion by the Company and its wholly-owned subsidiary,
Troy Systems International, Inc. (the "Subsidiary"), from S corporations to
C corporations for federal and state income tax purposes and assume that the
Company and the Subsidiary were subject to corporate income taxes at an
effective combined federal and state income tax rate of 40.0%. See
"Distributions" and Note 2 of the Notes to Combined Financial Statements.
(3) Pro forma balance sheet data give effect to (i) an estimated deferred tax
asset of approximately $390,000 that will result from the termination by the
Company and the Subsidiary of their S corporation elections and (ii) S
corporation distributions in the estimated amount of approximately $1.5
million paid or to be paid to existing stockholders after May 31, 1998. See
"Distributions."
(4) Pro forma as adjusted balance sheet data give effect to: (i) an estimated
deferred tax asset of approximately $390,000 that will result from the
termination by the Company and the Subsidiary of their S corporation
elections; (ii) S corporation distributions in the estimated amount of
approximately $1.5 million paid or to be paid to existing stockholders after
May 31, 1998; and (iii) the sale of 2,200,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $7.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
3
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS
IN EVALUATING THE COMPANY AND ITS BUSINESS AND BEFORE PURCHASING ANY OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
DEPENDENCE ON HEWLETT-PACKARD AND OTHER SINGLE SOURCE SUPPLIERS
The Company is dependent on Hewlett-Packard as a single source provider of
laser printers used in the manufacture of all of the Company's laser printing
solutions. The Company and Hewlett-Packard are parties to the U.S. LaserJet MICR
Solution Reseller Agreement and a Value-Added Reseller Addendum (collectively
the "HP Agreement"). The HP Agreement appoints the Company as an authorized,
exclusive reseller in the United States and certain other countries for
Hewlett-Packard MICR LaserJet printers. Pursuant to the HP Agreement, the
Company purchases Hewlett-Packard laser printers and modifies and enhances the
printers. Troy then repackages and relabels the printers and sells them as
MICR-enabled financial document printers under the Troy name. The HP Agreement
is an extension of the initial agreement with Hewlett-Packard entered into in
October 1993 and has an expiration date of March 31, 1999. If the HP Agreement
expires or is otherwise terminated in accordance with its terms, the Company
would be required to purchase Hewlett-Packard printers through other sources,
such as authorized distributors. The Company would also lose the benefit of
Hewlett-Packard's assistance in marketing Troy's MICR-enabled printers to
Hewlett-Packard's customers who may require a MICR printing solution. In
addition, the HP Agreement imposes certain shipment milestones that must be met
in order for the Company to retain its exclusive rights to resell
Hewlett-Packard MICR LaserJet printers. Although the Company has achieved these
milestones to date, there can be no assurance that the Company will continue to
satisfy milestones imposed by the HP Agreement. If the Company loses its
exclusive rights under the HP Agreement, Hewlett-Packard will be free to grant
rights to other vendors to sell MICR-enabled Hewlett-Packard laser printers.
Such an event would result in increased competition and could have a material
adverse effect on the Company. In addition to its relationship with
Hewlett-Packard, the Company is also dependent on single source suppliers for a
component used in its impact printing products and for a component used in its
ribbons. If the Company were to lose its component supplier for its impact
printing products, it would be required to identify a new supplier and
substantially reengineer its products for use with an alternative component. If
the Company were to lose its component supplier for ribbons, the Company would
be required to identify a new supplier. While the Company maintains business
interruption insurance policies (including a policy that specifically covers the
loss of the component supplier for its impact printing products), the loss of
the component supplier of its impact printer products or ribbons would interrupt
the manufacture of the Company's impact printers or ribbons, respectively, which
could have a material adverse effect on the Company. There can be no assurance
that alternative component suppliers would be available on a timely basis or at
all. See "Business--Strategic Relationships" and "--Manufacturing Capabilities."
CUSTOMER CONCENTRATION
In the six months ended May 31, 1998 and the fiscal year ended November 30,
1997, a reseller of the Company's consumable products accounted for 18.2% and
16.6%, respectively, of the Company's net sales, of which the Company believes a
significant portion was sold to a single customer. There can be no assurance
that either this reseller or its customer will continue to purchase products
from the Company. The loss of either this reseller or its customer would have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
4
<PAGE>
TECHNOLOGICAL OBSOLESCENCE
The market for the Company's products is characterized by rapid
technological advances, obsolescence and large fluctuations in product demand.
The introduction of products embodying new technologies could render the
Company's existing products and products currently under development obsolete
and unmarketable. The Company's continued success will depend upon its ongoing
ability to enhance its products as well as to develop and introduce new products
that keep pace with technological developments and achieve market acceptance.
Any failure by the Company to anticipate or respond adequately to technological
developments or end-user requirements, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company. The Company believes that impact printing solutions are approaching the
end of their life cycles because of advanced functionality offered by new
non-impact products from the Company as well as companies such as Oce Printing
Systems USA, Inc. ("Oce") and IBM. The Company anticipates a continuing decline
in sales of its impact printers and intends to minimize the effect of this
decline by offering a broader range of faster, lower cost laser printers, by
offering consumables for high speed laser printers and by pursuing certain
specialty impact printing markets, such as multi-part forms. There can be no
assurance, however, that sales of laser printers and consumables will increase
sufficiently to offset anticipated declines in sales of impact printing systems
or that the Company will successfully enter other specialty printing markets.
See "Business--Business Strategy" and "--Research and Development."
RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS
As part of its growth strategy, the Company intends to pursue acquisitions
of technologies, product lines and businesses that are complementary to the
Company's business and which management believes will enable the Company to
achieve its objective of becoming the leading worldwide provider of on-demand
distributive printing and imaging solutions. The Company's ability to grow
through such acquisitions will be dependent upon the availability of suitable
acquisition candidates at an acceptable cost, the Company's ability to compete
effectively for these acquisition candidates and the availability of capital to
complete such acquisitions. Management has limited experience in identifying,
negotiating and completing acquisitions. Completed acquisitions also involve
numerous risks, including difficulties in the assimilation of the operations and
products of the acquired business, delays in realizing the benefits of the
Company's strategies for an acquired business, dependence on new products and
processes, the diversion of management's attention from the Company's business,
risks of entering markets in which the Company has no or limited direct prior
experience and the inability to retain key employees necessary to manage such
acquisitions. In addition, gross margins of any acquired products, technologies
or businesses, expenditures for necessary product or technology development and
other factors related to any such acquisitions could result in dilution to the
Company's earnings. Future acquisitions also could have a significant impact on
the Company's financial position and capital needs and could cause substantial
fluctuations in the Company's quarterly and annual results of operations.
Furthermore, future acquisitions by the Company could result in the use of a
portion of the proceeds from the Offering, dilutive issuances of equity
securities, the incurrence of additional debt and the amortization of the costs
of goodwill and intangible assets and significant write-offs of in-process
product development. All of the foregoing risks, either individually or in the
aggregate, could have a material adverse effect on the Company. See
"Business--Business Strategy."
DEMAND FOR PRINTED FINANCIAL DOCUMENTS
The market for the Company's products currently depends entirely on the
demand for printed financial documents. There can be no assurance that
competition from alternative methods of financial document delivery (e.g.,
electronic banking, electronic commerce, on-line services and other electronic
media) will not erode the demand for printed financial documents. While part of
the Company's growth strategy is to diversify its business into additional
market segments of the on-demand distributive printing and imaging market such
as electronic payment systems, there can be no assurance that the Company will
5
<PAGE>
be successful in implementing this diversification strategy and failure to do so
could have a material adverse effect on the Company. See "Business--Industry
Overview" and "--Business Strategy."
COMPETITION
The on-demand distributive printing industry is highly competitive. Troy's
primary competitors are domestic and foreign printer manufacturers and
value-added resellers. Some of the Company's competitors have advantages over
the Company with respect to labor and component costs and have substantially
greater resources than the Company. The Company also faces competition from
current and prospective customers and distributors who may decide to design and
manufacture their financial document printing solutions internally. To remain
competitive, management believes that the Company must continue to compete
favorably on the basis of value by providing technologically advanced financial
printing solutions that satisfy the demands of customers and by offering
superior customer service, enhanced quality and reliability levels and flexible
and reliable delivery schedules. There can be no assurance that the Company will
be able to compete successfully against its current and future competitors.
Increased competition may result in price reductions, lower gross margins and
loss of market share, any of which would have a material adverse effect on the
Company. See "Business--Competition."
INTERNATIONAL OPERATIONS
Shipments to international customers in the six months ended May 31, 1998
and the fiscal years ended November 30, 1997 and 1996 represented 15.0%, 13.7%
and 14.3%, respectively, of the Company's net sales and are expected to continue
to account for a material portion of net sales. Sales and operations outside of
the United States are subject to certain inherent risks, including fluctuations
in the value of the U.S. dollar relative to foreign currencies, tariffs, quotas,
taxes, political and economic instability, restrictions on the export or import
of technology, potentially limited intellectual property protection,
difficulties in staffing and managing international operations, difficulties in
collecting receivables and potentially adverse tax consequences. Because the
Company's international sales are denominated in U.S. dollars, currency
fluctuations in countries where the Company does business may render the
Company's products less price competitive than those of foreign manufacturers.
There can be no assurance that any of these factors will not have a material
adverse effect on the Company.
CONTROL OF THE COMPANY BY PATRICK J. DIRK
Upon completion of the Offering, Patrick J. Dirk, the Company's Chairman of
the Board, President and Chief Executive Officer, will beneficially own an
aggregate of 5,692,857 shares of Common Stock, representing 58.7% of the
Company's outstanding Common Stock. As a result, Mr. Dirk will be able to
control the Company through the power to elect the Company's Board of Directors.
See "Principal Stockholders."
BENEFITS OF OFFERING TO CURRENT STOCKHOLDERS
The Offering will provide substantial benefits to current stockholders of
the Company. Consummation of the Offering is expected to: (i) create a public
market for the Common Stock; (ii) provide proceeds to pay a portion of the
Second Distributions; (iii) provide proceeds to repay amounts owed under the
Company's revolving line of credit and term loan which are guaranteed by Patrick
J. and Mary J. Dirk and the Dirk Family Trust u/d/t March 6, 1990, thus
releasing them from such guarantees; and (iv) permit current stockholders to
realize the appreciation in the value of the equity securities held by such
stockholders. Existing stockholders of the Company paid approximately $322,000
for 7,500,000 shares of Common Stock outstanding before the Offering. Assuming
an initial public offering price of $7.00 per share, the existing stockholders
of the Company will have unrealized gain of $52.2 million upon consummation of
the Offering. Upon consummation of the Offering, Suzanne M. Anderson, the
daughter of Mr. Patrick Dirk, a current shareholder and an employee of the
Company, will receive options to purchase an
6
<PAGE>
aggregate of 30,000 shares of Common Stock of the Company. Such options will
vest as follows: 10,000 shares 90 days after the consummation of the Offering
and 8,000 shares, 6,000 shares and 6,000 shares on the third, fourth and fifth
anniversaries of the consummation of the Offering, respectively. See
"Distributions," "Dilution" and "Certain Transactions."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results are subject to fluctuation due to
various factors, including the mix of products between laser printers, impact
printers and consumables, the stage of each product in its life cycle, the
availability and costs of components and materials, the rate of addition and
magnitude of new products and the timing of orders from and shipments to
customers. Because of these factors, quarterly operating results are likely to
vary in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
INTELLECTUAL PROPERTY
Certain equipment, processes, information and knowledge developed by the
Company and used in the design and manufacture of its products are regarded as
proprietary or confidential by the Company. The Company relies on a combination
of patents, trademarks, trade secrets and other intellectual property law,
non-disclosure agreements with employees and internal confidentiality measures
to protect its intellectual property rights and confidential information. Such
protection, however, may not preclude competitors from developing products
similar to the Company's products. In addition, the laws of certain foreign
countries may not protect the Company's intellectual property rights and
confidential information to the same extent as the laws of the United States.
Although the Company continues to evaluate and implement protective measures,
there can be no assurance that these efforts will be successful or that third
parties will not assert intellectual property infringement claims against the
Company. No such claims or litigation related to any such matter are currently
pending against the Company. However, there can be no assurance that none will
be initiated, that the Company would prevail in any such litigation seeking
damages or an injunction against the sale of the Company's products or that the
Company would be able to obtain any necessary licenses on reasonable terms or at
all. See "Business--Patents and Proprietary Rights."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent to a significant extent upon the efforts and
talents of Patrick J. Dirk and its other executive officers. The loss of Mr.
Dirk or any of these other executive officers could have a material adverse
effect on the Company. The Company does not have employment or noncompete
agreements with its key employees, except for Robert S. Messina, the Company's
Executive Vice President. See "Management."
GOVERNMENT REGULATION
The Company is subject to numerous federal, state and local laws and
regulations, including regulations promulgated by the Environmental Protection
Agency and similar state agencies with respect to storing, shipping, disposing,
discharging and manufacturing hazardous materials and hazardous and
non-hazardous waste. Although the Company believes that its operations are in
material compliance with current environmental and other laws and regulations,
there can be no assurance that regulatory requirements will not change,
unforeseen environmental incidents will not occur or past contamination or non-
compliance with environmental laws will not be discovered on properties on which
the Company is or has been located. See "Business--Environmental and Regulatory
Matters."
7
<PAGE>
S CORPORATION STATUS
Beginning in December 1989 and continuing until the consummation of the
Offering, the Company and the Subsidiary have elected to be treated as S
corporations under the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"). As a result, during this period the stockholders of the Company
and the Subsidiary were directly subject to tax on the income of the Company for
federal and state income tax purposes, except that the Subsidiary elected to be
taxed as a C corporation for California state income tax purposes. The Company
will use a portion of the net proceeds of the Offering to make a distribution to
its existing stockholders in connection with the termination of the S
corporation election. In addition, while the Company believes that it and the
Subsidiary have met the S corporation requirements, as of the date of this
Prospectus, the Internal Revenue Service (the "IRS") has not challenged the S
corporation status of either entity. If for any reason either the Company or the
Subsidiary were subsequently determined by the IRS not to have met S corporation
requirements, the Company could be liable to pay federal and state income taxes
on its income at the effective federal and state income tax rate for all or a
part of the period from December 1989 through the consummation of the Offering,
plus interest and possible penalties. See "Distributions," "Use of Proceeds" and
"Certain Transactions."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering to repay
indebtedness, to pay S corporation distributions and for working capital and
general corporate purposes, including possible acquisitions. The Company
currently has no other specific use for the remaining net proceeds of the
Offering. Accordingly, the Company will retain broad discretion to allocate a
substantial portion of the remaining net proceeds of the Offering. The Company
plans to invest the net proceeds in investment-grade, interest-bearing
securities. See "Use of Proceeds."
YEAR 2000 COMPLIANCE
Many computer systems and applications currently use two-digit date fields
to designate a year. As a result, on or near the turn of the century,
date-sensitive computing systems will recognize the year 2000 as 1900, or not at
all, which may cause systems to process financial and operational information
incorrectly. The Company has completed its assessment of the Year 2000
compliance of existing software products offered or used by the Company and
believes that no corrective action will be required. Consequently, the Company
does not anticipate incurring significant additional costs to achieve Year 2000
compliance, although no assurance can be given that the Company's assessment has
identified all potential Year 2000 issues. In addition, it is currently unknown
whether the Company's vendors, distributors, OEMs or other third parties with
which the Company conducts business will successfully achieve Year 2000
compliance with respect to their own computer software and products. The failure
of the Company or its vendors, distributors, OEMs or other third parties with
which the Company conducts business to successfully achieve Year 2000 compliance
could have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock in the public market after the Offering (including
sales of shares issued upon the exercise of outstanding options and warrants)
could have a material adverse effect on the market price of the Common Stock.
Such sales also could make it more difficult for the Company to sell equity
securities in the future at a time and price that the Company deems appropriate.
Upon the completion of the Offering, the Company will have 9,700,000 shares of
Common Stock outstanding, of which the 2,200,000 shares offered hereby will be
freely tradable (unless held by affiliates of the Company) and the remaining
7,500,000 shares (the "Restricted Shares") may be sold in the public market only
if registered or pursuant to an exemption from registration such as Rule 144,
144(k) or 701 under the Securities Act of 1933, as amended (the "Securities
Act"). All of the existing stockholders of the Company have entered into lock-up
agreements under which they have agreed not to sell, directly or indirectly, any
shares owned
8
<PAGE>
by them for a period of 180 days after the date of this Prospectus without the
prior written consent of Cruttenden Roth Incorporated. Following expiration of
these lock-up agreements, 1,265,358 of the Restricted Shares will be eligible
for sale in the public market without restriction and the balance will be
eligible for sale subject to the volume limitations and other conditions of Rule
144. In addition, approximately 90 days after completion of the Offering, the
Company intends to file a Registration Statement on Form S-8 covering shares
issuable under the Company's stock option plans, thus permitting the resale of
such shares by non-affiliates in the public market without restriction under the
Securities Act. See "Shares Eligible for Future Sale."
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER MEASURES
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is authorized to issue up to 5,000,000 shares of preferred stock (the
"Preferred Stock") and fix the rights, preferences, privileges and restrictions,
including voting rights, of such shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of any shares of Preferred
Stock may result in significant dilution of the interest in the Company of the
holders of Common Stock at that time. While the Company has no present intention
to issue shares of Preferred Stock, any such issuance could make it more
difficult for a third party to acquire a majority of the outstanding voting
power of the Company. The Company's stockholders also do not have the right of
cumulative voting for the election of directors. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law (the "DGCL"), which could have the effect of delaying or
preventing a change of control of the Company. The beneficial ownership and
voting control held by Patrick J. Dirk, the ability of the Board of Directors to
issue shares of Preferred Stock without further vote or action by the
stockholders, Section 203 of the DGCL and provisions in the Company's
Certificate of Incorporation will serve to prevent or delay a change of control
of the Company, which in turn could adversely affect the market price of the
Common Stock. See "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or, if
one does develop, that it will be maintained. The initial public offering price,
which will be established by negotiations between the Company and the
Representatives, may not be indicative of prices that will prevail in the
trading market. The stock market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
shares of Common Stock is likely to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, regulatory
actions, developments with respect to patents or proprietary rights, changes in
stock market analyst recommendations regarding the Company, other comparable
companies or the technology industry generally and general market conditions may
have a significant effect on the market price of the Common Stock. See
"Underwriting."
DILUTION
The initial public offering price of the Common Stock offered hereby is
substantially higher than the pro forma net tangible book value per share of
Common Stock. Investors purchasing shares of Common Stock in the Offering will
therefore incur immediate and substantial dilution. Additional dilution is
likely to occur upon exercise of outstanding stock options and warrants. See
"Dilution."
9
<PAGE>
DIVIDEND POLICY
The Company intends to use any earnings that may be generated to finance
future growth of the Company's business and does not intend to pay dividends in
the foreseeable future other than dividends described in "Distributions." See
"Dividend Policy."
DISTRIBUTIONS
The Company was incorporated in the State of California in March 1996. The
Subsidiary was incorporated in Minnesota in 1982 and was reincorporated in
Delaware on September 2, 1987. Prior to May 1998, the Company and the Subsidiary
were under common control. In May 1998, the Company and the Subsidiary completed
a reorganization whereby: (i) the Company was reincorporated in Delaware; (ii)
the Subsidiary became a wholly-owned subsidiary of the Company; (iii) the
Company transferred all of its operating assets to the Subsidiary; and (iv) the
Company effected a 910.7468-for-one stock split resulting in 7,500,000 shares of
Common Stock outstanding prior to the Offering. Prior to the Offering, the
Company was wholly-owned by Patrick J. and Mary J. Dirk as trustees under The
Dirk Family Trust UTD March 6, 1990 (the "Family Trust"), the trustee of The
Dirk 1997 Education Trust, the trustees of the Dirk 1998 Alaska Trust, Brian P.
Dirk and Patrick J. Dirk's other three children (the "Dirk Stockholders").
The Company and the Subsidiary have each elected, under the Internal Revenue
Code, to be treated as S corporations for federal and state income tax purposes,
except that the Subsidiary has elected to be taxed as a C corporation for
California state income tax purposes. As a result, earnings of the Company and
the Subsidiary have been taxed for federal and state income tax purposes (other
than California for the Subsidiary) directly to the Dirk Stockholders rather
than to the Company. Upon consummation of the Offering, the Company and the
Subsidiary will terminate their S corporation elections and thereafter will be
taxed as C corporations.
In past years, the Company and the Subsidiary paid pro rata distributions to
the Dirk Stockholders. In the fiscal years ended November 30, 1995, 1996 and
1997, these distributions totaled $0, $118,000 and $2.6 million, respectively.
In June 1998, the Boards of Directors of the Company and the Subsidiary paid
cash distributions to the Dirk Stockholders of approximately $695,000 (the
"First Distributions"). The Company and the Subsidiary also intend to pay cash
distributions to the Dirk Stockholders, on a pro rata basis, concurrent with the
completion of the Offering (the "Second Distributions"). The Second
Distributions are estimated to total approximately $805,000. Purchasers of the
Common Stock in the Offering will not receive any of these distributions.
During the fiscal years ended November 30, 1995, 1996 and 1997, the Company
also made cash distributions of $0, $57,000 and $286,000, respectively, to Dirk
Worldwide, Inc., a foreign sales corporation ("Dirk Worldwide"). The
distributions were made as part of the Company's tax strategies and consisted of
Dirk Worldwide's income for the applicable period. Dirk Worldwide was
wholly-owned by individual retirement accounts of the Dirk Stockholders. In July
1998, the Dirk Stockholders contributed their interests in Dirk Worldwide to the
Company for no additional consideration.
The Company and the Dirk Stockholders are parties to a Tax Allocation and
Indemnification Agreement (the "Tax Agreement") relating to their respective
income tax liabilities. The Tax Agreement indemnifies the Dirk Stockholders for
any adjustments causing an increase in the Dirk Stockholders' federal and state
income tax liability (including interest and penalties) related to tax years
prior to the consummation of the Offering, unless such adjustments result in or
are related to a corresponding decrease in the Dirk Stockholders' federal and
state income tax liability with respect to another S corporation taxable year.
Subject to certain limitations, the Tax Agreement also provides that the Dirk
Stockholders will reimburse the Company for any amounts refunded to them as a
result of the loss of the S corporation status of the Company or the Subsidiary.
Any payment made by the Company to the Dirk
10
<PAGE>
Stockholders pursuant to the Tax Agreement may be considered by the Internal
Revenue Service or the state taxing authorities to be nondeductible by the
Company or the Subsidiary for income tax purposes. See Note 2 of Notes to
Combined Financial Statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$7.00 per share, are estimated to be approximately $13.7 million (approximately
$15.9 million if the Underwriters' over-allotment option is exercised in full)
after deducting the underwriting discount and estimated offering expenses.
The net proceeds from the Offering will be used to repay indebtedness under
the Company's term loan and revolving line of credit with Union Bank of
California, to pay any unpaid portion of the Second Distributions and for
working capital and general corporate purposes. As of the date of this
Prospectus, the Company has not designated any other specific use for the net
proceeds from the sale of the Common Stock offered hereby, although the Company
anticipates using the remaining net proceeds for acquisitions of other
technologies, product lines or businesses that are complementary to the
Company's business. The Company has no present commitments or agreements with
respect to any such acquisitions and no portion of the net proceeds has been
allocated for any specific acquisition. Accordingly, the Company will retain
broad discretion to allocate a substantial portion of the remaining net proceeds
of the Offering. The Company is conducting the Offering at this time to ensure
it has sufficient capital for acquisitions when suitable candidates are
identified and to enable it to more readily use its Common Stock in
acquisitions. See "Business--Business Strategy." Pending the uses described
above, the Company intends to invest the net proceeds of the Offering in
short-term, interest-bearing securities.
The Company's term loan had an outstanding balance of approximately $686,000
as of May 31, 1998 and bears interest at a rate, based on an index selected by
the Company, which is 2.50% per annum in excess of the bank's adjusted
treasuries rate. All principal outstanding under the term loan which is not
bearing interest at a base interest rate bears interest at a rate of 0.75% above
the bank's reference rate. As of May 31, 1998, the interest rate on the
Company's term loan was 8.50%. The Company's revolving line of credit had an
outstanding balance of approximately $615,000 as of May 31, 1998 and bears
interest at a rate, based on an index selected by the Company, which is 2.25%
per annum in excess of the bank's LIBOR-rate. All principal outstanding under
the revolving line of credit which is not bearing interest at a base interest
rate bears interest at a rate of 0.50% above the bank's reference rate. As of
May 31, 1998, the interest rate on the Company's revolving line of credit was
9.00%. The term loan and line of credit mature on May 2, 2000 and June 30, 1999,
respectively. The proceeds from the term loan and the revolving line of credit
were used for working capital.
DIVIDEND POLICY
Other than the dividends described in "S Corporation Distributions," the
Company has not declared any cash dividends. Following the completion of the
Offering, the Company's Board of Directors intends to retain the earnings of the
Company, if any, to support the Company's operations and to finance expansion,
and it does not intend to declare or pay cash dividends on the Common Stock in
the foreseeable future. Any future determination as to the payment of dividends
will be at the discretion of the Board of Directors and will depend on the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board of Directors may deem relevant. In addition, the
Company's current revolving credit facility prohibits the payment of cash
dividends by the Company except for distributions for tax payments and pro rata
adjustments thereto.
11
<PAGE>
CAPITALIZATION
The following table sets forth the short-term obligations and capitalization
of the Company as of May 31, 1998: (i) on an actual basis; (ii) on a pro forma
basis to reflect the termination of the S corporation status of the Company and
the Subsidiary to be effective upon completion of the Offering and the payment
of the Distributions; and (iii) on a pro forma as adjusted basis to reflect the
termination of the S corporation status of the Company and the Subsidiary to be
effective upon completion of the Offering and the payment of the Distributions
and to reflect the receipt and the application of the estimated net proceeds
from the sale of 2,200,000 shares of Common Stock by the Company pursuant to the
Offering at an assumed initial public offering price of $7.00 per share. This
table should be read in conjunction with the Combined Financial Statements and
Notes appearing elsewhere in the Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1998
---------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
--------- ------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
Short-term notes payable................................................. $ 615 $ 615 $ --
--------- ------------- -------------
--------- ------------- -------------
Current portion of long-term debt........................................ $ 402 $ 402 $ 59
--------- ------------- -------------
--------- ------------- -------------
Long-term debt, net of current portion................................... $ 771 $ 771 $ 428
Stockholders' equity:
Preferred stock, $0.01 par value per share, 5,000,000 shares
authorized; no shares issued and outstanding......................... -- -- --
Common stock, $0.01 par value per share, 50,000,000 shares authorized;
7,500,000 shares issued and outstanding, actual and pro forma;
9,700,000 shares issued and outstanding, pro forma as adjusted(3).... 75 75 97
Additional paid-in capital............................................. 247 247 13,968
Retained earnings...................................................... 6,930 5,820 5,820
--------- ------------- -------------
Total stockholders' equity........................................... 7,252 6,142 19,885
--------- ------------- -------------
Total capitalization............................................. $ 8,023 $ 6,913 $ 20,313
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
- ------------------------
(1) Pro forma data give effect to (i) an estimated deferred tax asset of
approximately $390,000 that will result from the termination by the Company
and the Subsidiary of their S corporation elections and (ii) S corporation
distributions in the estimated amount of approximately $1.5 million paid or
to be paid to existing stockholders after May 31, 1998. See "Distributions."
(2) Pro forma as adjusted data give effect to: (i) an estimated deferred tax
asset of approximately $390,000 that will result from the termination by the
Company and the Subsidiary of their S corporation elections; (ii) S
corporation distributions in the estimated amount of approximately $1.5
million paid or to be paid to existing stockholders after May 31, 1998; and
(iii) the sale of 2,200,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $7.00 per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds."
(3) Excludes: (i) 1,564,298 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which options to acquire 326,957 shares
are outstanding at a weighted average exercise price of $0.42 per share and
options to acquire 380,000 shares will be granted upon completion of the
Offering at an exercise price equal to the price per share to the public in
the Offering; (ii) up to 350,000 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of $3.50 per share;
and (iii) shares of Common Stock equal to 10% of the shares sold in the
Offering, issuable upon exercise of the Representatives' Warrants. See
"Management--Stock Option and Incentive Plans," "Description of Capital
Stock" and "Underwriting."
12
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of May 31, 1998
would have been approximately $5.9 million or $0.79 per share, after giving pro
forma effect to the termination of the S corporation elections of the Company
and the Subsidiary to be effective upon completion of the Offering and the
payment of the Distributions. Pro forma net tangible book value per share is
determined by dividing the Company's net tangible book value (tangible assets
less total liabilities) by the number of shares of Common Stock outstanding.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering and the pro forma adjusted net tangible book value per
share of the Common Stock immediately after completion of the Offering. After
giving effect to the sale of the shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $7.00 per share and the
application of the estimated net proceeds therefrom after deducting the
underwriting discount and estimated expenses of the Offering, and without taking
into account any other changes in such net tangible book value after May 31,
1998 other than the termination of the S corporation elections of the Company
and the Subsidiary to be effected upon completion of the Offering and the
payment of the Distributions, the pro forma net tangible book value of the
Company as of May 31, 1998 would have been approximately $19.9 million, or $2.05
per share. This represents an immediate increase in such pro forma net tangible
book value of $1.26 per share to existing stockholders and an immediate dilution
in pro forma net tangible book value of $4.95 per share to purchasers of Common
Stock in the Offering, as illustrated in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share........................................ $ 7.00
Pro forma net tangible book value per share as of May 31, 1998....................... $ 0.79
Increase per share attributable to new investors..................................... 1.26
---------
Pro forma adjusted net tangible book value per share after the Offering(1)............. 2.05
---------
Dilution per share to new investors.................................................... $ 4.95
---------
---------
</TABLE>
The following table summarizes, as of May 31, 1998, the number of shares of
Common Stock purchased from the Company by existing stockholders and by new
investors in the Offering, the total consideration reflected in the accounts of
the Company and the average price paid per share. The table assumes an initial
public offering price of $7.00 per share and that no shares are purchased in the
Offering by existing stockholders. To the extent existing stockholders purchase
shares in the Offering, their percentage ownership, total consideration and
average consideration per share will be greater than is shown.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........................... 7,500,000 77.3% $ 322,000 2.0% $ 0.04
New investors...................................... 2,200,000 22.7 15,400,000 98.0 7.00
------------ ----- ------------- -----
Totals(1)........................................ 9,700,000 100.0% $ 15,722,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Excludes: (i) 1,564,298 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which options to acquire 326,957 shares
are outstanding at a weighted average exercise price of $0.42 per share and
options to acquire 380,000 shares will be granted upon completion of the
Offering at an exercise price equal to the price per share to the public in
the Offering; (ii) up to 350,000 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of $3.50 per share;
and (iii) shares of Common Stock equal to 10% of the shares sold in the
Offering, issuable upon exercise of the Representatives' Warrants. See
"Management--Stock Option and Incentive Plans," "Description of Capital
Stock" and "Underwriting."
13
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data presented below as of and in the fiscal
years ended November 30, 1995, 1996 and 1997 are derived from and should be read
in conjunction with the combined financial statements and related notes thereto
audited by McGladrey & Pullen, LLP, independent auditors, which are included
elsewhere in this Prospectus. The selected combined financial data presented
below as of and in the fiscal years ended November 30, 1993 and 1994 are derived
from the audited combined financial statements of the Company which are not
included in this Prospectus. The selected combined financial data as of and in
the six months ended May 31, 1998 and 1997 have been derived from the Company's
unaudited combined financial statements included elsewhere in this Prospectus.
Such unaudited combined financial statements have been prepared by the Company
on a basis consistent with the Company's annual audited combined financial
statements and, in the opinion of management of the Company, contain all normal
recurring adjustments necessary for a fair presentation of the combined
financial position and the results of operations for the applicable periods.
Operating results in the six months ended May 31, 1998 are not necessarily
indicative of the results that may be expected in the entire fiscal year ending
November 30, 1998, or any subsequent period. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's Combined Financial
Statements and related Notes and other financial information included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales......................................... $ 20,306 $ 17,583 $ 21,477 $ 28,161 $ 33,434 $ 17,112 $ 18,322
Cost of goods sold................................ 12,585 10,566 13,560 17,408 19,597 10,223 10,756
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 7,721 7,017 7,917 10,753 13,837 6,889 7,566
Selling, general and administrative expenses...... 4,857 5,058 5,594 5,234 6,622 3,303 3,424
Research and development expenses................. 1,345 1,378 1,748 2,041 2,521 1,245 1,228
--------- --------- --------- --------- --------- --------- ---------
Operating income.................................. 1,519 581 575 3,478 4,694 2,341 2,914
Interest expense.................................. 181 217 342 361 262 128 69
--------- --------- --------- --------- --------- --------- ---------
Income before state income taxes (credit)......... 1,338 364 233 3,117 4,432 2,213 2,845
State income taxes (credit)....................... 37 37 (80) 50 35 18 43
--------- --------- --------- --------- --------- --------- ---------
Net income........................................ $ 1,301 $ 327 $ 313 $ 3,067 $ 4,397 $ 2,195 $ 2,802
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma provision for income taxes(1)........... $ 535 $ 146 $ 93 $ 1,247 $ 1,773 $ 885 $ 1,138
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income(1)........................... $ 803 $ 218 $ 140 $ 1,870 $ 2,659 $ 1,328 $ 1,707
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma diluted net income per share(1)......... $ 0.11 $ 0.03 $ 0.02 $ 0.25 $ 0.34 $ 0.17 $ 0.22
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average diluted shares outstanding(2).... 7,500 7,500 7,500 7,500 7,759 7,735 7,807
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(SEE FOOTNOTES ON NEXT PAGE)
14
<PAGE>
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 759 $ -- $ -- $ 42 $ 100 $ -- $ 40
Working capital............................ 1,575 955 1,426 3,910 5,173 4,502 5,951
Total assets............................... 7,771 8,312 9,597 11,324 11,749 10,794 13,480
Short terms notes payble................... 685 1,000 1,880 1,612 -- 2,117 615
Current portion of long-term debt.......... 753 1,305 990 688 754 129 402
Long-term debt, net of current portion..... 2,106 1,183 2,067 1,521 1,280 1,488 771
Stockholders' equity....................... 537 865 1,153 4,102 5,948 4,785 7,252
</TABLE>
- --------------------------
(1) Pro forma net income and pro forma diluted net income per share data give
effect to the conversion by the Company and its wholly-owned Subsidiary from
S corporations to C corporations for federal and state income tax purposes
and assume that the Company and the Subsidiary were subject to corporate
income taxes at an effective combined federal and state income tax rate of
40.0%. See "Distributions" and Note 2 of the Notes to Combined Financial
Statements.
(2) Excludes: (i) 1,564,298 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which options to acquire 326,957 shares
are outstanding at a weighted average exercise price of $0.42 per share and
options to acquire 380,000 shares will be granted upon completion of the
Offering at an exercise price equal to the price per share to the public in
the Offering; (ii) up to 350,000 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of $3.50 per share;
and (iii) shares of Common Stock equal to 10% of the shares sold in the
Offering, issuable upon exercise of the Representatives' Warrants. See
"Management--Stock Option and Incentive Plans," "Description of Capital
Stock" and "Underwriting."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and its
liquidity and capital resources should be read in conjunction with "Selected
Combined Financial Data" and the Combined Financial Statements of the Company
and related Notes thereto appearing elsewhere in this Prospectus. This
Prospectus contains certain "forward-looking statements" within the meaning of
the federal securities laws, which involve risks and uncertainties and which can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. Actual results could differ
materially from those projected in such forward-looking statements due to a
number of factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Net sales are generated from the sale of the Company's laser printers,
impact printers, related consumables and services. The Company recognizes
revenue from the sale of its products when the goods are shipped to the customer
and it recognizes service revenue over the period of the contract on a straight-
line basis. In the six months ended May 31, 1998 and the fiscal year ended
November 30, 1997, a reseller of the Company's consumable products, Cannon IV
Inc., accounted for 18.2% and 16.6%, respectively, of the Company's net sales,
of which the Company believes a significant portion was sold to a single
customer. The Company does not have a written or oral contract with Cannon IV
Inc. All sales are made through a purchase order.
Cost of goods sold includes direct material and labor, warranty expenses,
license fees and manufacturing and service overhead. Inventories are stated at
the lower of cost (first-in, first-out) or market. Equipment is depreciated
using the straight-line method over the estimated useful life of the equipment.
Improvements to leased property are amortized over the lesser of the life of the
lease or life of the improvements.
Selling, general and administrative expenses include the costs of the sales,
marketing and customer support staffs, other marketing expenses, management and
administrative personnel costs, professional services, legal and accounting fees
and administrative operating costs. The Company expenses all of these costs when
incurred.
Research and development expenses include costs associated with the
development of new products and significant enhancements of existing products,
and consist primarily of employee salaries, benefits, consulting expenses and
the costs of software development tools. The Company expenses research and
development costs as they are incurred.
On October 1, 1997, the Company issued warrants to a consultant to purchase
up to 300,000 shares of Common Stock of the Company at $3.50 per share. The
warrants vest at a rate of 33 1/3% each upon the occurrence of three separate
performance conditions relating to (i) becoming publicly owned; (ii) certain
acquisition transactions; and (iii) the Company's market value. Condition (i)
will be satisfied upon the consummation of the Offering and the effect of the
vesting will be recorded as an expense of the Offering. The effect of the
warrants for conditions (ii) and (iii) will be recorded in the Company's
financial statements when the performance conditions are met, if ever, at the
then current fair value of the warrant vested. The recording of this effect
could materially impact the Company's financial statements. See "Description of
Capital Stock--Warrants" and "Note 8 to the Company's Consolidated Financial
Statements."
Prior to the Offering, the Company and the Subsidiary elected to be treated
for federal and state income tax purposes as S corporations, except that the
Subsidiary elected to be taxed as a C corporation under California income tax
laws. Upon completion of the Offering, the Company and the Subsidiary will
terminate their S corporation elections. The statements of operations data for
all periods discussed below
16
<PAGE>
include a provision for federal and state income taxes as if the Company were
subject to federal and state corporate income taxes for all such periods. This
pro forma provision is computed using an effective combined federal and state
income tax rate of 40.0%. See "Distributions" and Note 2 of Notes to Combined
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from the Company's Combined Statements of Operations
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR
ENDED NOVEMBER 30, MAY 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................................. 63.1 61.8 58.6 59.7 58.7
--------- --------- --------- --------- ---------
Gross profit....................................................... 36.9 38.2 41.4 40.3 41.3
Selling, general and administrative expenses....................... 26.1 18.6 19.9 19.3 18.7
Research and development expenses.................................. 8.1 7.2 7.5 7.3 6.7
--------- --------- --------- --------- ---------
Operating income................................................... 2.7 12.4 14.0 13.7 15.9
Interest expense................................................... 1.6 1.3 0.8 0.7 0.4
--------- --------- --------- --------- ---------
Income before state income taxes (credit).......................... 1.1 11.1 13.2 13.0 15.5
State income taxes (credit)........................................ (0.4) 0.2 0.1 0.1 0.2
--------- --------- --------- --------- ---------
Net income......................................................... 1.5% 10.9% 13.1% 12.9% 15.3%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma provision for income taxes............................... 0.4% 4.4% 5.3% 5.2% 6.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income............................................... 0.7% 6.7% 7.9% 7.8% 9.3%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED MAY 31, 1998 COMPARED TO SIX MONTHS ENDED MAY 31, 1997
NET SALES. Net sales increased by $1,210,000 or 7.1% to $18.3 million in
the six months ended May 31, 1998 from $17.1 million in the six months ended May
31, 1997. This increase was due primarily to an increase of $1.6 million in
sales of impact and laser printers, partially offset by a reduction of $383,000
in sales of consumables and services. Most of the increase in net sales of the
Company's laser printers was due to increased sales of the Troy 512 Plus and the
Troy 540 laser printers. The Troy 540 laser printer was introduced during the
six months ended May 31, 1997. Net sales of the Troy 512 Plus and Troy 540 laser
printers in the six months ended May 31, 1997 and 1998 were $2.1 million and
$3.4 million, respectively. While the Company experienced an increase in impact
printer sales in the first half of 1998 from the first half of 1997, the Company
believes that impact printer sales will decline in future periods because of
continuing increases in print quality and speed and continuing reductions in
prices of non-impact printers. Net sales were not significantly affected by
price changes.
COST OF GOODS SOLD. Cost of goods sold increased by $533,000 or 5.2% to
$10.8 million in the six months ended May 31, 1998 from $10.2 million in the six
months ended May 31, 1997. This increase was primarily due to increased net
sales partially offset by more favorable economies of scale, primarily in the
manufacturing of the Company's proprietary consumables. Cost of goods sold as a
percentage of net sales decreased to 58.7% in the first half of 1998 from 59.7%
in the first half of 1997.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$677,000 or 9.8% to $7.6 million in the six months ended May 31, 1998 from $6.9
million in the six months ended May 31, 1997. Gross profit as a percentage of
net sales increased to 41.3% in the first half of 1998 from 40.3% in the first
half of 1997.
17
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $121,000 or 3.7% to $3.4 million in the six
months ended May 31, 1998 from $3.3 million in the six months ended May 31,
1997. This increase was primarily due to an increase in the provision for bad
debts and sales taxes partially offset by a decrease in compensation expense.
Selling, general and administrative expenses as a percentage of net sales
decreased to 18.7% in the first half of 1998 from 19.3% in the first half of
1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by $17,000 or 1.4% to $1.2 million in the six months ended May 31,
1998 from $1.2 million in the six months ended May 31, 1997. This decrease was
primarily due to the reduction of research and development materials. Research
and development expenses as a percentage of net sales decreased to 6.7% in the
first half of 1998 from 7.3% in the first half of 1997.
OPERATING INCOME. As a result of the above factors, operating income
increased by $573,000 or 24.5% to $2.9 million in the six months ended May 31,
1998 from $2.3 million in the six months ended May 31, 1997. Operating income as
a percentage of net sales increased to 15.9% in the first half of 1998 from
13.7% in the first half of 1997.
INTEREST EXPENSE. Interest expense decreased by $59,000 to $69,000 in the
six months ended May 31, 1998 from $128,000 in the six months ended May 31,
1997. This decrease was due to reduced borrowings under the Company's line of
credit, the early retirement of debt and lower negotiated interest rates.
STATE INCOME TAXES. State income taxes increased by $25,000 to $43,000 in
the six months ended May 31, 1998 from $18,000 in the six months ended May 31,
1997.
FISCAL YEAR ENDED NOVEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1996
NET SALES. Net sales increased by $5.3 million or 18.7% to $33.4 million in
the fiscal year ended November 30, 1997 from $28.2 million in the fiscal year
ended November 30, 1996. This increase was due primarily to a $3.9 million
increase in sales of the Company's proprietary consumables (including
significant initial stocking orders for a new customer) and to a lesser extent
to a $1.7 million increase in sales of laser printers. This increase was offset
slightly by a $403,000 decrease in sales of the Company's impact printers and
services. Most of the increase in net sales of the Company's laser printers was
due to increased sales of the Company's Troy 512 Plus and the Troy 524 laser
printers, which were both introduced in fiscal 1996 and the introduction of the
Troy 540 and Troy 608 in fiscal 1997. Net sales of the Troy 512 Plus and Troy
524 laser printers in the fiscal years ended November 30, 1996 and 1997 were
$1.4 million and $6.1 million, respectively. Net sales of the Troy 540 and Troy
608 in the fiscal year ended November 30, 1997 were approximately $500,000.
These increases were offset by a $3.5 million reduction in net sales of the Troy
512 laser printer, which was replaced by the newer Troy 512 Plus laser printer.
In addition, net sales of consumables for the Troy 512 Plus and the Troy 524
laser printers also increased $1.3 million from fiscal 1996 to fiscal 1997. Net
sales were not significantly affected by price changes.
COST OF GOODS SOLD. Cost of goods sold increased by $2.2 million or 12.6%
to $19.6 million in the fiscal year ended November 30, 1997 from $17.4 million
in the fiscal year ended November 30, 1996. This increase was primarily due to
increased net sales partially offset by more favorable economies of scale,
primarily in the manufacturing of the Company's proprietary consumables. Cost of
goods sold as a percentage of net sales decreased to 58.6% in fiscal 1997 from
61.8% in fiscal 1996.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$3.1 million or 28.7% to $13.8 million in the fiscal year ended November 30,
1997 from $10.8 million in the fiscal year ended November 30, 1996. This
increase was also attributable to increased sales of higher speed laser
printers, which tend to have more favorable margins. Gross profit as a
percentage of net sales increased to 41.4% in fiscal 1997 from 38.2% in fiscal
1996.
18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.4 million or 26.5% to $6.6 million in
the fiscal year ended November 30, 1997 from $5.2 million in the fiscal year
ended November 30, 1996. Of this increase, approximately $628,000 was due to
additional compensation for sales, marketing and management personnel and
increased sales commissions. This increase was also due to new product
introductions resulting from higher net sales, expenses associated with the
renovation of the Company's California and West Virginia facilities and an
increase in rental expense at its West Virginia facility. Selling, general and
administrative expenses as a percentage of net sales increased to 19.9% in
fiscal 1997 from 18.6% in fiscal 1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $480,000 or 23.5% to $2.5 million in the fiscal year ended November
30, 1997 from $2.0 million in the fiscal year ended November 30, 1996. Of this
increase, approximately $205,000 was due to the addition of research and
development personnel. In addition, the Company engaged in significant
development activities relating to its higher speed laser printers and provided
certain specialized impact printer services to one of its customers. Research
and development expenses as a percentage of net sales increased to 7.5% in
fiscal 1997 from 7.2% in fiscal 1996.
OPERATING INCOME. As a result of the above factors, operating income
increased by $1.2 million or 35.0% to $4.7 million in the fiscal year ended
November 30, 1997 from $3.5 million in the fiscal year ended November 30, 1996.
Operating income as a percentage of net sales increased to 14.0% in fiscal 1997
from 12.4% in fiscal 1996.
INTEREST EXPENSE. Interest expense decreased by $99,000 to $262,000 in the
fiscal year ended November 30, 1997 from $361,000 in the fiscal year ended
November 30, 1996. This decrease was due to reduced borrowings under the
Company's line of credit and a lower negotiated interest rate.
STATE INCOME TAXES. State income taxes decreased by $15,000 to $35,000 in
the fiscal year ended November 30, 1997 from $50,000 in the fiscal year ended
November 30, 1996.
FISCAL YEAR ENDED NOVEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1995
NET SALES. Net sales increased by $6.7 million or 31.1% to $28.2 million in
the fiscal year ended November 30, 1996 from $21.5 million in the fiscal year
ended November 30, 1995. This increase was due primarily to a $3.9 million
increase in sales of the Company's proprietary consumables and to a lesser
extent to a $3.4 million increase in its laser printer and impact printer sales,
primarily the Company's higher speed laser printers. This increase was offset
slightly by a $600,000 decrease in service revenue. Most of the increase in net
sales of the Company's laser printers was due to increased sales of the
Company's Troy 512 laser printer and the introduction of the Troy 512 Plus
printer during the second quarter of fiscal 1996. Net sales of the Troy 512 and
Troy 512 Plus laser printers in the fiscal years ended November 30, 1995 and
1996 were $2.0 million and $4.7 million, respectively. In addition, net sales of
consumables for the Troy 512 and Troy 512 Plus laser printers also increased
$1.1 million from fiscal 1995 to fiscal 1996. Net sales were not significantly
affected by price changes.
COST OF GOODS SOLD. Cost of goods sold increased by $3.8 million or 28.4%
to $17.4 million in the fiscal year ended November 30, 1996 from $13.6 million
in the fiscal year ended November 30, 1995. This increase was primarily due to
increased net sales partially offset by more favorable economies of scale,
primarily in the manufacturing of the Company's proprietary consumables. Cost of
goods sold as a percentage of net sales decreased to 61.8% in fiscal 1996 from
63.1% in fiscal 1995.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$2.8 million or 35.8% to $10.8 million in the fiscal year ended November 30,
1996 from $7.9 million in the fiscal year ended November 30, 1995. This increase
was also attributable to increased sales of higher speed laser printers, which
tend to have more favorable margins. Gross profit as a percentage of net sales
increased to 38.2% in fiscal 1996 from 36.9% in fiscal 1995.
19
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $360,000 or 6.4% to $5.2 million in the
fiscal year ended November 30, 1996 from $5.6 million in the fiscal year ended
November 30, 1995. This decrease was primarily due to a reduction in legal fees
in fiscal 1996 as a result of settling a lawsuit in late fiscal 1995 and the
outsourcing of marketing and advertising services. These decreases were
partially offset by increased selling activity and an increase in compensation
expense, the result of hiring additional personnel. Selling, general and
administrative expenses as a percentage of net sales decreased to 18.6% in
fiscal 1996 from 26.1% in fiscal 1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $293,000 or 16.8% to $2.0 million in the fiscal year ended November
30, 1996 from $1.7 million in the fiscal year ended November 30, 1995. This
increase was due to the hiring of additional research and development personnel,
the increased research and development activity relating to the Company's
proprietary consumables, and increased research and development activities
relating to upgrading its impact printing line. Research and development
expenses as a percentage of net sales decreased to 7.2% in fiscal 1996 from 8.1%
in fiscal 1995.
OPERATING INCOME. As a result of the above factors, operating income
increased by $2.9 million or 504.9% to $3.5 million in the fiscal year ended
November 30, 1996 from $575,000 in the fiscal year ended November 30, 1995.
Operating income as a percentage of net sales increased to 12.4% in fiscal 1996
from 2.7% in fiscal 1995.
INTEREST EXPENSE. Interest expense increased by $19,000 to $361,000 in the
fiscal year ended November 30, 1996 from $342,000 in the fiscal year ended
November 30, 1995. This increase was due to increased borrowings under the
Company's line of credit.
STATE INCOME TAXES. State income taxes increased by $130,000 to $50,000 in
the fiscal year ended November 30, 1996 from an $80,000 credit in the fiscal
year ended November 30, 1995.
BACKLOG
The Company sells its products on a purchase order basis rather than through
long-term contracts. Because the Company typically ships product within 30 days
of order and customers may cancel or reschedule deliveries, the Company does not
consider backlog to be a reliable indicator of future financial results.
COMPLIANCE WITH YEAR 2000
Many computer systems and applications currently use two-digit date fields
to designate a year. As a result, on or near the turn of the century,
date-sensitive computing systems will recognize the year 2000 as 1900, or not at
all, which may cause systems to process financial and operational information
incorrectly. The Company has completed its assessment of the Year 2000
compliance of existing software products offered or used by the Company and
believes that no corrective action will be required. Consequently, the Company
does not anticipate incurring significant additional costs to achieve Year 2000
compliance, although no assurance can be given that the Company's assessment has
identified all potential Year 2000 issues. In addition, it is currently unknown
whether the Company's vendors, distributors, OEMs or other third parties with
which the Company conducts business will successfully achieve Year 2000
compliance with respect to their own computer software and products. The failure
of the Company or its vendors, distributors, OEMs or other third parties with
which the Company conducts business to successfully achieve Year 2000 compliance
could have a material adverse effect on the Company.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth the Company's unaudited combined quarterly
results of operations for each of the quarters in the fiscal years ended
November 30, 1996 and 1997 and the six months ended May 31, 1998. This quarterly
information is unaudited, but has been prepared on the same basis as the
20
<PAGE>
audited combined financial statements and, in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the quarters presented
when read in conjunction with the audited combined financial statements and
notes thereto included elsewhere in this Prospectus. The results of operations
for any quarter are not necessarily indicative of the results of any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
1996 1997
-------------------------------------------------- --------------------------------------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 FEB. 28 MAY 31 AUG. 31 NOV. 30
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales........... $ 6,369 $ 6,272 $ 7,421 $ 8,099 $ 8,826 $ 8,286 $ 7,479 $ 8,843
Cost of goods
sold.............. 3,858 3,677 4,809 5,064 5,290 4,933 4,249 5,125
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........ 2,511 2,595 2,612 3,035 3,536 3,353 3,230 3,718
Selling, general and
administrative
expenses.......... 1,281 1,313 1,287 1,353 1,527 1,776 1,645 1,674
Research and
development
expenses.......... 455 532 533 521 582 663 588 688
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income.... 775 750 792 1,161 1,427 914 997 1,356
Interest expense.... 105 90 84 82 58 70 59 75
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before state
income taxes...... 670 660 708 1,079 1,369 844 938 1,281
State income
taxes............. 11 11 11 17 11 7 7 10
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income.......... $ 659 $ 649 $ 697 $ 1,062 $ 1,358 $ 837 $ 931 $ 1,271
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
1998
------------------------
FEB. 28 MAY 31
----------- -----------
<S> <C> <C>
Net sales........... $ 8,928 $ 9,394
Cost of goods
sold.............. 5,358 5,398
----------- -----------
Gross profit........ 3,570 3,996
Selling, general and
administrative
expenses.......... 1,578 1,846
Research and
development
expenses.......... 630 598
----------- -----------
Operating income.... 1,362 1,552
Interest expense.... 39 30
----------- -----------
Income before state
income taxes...... 1,323 1,522
State income
taxes............. 20 23
----------- -----------
Net income.......... $ 1,303 $ 1,499
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
------------------------------------------------------------------------------------------------------
1996 1997
-------------------------------------------------- --------------------------------------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 FEB. 28 MAY 31 AUG. 31 NOV. 30
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods
sold.............. 60.6 58.6 64.8 62.5 59.9 59.5 56.8 58.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........ 39.4 41.4 35.2 37.5 40.1 40.5 43.2 42.0
Selling, general and
administrative
expenses.......... 20.1 20.9 17.3 16.7 17.3 21.4 22.0 18.9
Research and
development
expenses.......... 7.1 8.5 7.2 6.4 6.6 8.0 7.9 7.8
----- ----- ----- ----- ----- ----- ----- -----
Operating income.... 12.2 12.0 10.7 14.4 16.2 11.1 13.3 15.3
Interest expense.... 1.7 1.4 1.1 1.0 0.7 0.8 0.8 0.8
----- ----- ----- ----- ----- ----- ----- -----
Income before state
income taxes...... 10.5 10.6 9.6 13.4 15.5 10.3 12.5 14.5
State income
taxes............. 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- ----- -----
Net income.......... 10.3% 10.4% 9.4% 13.2% 15.4% 10.2% 12.4% 14.4%
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
1998
------------------------
FEB. 28 MAY 31
----------- -----------
<S> <C> <C>
Net sales........... 100.0% 100.0%
Cost of goods
sold.............. 60.0 57.5
----- -----
Gross profit........ 40.0 42.5
Selling, general and
administrative
expenses.......... 17.7 19.6
Research and
development
expenses.......... 7.1 6.4
----- -----
Operating income.... 15.2 16.5
Interest expense.... 0.4 0.3
----- -----
Income before state
income taxes...... 14.8 16.2
State income
taxes............. 0.2 0.2
----- -----
Net income.......... 14.6% 16.0%
----- -----
----- -----
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been through cash generated
from operations and borrowings under its revolving credit facility.
Cash flows from operating activities were $1,708,000 in the six months ended
May 31, 1998 compared to $2,420,000 in the six months ended May 31, 1997 and
$5,572,000 in the fiscal year ended November 30,
21
<PAGE>
1997. The cash flows from operating activities in the six months ended May 31,
1998 were comparatively
lower than in fiscal 1997 due primarily to increases in accounts receivable and
inventories and a decrease in accrued expenses, partially offset by an increase
in accounts payable. The receivable increase resulted primarily from one new
customer and higher sales in April and May 1998. The new customer is a foreign
government and the payment processing was expected to have a longer payment
period. The increase in inventories and accounts payable resulted primarily from
increased inventory levels to meet future sales.
Cash flows used in investing activities were $279,000 in the six months
ended May 31, 1998 compared to $392,000 in the six months ended May 31, 1997 and
$758,000 in the fiscal year ended November 30, 1997. Fiscal 1998 included less
than historical levels of property and equipment purchases. For the balance of
the fiscal year ending November 30, 1998, the Company plans to spend
approximately $1.0 million on additional purchases of equipment.
Cash flows used in financing activities were $1,489,000 in the six months
ended May 31, 1998 compared to $2,070,000 in the six months ended May 31, 1997
and $4,756,000 in the fiscal year ended November 30, 1997. Fiscal 1997 included
approximately $2.6 million of S Corporation distributions and net debt
reductions of approximately $2 million. For the balance of the fiscal year
ending November 30, 1998, the Company plans to make additional S Corporation
distributions of approximately $1.5 million and pay approximately $1.3 million
of debt from the proceeds of the Offering. See "Distributions" and "Use of
Proceeds."
The Company's term loan had an outstanding balance of approximately $686,000
as of May 31, 1998 and currently bears interest at the rate of 8.50%. The
Company's revolving line of credit had an outstanding balance of approximately
$615,000 as of May 31, 1998 and currently bears interest at a rate of 9.00%. The
term loan and line of credit mature on May 2, 2000 and June 30, 1998,
respectively. Under the line of credit, the Company is permitted to borrow
between 80% and 85% of eligible accounts receivable and between 25% and 50% of
eligible inventories (up to a maximum of $700,000 for eligible inventories). As
of May 31, 1998, the amount available under the line of credit was approximately
$3.7 million. See "Use of Proceeds."
The Company believes that cash generated by operating activities, the net
proceeds from the Offering and funds available under its credit facility will be
sufficient to finance its operating activities for at least the next 12 months.
To the extent that the funds generated from these sources are insufficient to
finance the Company's operating activities, the Company would need to raise
additional funds through public or private financing. No assurance can be given
that additional financing will be available on terms favorable to the Company,
or at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130 REPORTING COMPREHENSIVE INCOME,
and SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these statements will not impact the Company's financial position,
results of operations or cash flows and any effect will be limited to the form
and content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
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<PAGE>
BUSINESS
The Company provides on-demand distributive printing solutions, primarily to
Fortune 1000 and other large and mid-sized domestic and international
businesses. Troy's current product offering consists of high-quality laser
printers, impact printers, related consumables, including toners and ribbons,
and services. The Company's products provide proprietary solutions that enable
businesses to distribute and print magnetic ink character recognition encoded
financial documents such as checks, money orders, payment coupons and deposit
and withdrawal slips.
INDUSTRY OVERVIEW
ON-DEMAND DISTRIBUTIVE PRINTING
Traditional document printing used a "print-and-distribute" approach.
Pursuant to this approach, pre-printed or blank forms were printed and stored
for later use, or completed documents were printed, copied and distributed.
Based on the Company's review of market estimates of third parties it believes
are reliable, the Company believes that 15% to 20% of all pre-printed forms are
never used because of obsolescence. In addition, shipping and storage costs are
rising and there is a trend away from mass marketing to one-to-one marketing.
Because of these and other issues, this print-and-distribute approach is
generally proving to be too inefficient to meet today's business demands for
convenient, flexible, cost-effective and secure printing solutions.
The benefits of database sharing, team workgroups and improved customer
service drove the advent and growth of client server computing, cross platform
computing, networks, workgroups and intranets. These technological advances
enabled businesses to cost effectively place computing equipment throughout an
enterprise. At the same time, significant improvements in the cost, quality,
speed and finishing options of laser and other non-impact printing technologies
occurred. The merging of these technological developments created a new
opportunity termed on-demand distributive printing.
On-demand distributive printing gives an enterprise the ability to
electronically distribute and print documents on a cost-effective basis at
locations where the documents are required, when they are needed and in the
actual quantities needed. The movement to on-demand distributive printing has
revolutionized the entire printing industry. As a result, there has been a
significant transition away from the use of commercial printers to corporate
in-house printing. On-demand distributive printing represents a market segment
within the on-demand digital printing market. Based on the Company's review of
market estimates of third parties it believes are reliable, the Company believes
that the market for on-demand digital printing will grow at a compound annual
rate of 27% from 1995 to 2000 or from approximately $2.6 billion in 1995 to
approximately $8.6 billion in 2000. Management believes that the market for
on-demand distributive printing will continue to grow at rates consistent with
the growth of the on-demand digital printing market, however, there can be no
assurance that the growth rate of the on-demand distributive printing market
will be equal to or in excess of the growth rate of the on-demand digital
printing market.
While the growth of the Internet, intranets and other electronic media are
changing the way information and documents are distributed internally and
externally, industry studies do not predict a decline in the annual quantity of
financial documents until at least the year 2010 due to the continued expansion
of the volume and the continued preference for paper checks and other financial
documents. In addition, the Company believes that the electronic transmission of
financial documents will not become widespread until industry standards are
adopted and businesses possess the necessary hardware and software to conduct
electronic transactions.
FINANCIAL DOCUMENT PRINTING
One of the most important applications of on-demand distributive printing
involves the printing of financial documents. Financial documents are
increasingly being perceived as standard business forms in
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<PAGE>
the same manner as purchase orders and invoices. Accordingly, businesses are
increasingly insisting on convenient, flexible, cost-effective and secure
printing solutions for all business documents.
Unlike purchase orders and invoices, the printing of financial documents
presents a number of unique challenges. Perhaps the most significant challenge
is the printing of MICR lines, the unique characters on the bottom of a check.
The MICR line is printed with magnetic ink or toner that, when magnetized, emits
a magnetic signal that identifies each unique character. Financial documents are
processed on special MICR reader/sorter machines. The reader/sorter machines
first magnetize the MICR line and then read the magnetic signals. Each
character, if printed correctly and with the appropriate amount of magnetics
(ferrous oxide) in the ink or toner, will give off a magnetic signal unique and
identifiable to that character. The magnetic signal is developed from two key
elements (i) the character's shape--the horizontal and vertical attributes and
(ii) the magnetic content--the amount and distribution of magnetic material in
the ink or toner from which the character is formed. If the shape and/or
magnetics of the characters do not meet specified standards, the reader/sorter
machine will reject the document, which will then require costly manual
handling.
Financial documents have historically been printed with offset or
lithographic printing processes and impact ribbon printing techniques. These
printing technologies provide an estimated 1000 x 1000 dots per inch ("DPI")
print quality resolution. Because of the cost of such printers, only large
companies, primarily commercial printers, use these types of printers to print
high volumes of financial documents, generally for third parties. These costs
traditionally prohibited small to mid-sized companies from printing financial
documents in-house.
Today, laser printing provides an enormous amount of flexibility without a
serious degradation in print quality. Laser printing involves an imaging
technique, similar to photocopying, that lays down tiny particles of a black
powder (toner) onto the paper in the form of characters (or graphics) that are
then fused to the paper, typically with a heat and pressure process. Today's
popular laser printers now reach image resolutions of 1200 x 1200 DPI and
provide high quality visual images.
Because of the unique requirements of the MICR line, laser printing
techniques have traditionally been difficult to implement for financial
documents. The laser imaging, developing and fusing processes affect not only
the shape of the printed MICR line but also the magnetic properties of the toner
and the magnetic signal. The quality of the paper also affects the print quality
of the MICR line and the laser process can treat the paper harshly. Even subtle
changes to the printer, paper, toner and operation can produce unacceptable
MICR. This, in turn, creates rejects which result in additional processing
costs.
Security is another significant challenge of any enterprises' printing of
financial documents, which essentially involves printing "money" in a check
form. Security must be implemented in some form to reduce the potential for
fraud and illicit use of the equipment. Some or all of the following security
features are necessary when printing financial documents: hardware security
(e.g., key locks, passwords and restricted environments), software security
(e.g., multi-level passwords, restricted access, log and audit reports) and
document traceability (e.g., identifiable print locations).
THE TROY SOLUTION
Troy currently offers on-demand distributive printing solutions that enable
businesses to distribute and print MICR-encoded financial documents. Over the
past 27 years, Troy and its predecessor companies have developed an expertise in
MICR printing systems and consumables and were the first to develop a desktop,
laser financial document printer. The Company's printing systems incorporate
proprietary firmware and software and its consumable products incorporate
proprietary chemical formulations that together enable its customers to print
financial documents in the on-demand distributive printing environment, thereby
offering: (i) convenience and flexibility through the ability to print financial
documents where they are required, when they are needed and in the actual
quantities needed; (ii) cost savings through the elimination of the requirement
to purchase and maintain inventories of pre-printed forms; and (iii) enhanced
software, hardware and document security.
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<PAGE>
BUSINESS STRATEGY
The Company's objective is to become the leading provider of on-demand
distributive printing and imaging solutions throughout the world. In order to
achieve this objective, the Company will continue to implement the following
strategies:
EXPAND SOLUTIONS FOR HEWLETT-PACKARD BASED PRODUCTS. The Company intends to
continue to develop and expand its strategic relationship with Hewlett-Packard.
The Company believes that this relationship provides it with the opportunity to
expand its market share of MICR-enabled laser printers and consumables and
maintain and enhance its technological position and expertise. In addition, the
Company intends to expand its product offerings in conjunction with the
introduction of new Hewlett-Packard printers, as well as provide additional
services to Hewlett-Packard and its customers.
EXPAND EXISTING AND SEEK NEW OEM RELATIONSHIPS. The Company intends to
aggressively expand existing OEM relationships and seek new relationships. The
Company intends to expand its relationship with IBM and other existing OEMs by
expanding its offering of consumables to the OEMs. In addition, the Company
intends to develop new OEM and private label arrangements for the distribution
of its proprietary consumables. The Company believes that this strategy provides
it with the opportunity to expand its market share of consumables and maintain
and enhance its technological position and expertise.
LEVERAGE STRATEGIC ALLIANCES. Troy currently partners with various
hardware, software and firmware companies as well as consulting firms that offer
solutions which assist the Company in meeting its customers' on-demand
distributive printing needs. The Company intends to continue to aggressively
pursue new strategic alliances, which the Company believes will enable it to
enter new markets, expand its channels of distribution and enhance its product
and service offerings.
MAINTAIN TECHNOLOGICAL LEADERSHIP POSITION. Since entering the financial
document printing market in 1971, the Company has achieved a technological
leadership position in MICR laser printing technology and MICR proprietary
consumable formulation. The Company has done so by investing heavily in research
and development, developing higher quality products and focusing on satisfying
the needs of both its OEM customers and end users. The Company intends to
continue to invest heavily in research and development to enhance its MICR laser
printers and propriety consumables.
EXPAND DISTRIBUTION CHANNELS. The Company intends to further expand its
distribution channels to increase its focus on selling to smaller businesses,
such as local and regional banks and insurance companies, payroll services
companies, credit unions and temporary employment agencies. The Company believes
that an increasing number of such smaller businesses will bring their financial
document printing needs in-house as they are made aware of the benefits of
on-demand distributive printing.
COMPLEMENT INTERNAL GROWTH THROUGH ACQUISITIONS. Troy intends to acquire
products, technologies and businesses in related areas such as forms management,
forms finishing, networking, the Internet, financial software and service
fields. Possible acquisitions candidates may include businesses that the Company
is either currently working with or aware of that address segments of the
on-demand distributive printing market. The Company believes that this
acquisition strategy will provide it with an opportunity to become a leading
provider of on-demand distributive printing and imaging solutions. In addition,
potential acquisition candidates may enable the Company to provide enhanced and
new solutions for its current and prospective customer base, exposure to new
markets and customers and increased opportunities for strategic alliances in the
on-demand distributive printing and imaging market.
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<PAGE>
The following diagram depicts segments of the on-demand distributive
printing and imaging market:
[Circle diagram with the center circle stating "TROY On-Demand Distributive
Printing & Imaging Solution." The next circle depicts "software," "hardware" and
"consumables and services." The last circle includes the following business
segments:]
<TABLE>
<CAPTION>
SOFTWARE HARDWARE CONSUMABLES AND SERVICES
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
CHECK WRITING SOFTWARE PRINTERS TONERS, RIBBONS & PARTS
Connectivity Print Servers Papers
Data Conversion Kiosks Financial Transaction
Internet Forms Finishing Management & Services
Networking Forms Handling Film
Forms Design Imaging Services Hardware Maintenance
System Integration
Forms Management
Payment Systems
</TABLE>
The Company's ability to successfully implement the foregoing strategies is
dependent upon the vision and ability of its management team. The Company has
assembled a management team which combines expertise and experience in the areas
of strategic planning, sales and marketing, operations, finance, acquisitions
and numerous engineering specialties such as electrical, chemical, mechanical
and software.
PRODUCTS AND SERVICES
The Company's current product offering consists of laser printers, impact
printers, related consumables, including toner and ribbons, and services. The
following tables set forth the Company's net sales in each of the three years
ended November 30, 1995, 1996 and 1997, and for the six months ended May 31,
1997 and 1998 for each of the Company's four major product lines:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Laser Printers................................. $ 2,475 $ 5,236 $ 6,974 $ 3,283 $ 4,726
Impact Printers................................ 5,391 5,987 5,773 2,160 2,310
Consumables.................................... 9,938 13,865 17,803 10,139 9,839
Services....................................... 3,673 3,073 2,884 1,530 1,447
--------- --------- --------- --------- ---------
Total Net Sales.............................. $ 21,477 $ 28,161 $ 33,434 $ 17,112 $ 18,322
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
AS A PERCENTAGE OF TOTAL NET SALES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Laser Printers.............................................. 11.5% 18.6% 20.9% 19.2% 25.8%
Impact Printers............................................. 25.1 21.3 17.3 12.6 12.6
Consumables................................................. 46.3 49.2 53.2 59.3 53.7
Services.................................................... 17.1 10.9 8.6 8.9 7.9
--------- --------- --------- --------- ---------
Total Net Sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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<PAGE>
LASER PRINTERS
Through an exclusive OEM relationship with Hewlett-Packard, Troy purchases
Hewlett-Packard laser printers and modifies and enhances the printers. Troy then
repackages and relabels the printers and sells them as MICR-enabled financial
document printers under the Troy name.
All of the Company's laser printers offer the following key features:
- ability to print financial documents from blank paper meeting certain
minimum quality standards;
- ability to print checks and money orders from multiple accounts directly
from the keyboard without any loading and unloading of pre-printed stock;
- automatic detection by the Company's proprietary sensors of low MICR
toner;
- automatic toner density adjustments and automatic shut-down on low-toner
events;
- automatic jam recovery processing designed to prevent duplicate check
printing;
- ability to print customized images on financial documents, such as logos
and signatures;
- MICR toner detection functions; and
- ability to print checks complete with MICR line, signatures, logos and
check overlay, all in one pass.
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<PAGE>
The Company offers the following laser printers with the following key
features:
<TABLE>
<CAPTION>
<S> <C> <C>
PRODUCT DESCRIPTION KEY FEATURES
TROY 512 Plus A 12 page-per minute - Produces up to 2,800 checks per hour
laser printer for - Prints four different checks on a single page
corporate environments, and from separate accounts
based on the HP LaserJet - Prints different-sized checks from three
5 separate 850 sheet paper trays
- Contains an audit function that uses an
electronic circuit board to capture and store
data for future report generation (optional)
TROY 524 A 24 page-per minute - Produces up to 5,700 checks per hour
laser printer for medium - Prints different-sized checks from three
and large office separate 1,000 sheet paper trays
environments, based on - Prints up to four different checks on a single
the HP LaserJet 5Si page
- Sorts checks into any one of eight different
mail slots (optional)
- Contains an audit function that uses an
electronic circuit board to capture and store
data for future report generation (optional)
TROY 540 A 40 page-per minute - Produces up to 9,600 checks per hour
laser printer for high - Prints different-sized checks from three
volume office separate 500 sheet paper trays
environments, especially
data centers, based on
the HP D640
TROY 608 An eight page-per minute - Produces up to 1,920 checks per hour
laser printer for small - Prints different-sized checks from two separate
office environments and trays
corporate departments, - Contains an instant-on fuser that virtually
particularly where eliminates warm-up waiting time, allowing the
employees in workgroups first page to print in less than 20 seconds
of two-to-five persons
share higher-volume
network printers with
other departments and
personnel, based on the
HP LaserJet 6P
TROY 617 A 17 page-per-minute, - Produces up to 4,080 checks per hour
medium-volume, midrange, - Prints different-sized checks from multiple
laser printer for paper trays
workgroup environments,
based on the HP LaserJet
4000
</TABLE>
IMPACT PRINTERS
The Company offers two lines of impact printing systems. The first line is a
stand alone printer that contains two separate print drums, one with
alphanumeric characters and one with MICR characters. Through its dual drums,
this printer has the capability to print both standard and MICR documents. This
printer is sold under the Company's name, primarily in international markets.
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<PAGE>
The second line is an impact printing module that is incorporated into a
print line consisting of IBM, Xerox or other high speed laser printers. This
system permits organizations to print high volumes of MICR-encoded documents
in-house while maintaining the flexibility to print non-MICR documents. As part
of this printing line, Troy's impact printing module, through its proprietary
software and sensors, is either enabled or disabled depending on the particular
print job. This enabling/disabling permits efficient use of MICR ribbons, which
are significantly more expensive than standard ribbons.
The Company's impact printers provide the following unique benefits:
- ability to embed the MICR characters onto the paper so that the characters
are actually removed from the printer's ribbon and placed on the paper, a
technique called "full or total character transfer;"
- fixed impact fonts that are etched into the print drum, providing font
character consistency;
- ability to place MICR characters only where MICR information is required;
- fixed consistency of the magnetic properties within the MICR line through
total character transfer;
- continuous form output compared to cut sheet paper offered by most of the
Company's competitors; and
- ability to print at high speeds of up to 310 pages per minute.
RELATED CONSUMABLES
Both the Company's laser and impact printing solutions require ongoing
consumables, sales of which represent the largest portion of the Company's
revenue. The Company's impact systems require MICR ribbons for operation, while
its laser systems require toner cartridges. The Company is the only authorized
MICR toner manufacturer for Hewlett-Packard LaserJet printers and is the only
authorized MICR toner manufacturer for the IBM 3900 and InfoPrint 4000 family of
high speed laser printers. See "--Sales and Marketing."
In addition to the Company's MICR toner and ribbons, which support the
Company's hardware, the Company also offers other ribbons, toners and
accessories for use by other printing devices, including:
- fluorescent and indelible ribbons;
- post-encoding equipment (used to add the amount information to checks
prior to processing);
- jumbo rolls (large rolls of MICR ribbon, typically 42" wide, manufactured
to precise specifications);
- MICR toner (designed to match the specifications of the particular printer
engine);
- standard toner (for selected manufacturers of printers and fax machines);
- paper trays;
- paper handling accessories;
- memory upgrades;
- networking and custom options; and
- check security paper.
SERVICES
Troy offers technical support, maintenance and on-site services, portions of
which are provided by third parties. Troy provides its technical support through
an 800 line from 7:00 am to 5:00 pm (pst) and through its web-site
(http://[email protected]). The Company also provides on-site service for its
new
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<PAGE>
printers as well as upgrades and offers on-site service through yearly
maintenance contracts or on a time and material basis after the expiration of
the applicable warranty period.
In addition to the Company's technical support, maintenance and on-site
services, for over five years, the Company has maintained a research group
dedicated to providing solutions for MICR document processing problems, the MICR
Technology Center ("MTC"). Members of the MTC testing facility have the ability
to examine all aspects of the MICR printing process to pinpoint where
improvements can be made and to ensure the highest quality MICR line. An
analysis of the printing process entails examining four critical factors--MICR
font, toner, paper and printer. The MTC offers testing services for all these
factors, including:
- consulting services;
- customized testing and evaluation;
- document testing services;
- state-of-the-art paper test lab;
- ANSI specification evaluation;
- fraud prevention;
- quality control programs;
- signal level testing;
- document imaging;
- comprehensive document design analysis; and
- forms design and construction.
SALES AND MARKETING
The Company markets its products to Fortune 1000 companies through its
direct sales force of ten persons (eight domestically and two internationally),
while it markets its products to large-to-mid sized businesses through its
network of over 80 dealers and value-added resellers. The Company markets its
products in 55 countries, primarily through a distributor network. The Company
promotes its products through trade shows and direct marketing materials as well
as referrals from its business partners, including Hewlett-Packard and IBM.
STRATEGIC RELATIONSHIPS
For over five years, the Company has maintained a strategic relationship
with Hewlett-Packard whereby the Company purchases Hewlett-Packard laser
printers and modifies and enhances the printers. Troy then repackages and
relabels the printers and sells them as MICR-enabled financial document printers
under the Troy name. Management believes that its current relationship with
Hewlett-Packard gives it a competitive advantage in marketing its products
primarily because of Hewlett-Packard's reputation as the leading provider of
laser printing solutions to companies throughout the world.
Since April 1, 1996, the Troy/Hewlett-Packard strategic alliance has been
governed by the HP Agreement, which (i) appoints the Company as an authorized,
exclusive reseller in the United States and 35 other countries for
Hewlett-Packard, MICR LaserJet printers; (ii) designates the Company as the
exclusive reseller in the United States of Hewlett-Packard MICR toner and a
custom, single inline memory module; and (iii) permits the Company to sell other
products designated by Hewlett-Packard on a non-exclusive basis, such as paper
trays. The HP Agreement expires on March 31, 1999, and has certain shipment
milestones in order for the Company to maintain exclusive rights to resell
Hewlett-Packard
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<PAGE>
MICR LaserJet printers. If the milestones are not met by the dates specified,
the HP Agreement will remain in effect but the exclusivity granted to the
Company to resell MICR LaserJet printers may be removed at the discretion of
Hewlett-Packard. Either party may terminate the HP Agreement: (i) after the
expiration date upon 180 days written notice; (ii) by either party in the event
of certain events of bankruptcy or insolvency by the other party; and (iii) by
either party upon 30 days written notice in the event of a material breach of
any obligations under the HP Agreement by the other party that is not cured.
Pursuant to the agreement between the Company and IBM, dated February 6,
1998 (the "IBM Agreement"), IBM has agreed to purchase from the Company all of
its requirements of MICR toner for the IBM 3900 and InfoPrint 4000 family of
high speed laser printers, and the Company has agreed not to sell such IBM toner
to any other parties. IBM is not obligated to purchase any minimum amount of
such toner. The IBM Agreement expires on February 5, 2001, but may be extended
for an additional year upon mutual written consent. Either party may terminate
the IBM Agreement (i) upon certain events of insolvency or bankruptcy or (ii)
upon a material breach that has not been cured within 30 days.
MANUFACTURING CAPABILITIES
FACILITIES
The Company's existing headquarters is located in Santa Ana, California and
consists of approximately 37,000 square feet. This facility accommodates
manufacturing of the Company's impact printers, research and development, sales,
finance, administration and operations, customer support and marketing. The
Company leases this facility pursuant to a lease expiring on April 30, 2001.
This lease provides for rent of $13,794 per month. The Company also has a
facility, primarily for manufacturing its laser printers and proprietary
consumables, located in Wheeling, West Virginia that consists of approximately
77,000 square feet. The Company leases this facility from an affiliate of the
Dirk Stockholders pursuant to a lease expiring on September 1, 2000. This lease
provides for rent of $21,200 per month. See "Certain Transactions." The Company
believes that it has sufficient capacity in its West Virginia and California
facilities to accommodate its growth plans for the foreseeable future.
OPERATIONS
LASER PRINTERS. Through an exclusive OEM relationship with Hewlett-Packard,
Troy purchases Hewlett-Packard laser printers and installs various proprietary
hardware, firmware and software components into the printers. After the
Company's quality control team tests these printers, the Company repackages and
relabels the printers and sells them as MICR-enabled financial document printers
under the Troy name.
IMPACT PRINTERS. The Company manufactures print drums, drum arms and
ancillary components for its impact printers and purchases most of the remaining
hardware components and subassemblies. The Company also sub-contracts portions
of its circuit board assembly. All software and hardware is configured by the
Company and tested by the Company's quality control team prior to installation.
Each printer is manufactured by highly skilled technicians on a made-to-order
system.
CONSUMABLES. Troy's consumable products are produced in its facility in
West Virginia. Troy manufactures its ribbons through a four step process of
formulation, coating, drying and packaging. The first step in the manufacturing
process is formulation of the ink used to coat the ribbons. The formulations are
specifically designed for a family of printers. Certain pigments and resins,
including the necessary magnetics for the MICR line, are mixed in a proprietary
formulation. Through a coating and drying process, the ink is then applied to a
large roll of polyethylene substrate. Once dry, the ribbons are then packaged to
customer specifications. These large rolls are either sold as is or are
converted into smaller rolls or cartridges for sale.
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<PAGE>
Troy manufacturers its toner through a five step batch process consisting of
formulation/compounding, pulverizing, classifying, mixing and packaging. Troy
begins by formulating the resins, magnetics and pigments and shipping the
materials to third parties for compounding. In the compounding process, the
resins are melted and then various pigments and magnetics are blended into the
resins through a large mixing machine. The materials are then dropped onto two
steel rollers that form the material into a thin sheet. Once the sheet has been
cooled and hardened, it is ground into small particles a little larger than
coffee grounds. This ground-up material is then shipped to Troy for further
processing. Troy then combines additives and completes its other proprietary
processes. Once mixed, the toner is packaged to customer specifications and sold
either in bulk, bottles or cartridges.
The Company has designed its computer-controlled, modern toner manufacturing
operation to provide quality, consistency and flexibility. Batch processing
enables the Company to produce multiple high-quality toner formulations during
the same production shift. In addition, each product is developed as a unique
formulation for a specific family of printers.
RESEARCH AND DEVELOPMENT
Troy's success is in part dependent on its ability to continue to design and
develop on-demand distributive printing solutions that meet customer
requirements with respect to functionality, performance, technology and
reliability. The Company's principal research and development activities consist
of: (i) developing proprietary MICR solutions and new products for
Hewlett-Packard laser printers; (ii) developing financial document impact
printing systems; (iii) creating specialty toners (e.g., MICR, fluorescent,
color); (iv) developing specially formulated toners for select OEMs; and (v)
developing connectivity solutions for its printers. The Company seeks customer
feedback in the product design process in order to meet changing requirements
and is committed to developing functional and integrated printing solutions in a
rapid and efficient manner.
The Company has assembled a highly trained staff of chemical, software,
electrical and mechanical engineers. In addition, the Company invests
significantly in highly sophisticated research and development equipment. For
example, the Company operates pilot toner and ribbon lines which mimic Troy's
actual production line, thereby enabling the Company to produce and test its
consumable products in order to ensure consistent and high quality products
prior to mass production. The Company currently employs 37 persons in its
research and development efforts.
CUSTOMERS
Troy has sold its printing systems and related consumables to more than
9,000 customers, including financial institutions, insurance companies, payroll
processing companies, corporations and government agencies. AT&T Corporation,
BankAmerica Corporation, Farmer's Insurance Group, Ford Motor Company, Manpower,
Inc., State Farm Insurance and Wells Fargo & Company are among the Company's
customers, each of whom purchased products during the last 12 months.
COMPETITION
The market for the Company's products is highly competitive and subject to
rapid technological change. The Company currently competes principally on the
basis of the quality, flexibility, convenience and security of its printing
solutions. The Company believes that it competes favorably with respect to these
factors as a result of: (i) the breadth of its products' features; (ii) the
Company's knowledge, technical exposure and professionalism developed over time;
and (iii) a historical commitment to quality. Although the prices of the
Company's products are generally higher than those of its competitors, the
Company has been able to maintain these prices as a result of advanced
technological features (including security), higher levels of quality and
value-added services.
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<PAGE>
In the printer market, the Company's primary competitors are ACOM Computer,
Inc., Bottomline Technologies, Inc., Check Technology Corporation, Delphax
Systems, IBM, Lexmark International, Inc., Oce, Source Technologies, The
Standard Register Company and Xerox. Troy also competes with companies who
provide a MICR font and toner solution without a printer. The Company believes
that its current relationship with Hewlett-Packard gives it a competitive
advantage in the MICR printing market primarily because of Hewlett-Packard's
reputation as the leading provider of laser printing solutions to companies
throughout the world. If the HP Agreement is terminated, the Company would be
required to purchase Hewlett-Packard printers through other sources and would
lose the benefit of Hewlett-Packard's assistance in marketing Troy's
MICR-enabled printers to Hewlett-Packard's customers who may require a MICR
printing solution. The Company would also likely experience increased
competition should such events occur.
Troy competes in the toner and ribbon market primarily on the basis of
quality and service. Color Image is the Company's most significant competitor
with respect to toner products. Troy's significant competitors with respect to
ribbons are Nu-Kote International, Commander Imaging Products Inc. and Fuji
Copian Corporation. The Company positions itself with a pricing strategy that
reflects its quality, reliability, precision of formulation and available
customer support. Many small companies also offer remanufactured MICR cartridges
which are typically lower priced but less reliable than new MICR cartridges,
such as those offered by the Company.
The Company also has several indirect competitors that offer certain
products as an alternative to financial document printing solutions, such as
pre-printed checks, check printing services and electronic payment systems,
outsourcing for payroll, on-line banking and payment systems for their clients.
These companies tend to provide an alternative to internal printing of checks
and other financial documents.
PATENTS AND PROPRIETARY RIGHTS
The Company considers as proprietary certain printing system components,
manufacturing processes, information, knowledge, trademarks and tradenames. The
Company relies on a combination of patent, trademark, trade secret and other
intellectual property laws, nondisclosure agreements with employees and internal
confidentiality measures to protect its intellectual property rights and
confidential information. The Company seeks patents from time to time on its
products and processes. The decision to seek additional patents is based on the
Company's analysis of various business considerations such as the cost of
obtaining a patent, the likely scope of patent protection and the benefits of
patent protection relative to relying on trade secrets and other protection. The
Company also relies on know-how and continuing technological innovations to
develop and maintain its competitive position.
As of February 28, 1998, the Company held seven United States patents and
one United Kingdom patent. The Company's existing patents primarily cover
components of the Company's impact printing systems. The Company has also filed
applications for four additional United States patents, which are pending. There
can be no assurance that the Company's issued patents will provide meaningful
protection of the Company's products and technologies. In addition, patent
applications can be denied or significantly reduced before issuance. Moreover,
there can be no assurance that third parties will not assert intellectual
property infringement claims against the Company or that, if asserted, that the
Company would prevail or be able to obtain any necessary licenses.
The Company also relies on proprietary manufacturing processes and
techniques, materials expertise and trade secrets applicable to the manufacture
of its products. The Company believes that these proprietary rights may provide
it with a competitive advantage as important, if not more important, than patent
protection. The Company seeks to maintain the confidentiality of this
proprietary information by requiring employees who have access to proprietary
information to sign confidentiality agreements and by limiting access by outside
parties to such proprietary information. There can be no assurance, however,
that these measures will provide the Company with adequate protection of its
proprietary information or
33
<PAGE>
with adequate remedies in the event of unauthorized use or disclosure. In
addition, there can be no assurance that the Company's competitors will not
independently develop or otherwise gain access to processes, techniques or trade
secrets that are similar or superior to the Company's. Finally, as with patent
rights, legal action to enforce trade secret rights can be lengthy and costly,
with no guarantee of success.
ENVIRONMENTAL AND REGULATORY MATTERS
The Company's operations are subject to numerous domestic and international
laws and regulations, particularly relating to environmental matters that impose
limitations on the discharge of pollutants into the air, water and soil and
establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company is also required to have permits from a number of
governmental agencies in order to conduct various aspects of its business.
Compliance with these laws and regulations is not expected to have a material
adverse effect on the capital expenditures, earnings or competitive position of
the Company. There can be no assurance, however, that future changes in
environmental laws or regulations, or in the criteria required to obtain or
maintain necessary permits, will not have a material adverse effect on the
Company's operations.
EMPLOYEES
At May 31, 1998, the Company employed approximately 150 persons in the areas
of research and development, manufacturing, management and administration. None
of the Company's employees are represented by a labor union or covered by a
collective bargaining agreement. The Company has a proactive communication
policy that includes regular meetings, discussions and question and answer/
feedback sessions. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.
LEGAL PROCEEDINGS
From time to time, the Company is subject to litigation in the ordinary
course of its business. In February 1998, a former employee of the Company filed
suit in the Circuit Court of Ohio County, West Virginia, alleging, among other
things, sexual harassment by another former employee of the Company. The former
employee is seeking damages in an unspecified amount, and has requested that the
amount of damages be determined by the courts. The Company denies any liability
in this matter and intends to vigorously defend this litigation. However, this
litigation is in its early stages and the outcome of the litigation is
inherently uncertain and an adverse resolution of this litigation could result
in a monetary judgment against the Company. The Company is not presently a party
to any other material litigation.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTOR, DIRECTOR NOMINEES AND OTHER KEY EMPLOYEES
The executive officers, sole director and director nominees of the Company
and their ages as of February 28, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Patrick J. Dirk............................. 58 Chairman of the Board, sole Director, President and Chief
Executive Officer of the Company and Chairman of the Board and
Chief Executive Officer of the Subsidiary
Robert S. Messina........................... 48 Executive Vice President of the Company and President and
Chief Operating Officer of the Subsidiary
Brian P. Dirk(1)............................ 34 Vice President and Director Nominee and Vice President
International Sales of the Subsidiary
Del L. Conrad............................... 52 Chief Financial Officer, Treasurer and Secretary of the
Company
Norman B. Keider(1)(2)...................... 66 Director nominee
John B. Zaepfel(1)(3)....................... 61 Director nominee
William P. O'Reilly(1)(2)................... 52 Director nominee
Gene A. Bier(1)(3).......................... 59 Director nominee
</TABLE>
- ------------------------
(1) Will become a director upon completion of the Offering.
(2) Member of the Compensation Committee upon completion of the Offering.
(3) Member of the Audit Committee upon completion of the Offering.
EXECUTIVE OFFICERS, DIRECTOR AND DIRECTOR NOMINEES
PATRICK J. DIRK has been the Chairman of the Board, sole director, President
and Chief Executive Officer since he co-founded the Company with his wife in May
1982. Mr. Dirk is also the founder, Chairman of the Board and Chief Executive
Officer of the Subsidiary. From March 1984 to present, Mr. Dirk has served as a
Director of Eltrax Systems, Inc. ("Eltrax"), a managed network services company
providing communication products and services for enterprise wide networks,
which he co-founded in March 1984 and served as Chairman of the Board from
February 1995 until August 1995. From 1973 until 1982, Mr. Dirk was employed in
various capacities by Kroy Inc., a corporation involved in manufacturing
automated lettering machines and related products, serving most recently as
President and a member of the Board of Directors. Mr. Dirk also serves as a
member of the Board of Directors and advisory boards of several private
companies, none of which compete with the Company. Mr. Dirk is required to
devote substantially all of his efforts to the Company and its wholly-owned
Subsidiary's operations.
ROBERT S. MESSINA has been the Executive Vice President of the Company since
April 1998 and the President and Chief Operating Officer of the Subsidiary since
December 1996. From December 1995 through December 1996, Mr. Messina served as
the Executive Vice President and General Manager of the Subsidiary and from July
1994 through December 1995 as the Vice President Sales and Marketing. From
January 1992 through March 1994, he was the General Manager of Omninote, a
division of Telautograph Corp., a network communications company.
BRIAN P. DIRK has been the Vice President of the Company since April 1998
and will become a director of the Company upon completion of the Offering. Mr.
Dirk's primary responsibility is to the Company's Subsidiary where he has served
as Vice President International Sales since August 1995. Since joining the
Company in 1987, Mr. Dirk has held various training and management positions in
the Company including Director of Business Development, International Sales
Manager, Special Projects Manager, Telesales
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<PAGE>
Representative and Purchasing Agent. Mr. Brian Dirk is the son of Mr. Patrick
Dirk, the Chairman of the Board, President and Chief Executive Officer of the
Company.
DEL L. CONRAD has been the Chief Financial Officer, Treasurer and Secretary
of the Company since April 1998 and was the Vice President of Finance and
Administration of the Subsidiary from March 1995 to April 1998. From August 1991
to March 1995, he served as a consultant to companies on mergers and
acquisitions, bank financing and operations. From June 1981 to July 1991, Mr.
Conrad was a partner with McGladrey & Pullen, LLP, a public accounting firm.
DIRECTOR NOMINEES
NORMAN B. KEIDER will become a director upon completion of the Offering.
Since August 1993, Mr. Keider has been a self employed management consultant.
Mr. Keider served as a managing director of A.T. Kearney, an executive search
consulting firm from January 1989 to August 1993. From April 1986 to January
1989, he was a partner with Keider-Zupsic Associates, an executive search
consulting company. Mr. Keider also served as a partner for Arthur Young &
Company, an executive search consulting company from December 1979 to April
1986. From January 1978 to December 1979, he was a self employed consultant for
acquisition searches. From December 1972 to January 1978, Mr. Keider was the
President and Chief Executive Officer of Atlas Powder Company, a manufacturer of
commercial explosives.
JOHN B. ZAEPFEL will become a director upon completion of the Offering.
Since June 1991, Mr. Zaepfel has been a Managing Partner of the Zaepfel Group, a
middle market consulting firm, specializing in strategic facilitation and
planning. Mr. Zaepfel has served as Chief Executive Officer of several companies
and is currently serving as a director for ten companies, including two publicly
traded companies, RemedyTemp, Inc. and Pro-Dex, Inc. From January 1985 to May
1989, Mr. Zaepfel was the founder and Chief Executive Officer of CPG
International, Inc., a manufacturer and marketer of fine art, graphic art,
engineering, drafting and media supplies. From 1974 to 1984, Mr. Zaepfel was
President and Chief Executive Officer of Chartpak and Pickett Industries,
wholly-owned subsidiaries of Times Mirror. Mr. Zaepfel was General Manager of
Chartpak, a division of Avery International from 1990 to 1993.
WILLIAM P. O'REILLY will become a director upon completion of the Offering.
Mr. O'Reilly has been the Chief Executive Officer of Eltrax since January 1997.
Mr. O'Reilly has also been the Chairman of the Board of Directors of Eltrax
since August 1995 and a director of Eltrax since July 1995. For the past 15
years, Mr. O'Reilly has been a private investor and entrepreneur who has managed
several business ventures. In 1989, Mr. O'Reilly formed a group of investors to
acquire Military Communications Center, Inc., where he served as Chairman of the
Board and Chief Executive Officer from 1989 to 1994. In 1986, Mr. O'Reilly
founded Digital Signal, Inc., a provider of fiber optic capacity to long
distance carriers in the telecommunications industry, where he served as Chief
Executive Officer from 1986 to 1989. In 1980, Mr. O'Reilly founded Lexitel
Corporation, a long distance carrier (which was subsequently acquired by ALC
Communications, Inc.), where he served as Chairman of the Board and Chief
Executive Officer from 1980 to 1984. Mr. O'Reilly is also a director of two
public companies, Charter Communications, Inc., a builder and operator of
international communication networks which provides voice, video and data
services, and World Access, Inc., a value added reseller of telecommunications
equipment.
GENE A. BIER will become a director upon completion of the Offering. Since
1987, Mr. Bier has been the President and Chief Executive Officer of XCORP
Business Development, Inc., a consulting and investment company. From July 1986
to February 1996, Mr. Bier was a director of Eltrax and from September 1989 to
March 1990, he was Chairman of the Board. From June 1983 to January 1987, Mr.
Bier was Chief Executive Officer of U.S. West Communications, formerly Minnesota
Northwestern Bell. From September 1978 to June 1983, he was Vice President and
from August 1963 to September 1978, he held various positions in the Bell
System. Mr. Bier has served on the boards of many local organizations, including
the Minnesota Business Partnership, Inc., the Greater Minneapolis Metropolitan
Housing
36
<PAGE>
Corporation, the United Way of Minneapolis and the Metropolitan Medical Center.
Mr. Bier was Chairman of the Greater Minneapolis Chamber of Commerce, the
Governor's Jobs Training Council, the Minnesota State Lottery Board and the
Urban Coalition.
OTHER KEY EMPLOYEES
THOMAS O. TULOWITZKI has been the Subsidiary's Senior Vice President
Engineering since March 1996. From February 1991 to March 1996, Mr. Tulowitzki
served as a Manager of Sustaining Engineering for Danka Business Systems PLC
("Danka"), an independent supplier of photocopiers, facsimiles and other related
automated office equipment. From September 1989 to January 1991, he was self
employed. From August 1964 to August 1989, Mr. Tulowitzki served in various
technical and management positions for Xerox Corporation, a manufacturer of
office products and supplies.
LEE C. MARTIN, JR. has been the Subsidiary's Vice President Domestic Sales
since December 1996 and held various sales positions with the Subsidiary from
September 1993 to December 1996. From August 1990 to August 1993, Mr. Martin
served as Director of Sales of Emulex Corporation, a designer and manufacturer
of high-performance network connectivity products including fiber channel,
printer servers and network access products and from August 1983 to August 1990
served as district sales manager and a regional sales manager.
MARK D. CHAPMAN has been the Subsidiary's Vice President Marketing since
December 1996 and Director of Marketing from August 1994 to December 1996. From
March 1994 to August 1994, Mr. Chapman was the Director of Marketing of Omnifax
Corp, a division of Danka and a manufacturer of facsimile machines. From
November 1992 to March 1994, he served as Manager of Marketing Services of
Telautograph Corporation, a manufacturer of specialized communications equipment
utilized by hospitals, hotels and Fortune 500 corporations. From August 1983 to
November 1992, Mr. Chapman held various sales and marketing positions with
Siemens Energy and Automation, a manufacturer of electrical distribution
equipment.
LARRY D. LANDTISER has been the Subsidiary's Vice President Manufacturing
since October 1996 and from October 1984 to January 1996. From January 1996 to
July 1996, Mr. Landtiser served as Manager of Purchasing for PAC Clay Products,
a manufacturer of clay products. From July 1996 to September 1996, he served as
the Director of Materials of ICEE Corp., a manufacturer of fountain products.
BOARD OF DIRECTORS COMPENSATION
Directors of the Company are elected annually and serve until the next
annual meeting of stockholders or until their successors are duly elected and
qualified. The Company does not currently pay fees to the members of the Board
of Directors.
Effective upon completion of the Offering, non-employee directors will
receive $1,500 for each regular meeting of the Board of Directors, $750 for each
special meeting of the Board of Directors and $750 for each meeting of the Audit
Committee and Compensation Committee. In addition, directors are reimbursed for
travel expenses for attending meetings of the Board and any Board or advisory
committees. Upon the completion of the Offering, each non-employee director will
be granted a ten-year option to purchase an aggregate of 30,000 shares of Common
Stock at the initial public offering price. Each option will vest 10,000 shares
90 days after the Offering and 5,000 shares per year over the next four years.
COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee which will take effect upon completion of the Offering. The Audit
Committee provides assistance to the Board in satisfying its fiduciary
responsibilities relating to accounting, auditing, operating and reporting
practices of the Company and reviews the annual financial statements of the
Company, the selection and work of the
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<PAGE>
Company's independent auditors and the adequacy of internal controls for
compliance with corporate policies and directives. The Compensation Committee
reviews general programs of compensation and benefits for all employees of the
Company and makes recommendations to the Board concerning such matters as
compensation to be paid to the Company's officers and directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the commencement of the Offering, the Company had no Compensation
Committee but the Board of Directors performed equivalent functions. Of the
members of the Board of Directors, Mr. Patrick Dirk served as the Company's
Chairman and Chief Executive Officer and set the compensation of the executive
officers. Upon completion of the Offering, Messrs. Keider and O'Reilly will
become members of the Compensation Committee. Messrs. O'Reilly and Patrick Dirk,
the Company's Chairman of the Board, President and Chief Executive Officer, are
both members of the Board of Directors of Eltrax Systems, Inc. Mr. Patrick Dirk
serves as a member of the Audit Committee for Eltrax Systems, Inc.
EXECUTIVE COMPENSATION
The following table describes the compensation earned during the fiscal year
ended November 30, 1997 by the Chief Executive Officer of the Company and each
of the Company's other executive officers whose salary and bonus exceeded
$100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) COMPENSATION(3)
- ---------------------------------------------- --------- ---------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Patrick J. Dirk .............................. 1997 $ 200,000 $ 85,000 $ 9,070 $ 7,454
Chairman of the Board, President and Chief
Executive Officer
Robert S. Messina ............................ 1997 148,096 113,925 5,400 8,289
Executive Vice President
Brian P. Dirk ................................ 1997 113,288 67,597 2,055 5,405
Vice President
Del L. Conrad ................................ 1997 120,077 25,000 -- 7,987
Chief Financial Officer, Treasurer and
Secretary
</TABLE>
- ------------------------
(1) Cash bonuses for services rendered have been included as compensation for
the year earned, even though such bonuses were paid in 1998. Represents
performance bonuses of $85,000, $70,000, $15,000 and $25,000 for Messrs.
Patrick Dirk, Messina, Brian Dirk and Conrad, respectively. Also includes
commissions payable in the amounts of $52,597 and $43,925 for Messrs. Brian
Dirk and Messina.
(2) Represents $5,775, $5,400 and $2,055 for automobile usage for Messrs.
Patrick Dirk, Messina and Brian Dirk and $3,295 for reimbursement of social
club membership fees for Mr. Patrick Dirk.
(3) Includes $4,750, $3,611, $3,330 and $3,441 for Messrs. Patrick Dirk,
Messina, Brian Dirk and Conrad, respectively, for matching contributions
under the Company's 401(k) Plan and $2,704, $4,678, $2,075 and $4,546 as the
value of insurance premiums paid by the Company on behalf of Messrs. Patrick
Dirk, Messina, Brian Dirk and Conrad, respectively, under a medical
insurance arrangement.
No stock options were granted to any Named Executive Officer during the
fiscal year ended November 30, 1997. The following table summarizes the value of
options held at November 30, 1997 by the Named Executive Officers. There were no
option exercises by the Named Executive Officers during fiscal 1997.
38
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT FISCAL
FISCAL YEAR END YEAR END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Patrick J. Dirk..................... -- -- -- --
Robert S. Messina................... -- 244,990 -- $ 1,614,484
Brian P. Dirk....................... -- 81,967 -- 536,884
Del L. Conrad....................... -- -- -- --
</TABLE>
- ------------------------
(1) Value is based on the difference between the fair market value of the shares
of Common Stock as of the date hereof (assuming an initial public offering
price of $7.00 per share) and the exercise price of the options ranging from
$0.41 to $0.45 per share. Options are in-the-money if the market value of
the shares exceeds the option exercise price.
EMPLOYMENT AGREEMENTS
On November 27, 1996, the Company entered into a non-competition agreement
with Robert Messina (the "Messina Agreement") providing for Mr. Messina's
service as President and Chief Operating Officer of the Subsidiary. As part of
the Messina Agreement, Mr. Messina was granted an option to purchase 244,990
shares of Common Stock at an exercise price of $0.41 per share. This option is
fully vested and terminates on November 25, 2006. The Messina Agreement contains
provisions providing for the maintenance of confidentiality of proprietary
information of the Company and a three year non-competition clause in the event
of termination of employment. If Mr. Messina's service with the Company is
terminated without cause, whether actual or constructive, the Company must pay
Mr. Messina (i) $200,000 in the event Mr. Messina is terminated during either
fiscal year 1997 or 1998, or (ii) $300,000 in the event Mr. Messina is
terminated during either fiscal year 1999 or 2000. Such payment is payable in 36
equal monthly installments.
The Company generally enters into confidentiality and non-disclosure
agreements with its technical personnel. Pursuant to the terms of these
agreements, employees agree to confidentiality restrictions and to assign to the
Company any reports, blueprints, data, writings and technical information
prepared by them during their employment that relate to Troy's business.
STOCK OPTION AND INCENTIVE PLANS
In April 1998, the Board of Directors and stockholders of the Company
adopted the 1998 Stock Incentive Plan (the "1998 Plan"), and reserved a maximum
of 1,200,000 shares of Common Stock for issuance under the 1998 Plan, plus any
shares (37,341 as of the date of this Prospectus) that are not issued under the
Company's 1996 Stock Option Plan (the "1996 Plan"). The 1998 Plan provides for
the grant to eligible recipients of: (i) options to purchase Common Stock that
qualify as "incentive stock options" ("Incentive Options"), within the meaning
of Section 422 of the Internal Revenue Code; (ii) options to purchase Common
Stock that do not qualify as Incentive Options ("Non-Qualified Options"); (iii)
awards of shares of Common Stock that are subject to certain forfeiture and
transferability restrictions that lapse after specified employment periods
("Restricted Stock Awards"); (iv) rights entitling the recipient to receive a
payment from the Company, in the form of shares of Common Stock, cash or a
combination of both, upon the achievement of established performance or other
goals ("Performance Units"); (v) awards of shares of Common Stock ("Stock
Bonuses"); and (vi) rights entitling the recipient to receive a payment from the
Company, in the form of shares of Common Stock, or a combination of both, equal
to the difference between the market value of one or more shares of Common Stock
and the exercise price of such shares under the terms of such right ("Stock
Appreciation Rights"). Incentive Options and Non-Qualified Options are
collectively referred to herein as "Options," and Options, Restricted Stock
Awards, Performance Units, Stock Bonuses and Stock Appreciation Rights are
collectively referred to herein as
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<PAGE>
"Awards." The 1998 Plan provides for the granting of Options at an exercise
price that is not less than 100% of the fair market value of one share of the
Company's Common Stock on the date of grant for Incentive Options, and 85% of
the fair market value of one share of the Company's Common Stock on the date of
grant for Non-Qualified Options.
In the event a "change in control" of the Company occurs, then, if approved
by the Compensation Committee of the Board of Directors (the "Committee"): (i)
all outstanding Options and Stock Appreciation Rights held at least six months
will become immediately exercisable in full and will remain exercisable for the
remainder of their terms, regardless of whether the participant remains in the
employ or service of the Company or any subsidiary; (ii) all outstanding
Restricted Stock Awards held at least six months will become immediately fully
vested; and (iii) all outstanding Performance Units and Stock Bonuses will vest
and/or continue to vest in the manner determined by the Committee and reflected
in the award agreement. In addition, the Committee, without the consent of any
affected participant, may determine that some or all participants holding
outstanding Options will receive cash in an amount equal to the excess of the
fair market value immediately prior to the effective date of such change in
control over the exercise price per share of the Options.
For purposes of the 1998 Plan, a "change in control" of the Company will be
deemed to have occurred, among other things, upon: (i) the sale or other
disposition of substantially all of the assets of the Company; (ii) the approval
by the Company's shareholders of a plan or proposal for the liquidation or
dissolution of the Company; (iii) a merger or consolidation to which the Company
is a party if the Company's shareholders immediately prior to the merger or
consolidation beneficially own, immediately after the merger or consolidation,
securities of the surviving corporation representing (A) more than 50%, but not
more than 80%, of the combined voting power of the surviving corporation's then
outstanding securities unless such transaction was approved in advance by the
directors as of the effective date of the 1998 Plan or by any persons who
subsequently become directors and whose election or nomination was approved by a
majority vote of the directors comprising the Board as of the effective date of
the 1998 Plan (the "Incumbent Directors"), or (B) 50% or less of the combined
voting power of the surviving corporation's then outstanding securities
(regardless of any approval by the Incumbent Directors); (iv) any person
becoming, after the effective date of the 1998 Plan, the beneficial owner of (A)
20% or more, but less than 50%, of the combined voting power of the Company's
outstanding securities (unless such transaction was approved in advance by the
Incumbent Directors), or (B) 50% or more of the combined voting power of the
Company's outstanding securities (regardless of any approval by the Incumbent
Directors); (v) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or (vi) any other change in control of the
Company of a nature that would be required to be reported pursuant to Section 13
or 15(d) of the Exchange Act.
The terms of the 1996 Plan are substantially similar to those of the 1998
Plan, including the pricing of Options, although the 1996 Plan does not provide
for the grant of Performance Units, Restricted Stock Awards or Stock Bonuses or
the acceleration of any vesting of Options upon a "change in control."
As of May 31, 1998, the Company had outstanding options to purchase an
aggregate of 326,957 shares of Common Stock at a weighted average exercise price
of $0.42 per share. These options are exercisable in full at various times
through November 25, 2006. Upon consummation of the Offering, the Company
intends to grant options to purchase an aggregate of 380,000 shares of Common
Stock to certain key employees and directors. Such options will have an exercise
price equal to the price per share to the public in the Offering.
40
<PAGE>
CERTAIN TRANSACTIONS
For information concerning the Distributions paid to the Dirk Stockholders
and the Tax Agreement, see "Distributions."
Prior to April 1998, Troy Group, Inc. and the Subsidiary were 100%
beneficially owned by the Dirk Stockholders. Effective May 31, 1998, the Dirk
Stockholders contributed the stock of the Subsidiary beneficially owned by them
to the Company in exchange for an aggregate of 1,124,772 shares of Common Stock
of the Company. The percentage ownership of the Dirk Stockholders in the Company
did not change as a result of the contribution of the stock of the Subsidiary.
In November 1993, the Company borrowed, pursuant to a non-negotiable
promissory note (the "Dirk Note"), an aggregate of approximately $1.6 million
from Patrick J. Dirk and Mary J. Dirk, as trustees of the Dirk Family Trust
U/D/T March 6, 1990 (the "Family Trust"), as amended. The proceeds of the Dirk
Note were used for working capital purposes. The Dirk Note bore interest at a
rate of 7.0% per annum. The Company made payments to the Family Trust for the
years ended November 30, 1995, 1996 and 1997 in the amounts of $174,000,
$163,000 and $349,000, respectively. As of November 30, 1997 and May 31, 1998,
the aggregate amount outstanding under the Dirk Notes was approximately $375,000
and zero, respectively.
The Company leases a total of 77,000 square feet at its West Virginia
facility from Dirk Investments, Inc. ("Dirk Investments"). Dirk Investments is
wholly-owned by the Dirk Stockholders. This lease expires on September 1, 2000
and provides for rent, effective as of December 1997, of approximately $21,200
per month. Total rental payments made by the Company for the years ended
November 30, 1995, 1996 and 1997 were approximately $144,000, $158,000, and
$168,000, respectively. In 1993, Dirk Investments secured loans (the "West
Virginia Loans") to acquire and improve the West Virginia facility. One loan,
which had an original principal balance of $800,000 (the "WVEDA Loan"), bears
interest at a rate of 5.0% and is repayable over 20 years. The second loan has a
principal balance of $350,000, bears interest at an initial rate of 7.95% for
five years and thereafter, adjusted on an annual basis, at a rate equal to the
minimum National Prime as published by the Wall Street Journal plus 2%. This
second loan also has a term of twenty years. The third loan, which had an
original principal balance of $700,000, bears interest at an interest rate of
6.612% per year and is repayable in monthly installments through February 21,
2014. The Subsidiary and Patrick and Mary Dirk guaranteed repayment of $500,000
of the amounts outstanding under the WVEDA Loan. In June 1998, the Subsidiary
was released from this guarantee.
On February 6, 1998, Patrick J. and Mary J. Dirk and the Family Trust
guaranteed, to a maximum liability of $800,000, the Company's obligations under
its $4.5 million revolving line of credit and its term loan with Union Bank of
California. The Company intends to use a portion of the proceeds of the Offering
to repay amounts owed under the line of credit and the term note. The guarantees
will be released upon completion of the Offering.
During the fiscal years ended November 30, 1995, 1996 and 1997, the Company
made cash distributions of $0, $57,000 and $286,000, respectively, to Dirk
Worldwide, Inc., a foreign sales corporation ("Dirk Worldwide"). The
distributions were made as part of the Company's tax strategies and consisted of
Dirk Worldwide's income for the applicable period. Dirk Worldwide was
wholly-owned by individual retirement accounts of the Dirk Stockholders. In July
1998, the Dirk Stockholders contributed their interests in Dirk Worldwide to the
Company for no additional consideration.
All future transactions, including any loans from the Company to its
officers, directors, principal shareholders or affiliates, will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date hereof, and as
adjusted to reflect the sale of the shares offered hereby, with respect to the
beneficial ownership of the shares of the Company's Common Stock by: (i) each
person who is known by the Company to own beneficially more than 5% of the
Common Stock; (ii) each director and director nominee; (iii) each Named
Executive Officer; and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OWNERSHIP(1)
BENEFICIALLY ----------------------------------
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
Patrick J. Dirk(2)............................................. 5,692,857 75.9% 58.7%
Mary J. Dirk(2)................................................ 5,692,857 75.9 58.7
Brian P. Dirk(3)............................................... 503,752 6.6 5.1
Suzanne M. Anderson(4)......................................... 421,786 5.6 4.3
Kristine L. Gigerich(4)........................................ 421,786 5.6 4.3
Lorrie A. Brown(4)............................................. 421,786 5.6 4.3
Robert S. Messina(5)........................................... 244,990 3.2 2.5
Del L. Conrad.................................................. -- -- --
Norman B. Keider............................................... -- -- --
John B. Zaepfel................................................ -- -- --
William P. O'Reilly............................................ -- -- --
Gene A. Bier................................................... -- -- --
All directors and executive officers as a group (4
persons)(6).................................................. 6,441,599 82.3 64.2
</TABLE>
- ------------------------
(1) For the purpose of calculating the percentage beneficially owned, the number
of shares of Common Stock deemed outstanding "Before Offering" includes: (i)
7,500,000 shares of Common Stock outstanding as of May 1, 1998; and (ii)
shares of Common Stock subject to options held by the person or group that
are currently exercisable or exercisable within 60 days from the date of
this Prospectus ("Presently Exercisable Options"). The number of shares of
Common Stock deemed outstanding after the Offering includes an additional
2,200,000 shares offered hereby. Except as otherwise indicated in the
footnotes of this table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock listed as
beneficially owned by them. The address of the beneficial owners is 2331
South Pullman Street, Santa Ana, California 92705.
(2) Includes 5,692,857 shares of Common Stock held by Patrick J. and Mary J.
Dirk as trustees under the Family Trust. Excludes 120,000 shares of Common
Stock held by the trustee of The Dirk 1997 Education Trust (the "Education
Trust"), 187,143 shares of Common Stock held by the trustees of the Dirk
1998 Alaska Trust (the "Alaska Trust"), 375,000 shares of Common Stock held
by each of Brian P. Dirk and the three other adult children of Patrick J.
and Mary J. Dirk and 81,967 shares of Common Stock issuable upon exercise of
outstanding stock options held by Brian P. Dirk.
(3) Includes 81,967 shares issuable under Presently Exercisable Options and
46,785 shares of Common Stock held by Mr. Brian Dirk as a trustee under the
Alaska Trust.
(4) Includes 46,786 shares of Common Stock held by such person as a trustee
under the Alaska Trust.
(5) Includes 244,990 shares issuable under Presently Exercisable Options.
(6) Includes an aggregate of 326,957 shares issuable under Presently Exercisable
Options.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 50,000,000
shares of Common Stock, $0.01 par value per share and 5,000,000 shares of
preferred stock, undesignated as to series (the "Preferred Stock"). The
following summary of the terms and provisions of the Company's capital stock
does not purport to be complete and is qualified by reference to the Company's
Certificate of Incorporation and applicable law.
COMMON STOCK
As of May 1, 1998, there were 7,500,000 shares of Common Stock issued and
outstanding, held of record by six stockholders. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of stockholders and are not entitled to cumulate votes. The holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets that are legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of any holders of preferred stock then outstanding. The holders of
Common Stock have no preemptive, subscription, redemption, sinking fund or
conversion rights. All outstanding shares of Common Stock are fully paid and
nonassessable and the shares of Common Stock to be issued upon completion of
this Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue any authorized but unissued shares of
Preferred Stock in one or more series and to designate the rights, preferences
and privileges of each such series, any or all of which may be greater than the
rights of Common Stock. It is not possible to state the actual effect of the
issuance of any shares of Preferred Stock upon the rights of holders of the
Common Stock until the Board of Directors determines the specific rights of the
holders of such shares. However, the effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock, impairing the liquidation rights of the Common Stock and delaying
or preventing a change in control of the Company without further action by the
stockholders. The Company has no present plans to issue any shares of Preferred
Stock.
OPTIONS
As of May 1, 1998, the Company had outstanding options to purchase an
aggregate of 326,957 shares of Common Stock at a weighted average exercise price
of $0.42 per share. These options are exercisable in full at various times
through November 25, 2006. All outstanding options provide for antidilution
adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in the
corporate structure of the Company. Upon consummation of the Offering, the
Company intends to grant options to purchase an aggregate of 380,000 shares of
Common Stock to certain key employees. Such options will have an exercise price
equal to the price per share to the public in the Offering.
WARRANTS
Effective as of October 1, 1997, in connection with a consulting agreement
(the "Broadland Consulting Agreement") between the Company and Broadland Capital
Partners ("Broadland"), the Company issued to Broadland a warrant to purchase up
to 300,000 shares of Common Stock at an exercise price of $3.50 per share. The
warrant was issued to Broadland for providing the following services: (i)
assisting the Company in focusing its business plan and strategy in preparation
for a public offering; (ii) identifying and analyzing comparable companies;
(iii) identifying and conducting due diligence of potential investment
43
<PAGE>
bankers; (iv) assisting the Company in evaluating and negotiating with potential
underwriters; (v) assisting the Company in the public offering process,
including participating in drafting sessions, collecting information and
preparing road show strategies and materials; (vi) assisting the Company in
preparing to become a public company, including advising the Company regarding
investment community expectations and introducing the Company to potential
market makers and research analysts; (vii) assisting the Company in identifying
and negotiating with potential acquisition candidates; and (viii) providing such
other services in connection with the Offering as may be requested from time to
time. The warrant will vest at the rate of 33 1/3% upon the happening of three
separate performance conditions relating to the Company becoming publicly owned,
certain acquisition transactions and the Company's market value following the
Offering and will expire five years after they vest. In May 1998, in connection
with legal services provided to the Company, the Company issued a warrant to
purchase up to 50,000 shares of Common Stock at an exercise price of $3.50 per
share. The warrant was issued for providing the following services: (i)
assisting in drafting offering and other legal documents in connection with an
initial public offering; (ii) assisting the Chief Executive Officer in the
completion of the underwriters due diligence investigation of the Company; (iii)
providing necessary legal opinions required by an underwriting agreement; and
(iv) providing such other services in connection with the Offering as requested
by the Chief Executive Officer from time to time.
REGISTRATION RIGHTS
The holder of a warrant to purchase 300,000 shares of Common Stock or the
holder's transferee is entitled to have such shares registered under the
Securities Act if registration is required by any governmental authority under
any federal or state law in connection with the issuance of shares upon
exercise.
ANTI-TAKEOVER PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law. In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless (with certain exceptions) the "business combination" or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the interested stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or, in the case of
affiliates or associates of the corporation, within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the Board of Directors, such as discouraging takeover attempts that might
result in a premium over the market price of the Common Stock.
The Company's Certificate of Incorporation eliminates the right of
stockholders to act by written consent without a meeting unless such written
consent is unanimous. In addition, stockholders are not entitled to cumulative
voting in the election of directors. The authorization of Preferred Stock makes
it possible for the Board of Directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. The foregoing provisions of the Company's
Certificate of Incorporation and the Delaware General Corporation Law may have
the effect of deferring hostile takeovers or delaying changes in control of
management of the Company.
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of its
directors to the fullest extent permitted under the Delaware General Corporation
Law. Specifically, the directors of the Company are not liable to the Company or
its stockholders for monetary damages for any breach of fiduciary duty by
44
<PAGE>
such a director, except for liability for (i) any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) corporate distributions, including dividends, stock distributions and
redemptions, which are in contravention of restrictions in Delaware law, the
Company's Certificate of Incorporation or Bylaws, or any agreement to which the
Company is a party, and (iv) any transaction from which the director derives an
improper personal benefit. This provision will generally not limit liability
under state or federal securities laws.
Delaware law and the Company's Certificate of Incorporation provide that the
Company shall, under certain circumstances and subject to certain limitations,
indemnify any person made or threatened to be made a party to a proceeding by
reason of that person's former or present official capacity with the Company
against judgments, penalties, fines, settlements and reasonable expenses. Any
such person is also entitled, subject to certain limitations, to payment or
reimbursement of reasonable expenses in advance of the final disposition of the
proceeding.
The Company has also entered into indemnification agreements with all of the
directors and executive officers of the Company whereby the Company has agreed
to indemnify and hold harmless the directors and executive officers from and
against any claims, liability, damages or expenses incurred by them in or
arising out of their status, capacities and activities with respect to the
Company to the maximum extent permitted by Delaware law. The Company believes
that these agreements are necessary to attract and retain qualified persons as
directors and executive officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 9,700,000 shares of
Common Stock outstanding, assuming no exercise of options or warrants after
February 28, 1998. Of these shares, the 2,200,000 shares sold in the Offering
will be freely tradable without restriction under the Securities Act, except for
shares held by "affiliates" of the Company, as defined under the Securities Act.
The remaining 7,500,000 shares of Common Stock held by existing stockholders
(the "Restricted Shares") were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. The
Restricted Shares may be sold in the public market only if registered, or
pursuant to an exemption from registration such as Rule 144, 144(k) or 701 under
the Securities Act. Holders of all of the Restricted Shares have entered into
lock-up agreements under which they have agreed not to offer, sell or otherwise
dispose of, or directly or indirectly cause or permit the offer, sale or other
disposition of, any Common Stock of the Company owned of record or beneficially
and of which such stockholder has the power to control the disposition for a
period of 180 days after the date of this Prospectus (the "Lock-Up Period"),
without the prior written consent of the Representatives. The Representatives
may, in their sole discretion at any time without notice, release any portion of
the shares subject to the lock-up agreements during the Lock-Up Period.
Following expiration of the Lock-Up Period, 1,265,358 of the Restricted Shares
will be eligible for sale in the public market without restriction and the
balance will be eligible for sale subject to the volume limitations and other
conditions of Rule 144 described below. In addition, approximately 90 days after
completion of the Offering, the Company intends to file a Registration Statement
on Form S-8 covering shares issuable under the Company's 1998 Plan and 1996
Plan, thus permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell within any three-month period commencing 90 days after the date
of this Prospectus, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 100,000 shares immediately after the Offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are generally subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Under Rule 701 under the Securities Act, persons who purchase shares upon
exercise of options granted prior to the effective date of the Offering are
entitled to sell such shares 90 days after the effective date of the Offering in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144.
Because there has been no public market for shares of the Company's Common
Stock, the Company is unable to predict the effect that sales made under Rule
144, pursuant to future registration statements, or otherwise, may have on any
then prevailing market price for shares of the Common Stock. Nevertheless, sales
of a substantial amount of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.
46
<PAGE>
UNDERWRITING
The Underwriters named below, for which Cruttenden Roth Incorporated and
Josephthal & Co. Inc. are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the respective numbers of shares of
Common Stock set forth opposite their names below, at the initial public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the Underwriters are
obligated to purchase all the shares of Common Stock, subject to certain legal
matters and various other conditions.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Cruttenden Roth Incorporated...............................................
Josephthal & Co. Inc.......................................................
-----------------
Total......................................................................
-----------------
-----------------
</TABLE>
The Representatives have advised the Company that the Underwriters initially
propose to offer the Common Stock to the public at the offering price set forth
on the cover page of this Prospectus. The Underwriters may allow selected
dealers (who may include the Underwriters) a concession not in excess of $
per share, and the Underwriters and such dealers may reallow a discount of not
in excess of $ per share to other dealers. After the initial public offering,
the public offering price and the concession and discount to dealers and other
selling terms may be changed by the Representatives. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or in part.
The Company has granted to the Underwriters an option to purchase up to
330,000 additional shares of Common Stock at the initial public offering price,
less the underwriting discount, set forth on the cover page of this Prospectus.
This option is exercisable for 30 days from the date of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
be committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
Underwriters may exercise such option solely to cover over-allotments, if any,
in the sale of the shares.
The Company has agreed to pay the Underwriters a nonaccountable expense
allowance of 0.75% of the aggregate price to the public of the shares purchased
hereby including any shares purchased pursuant to the overallotment option.
The Company has agreed to sell to the Representatives, for nominal
consideration, the Representatives' Warrant which represents the right to
purchase shares of Common Stock equal to 10% of the shares sold in the Offering,
at an exercise price per share equal to 120% of the price per share to the
public in the Offering. The Representatives' Warrant is exercisable during the
period commencing one year following from the date of this Prospectus and ending
on the fifth anniversary of the date of this Prospectus. The Representatives'
Warrant includes a net exercise provision pursuant to which the holder may
exercise this warrant by, in effect, paying the exercise price using shares of
Common Stock issuable upon exercise of such warrants valued at the fair market
value at the time of the exercise. For a period of one year from the date of
this Prospectus, the Representatives' Warrant is not transferable, except to
officers and stockholders of the Representatives. The Representatives' Warrant
grants to the holders thereof certain limited
47
<PAGE>
rights or registration of the Common Stock issuable upon exercise of such
warrant. Any profits realized by the Representatives upon the sale of the
Representatives' Warrant or the securities issuable upon exercise thereof may be
deemed to constitute additional underwriting compensation.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1933, or
will contribute to payments the Underwriters may be required to make in respect
thereof.
The Company and each of its existing stockholders have agreed that they will
not, without the prior written consent of Cruttenden Roth Incorporated, directly
or indirectly, sell, offer, contract or grant any option to sell (including
without limitation any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable or exercisable for or convertible into shares
of Common Stock, currently or hereafter owned either of record or beneficially
(as defined in Rule 13d-3 under the Exchange Act) by such party, or publicly
announce such party's intention to do any of the foregoing, for a period of 180
days after the date of this Prospectus.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Common Stock offered by this Prospectus to any
account on which they exercise discretionary authority in excess of 5% of the
number of shares of Common Stock offered hereby.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
the Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the Offering, if the Underwriters repurchase previously distributed
Common Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the Common
Stock above market levels that may otherwise prevail. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise, and if commenced, may be discontinued at any time. The Underwriters
are not required to engage in these activities, and may end any of these
activities at any time.
Prior to the Offering, there has been no public market for the Company's
Common Stock. The initial public offering price for the Common Stock will be
determined by negotiations among the Company and the Representatives of the
Underwriters. The factors to be considered in determining the initial public
offering price will include the history of and the prospects for the Company and
the industry in which it operates, the past and present operating results of the
Company and the trends of such results, the future prospects of the Company, an
assessment of the Company's management, the general condition of the securities
markets at the time of the Offering and the prices for similar securities of
comparable companies.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Oppenheimer Wolff & Donnelly LLP, San Jose, California. Certain legal
matters relating to this Offering will be passed upon for the Underwriters by
Morris, Manning & Martin, L.L.P., Atlanta, Georgia.
48
<PAGE>
EXPERTS
The financial statements of the Company as of November 30, 1996 and 1997,
and for each of the three years in the period ended November 30, 1997 included
in this Prospectus and Registration Statement have been audited by McGladrey &
Pullen, LLP, independent auditors, as set forth in their report appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
to the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified by such reference. A copy of the
Registration Statement may be inspected without charge at the offices of the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of all or any part of the Registration Statement may be obtained
from the Public Reference Section of the Commission in Washington D.C., upon the
payment of the fees prescribed by the Commission. The Commission maintains a Web
site (http:// www.sec.gov) that contains reports, proxy statements and other
information that has been or will be filed by the Company.
The Company intends to furnish holders of the Common Stock with annual
reports containing audited financial statements certified by independent
auditors, and quarterly reports for each of the first three quarters of each
year containing unaudited financial information.
49
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent auditor's report on the combined financial statements.......................................... F-2
Combined balance sheets.................................................................................... F-3
Combined statements of operations.......................................................................... F-4
Combined statements of stockholders' equity................................................................ F-5
Combined statements of cash flows.......................................................................... F-6
Notes to combined financial statements..................................................................... F-7
Independent auditor's report on the schedule............................................................... F-16
Schedule II--valuation and qualifying account.............................................................. F-17
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE
COMBINED FINANCIAL STATEMENTS
To the Board of Directors
Troy Group
Santa Ana, California
We have audited the accompanying combined balance sheets of Troy Group, Inc.
and subsidiary and Dirk Worldwide, Inc. ("Troy Group") as of November 30, 1997
and 1996, and the related combined statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended November
30, 1997. These financial statements are the responsibility of the Companies
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Troy Group as of
November 30, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended November 30, 1997, in
conformity with generally accepted accounting principles.
Anaheim, California
July 14, 1998
MCGLADREY & PULLEN, LLP
F-2
<PAGE>
TROY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
NOVEMBER 30, 1998
---------------------------- MAY 31, PRO FORMA
1996 1997 1998 (NOTE 2)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash.............................................. $ 42,000 $ 100,000 $ 40,000 $ 40,000
Accounts receivable, less allowance for doubtful
accounts 1996 $173,000; 1997 $164,000; 1998
$315,000........................................ 5,205,000 5,509,000 6,489,000 6,489,000
Inventories....................................... 4,235,000 3,831,000 4,625,000 4,625,000
Prepaid expenses and other........................ 129,000 254,000 254,000 454,000
------------- ------------- ------------- -------------
Total current assets.......................... 9,611,000 9,694,000 11,408,000 11,608,000
Equipment and leasehold improvements, net........... 1,600,000 1,180,000 1,259,000 1,259,000
Other assets........................................ 113,000 875,000 813,000 1,003,000
------------- ------------- ------------- -------------
Total assets.................................. $ 11,324,000 $ 11,749,000 $ 13,480,000 $ 13,870,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued not yet presented for payment....... $ 390,000 $ 173,000 $ 428,000 $ 428,000
Notes payable..................................... 1,612,000 -- 615,000 615,000
Current portion of long-term debt................. 688,000 754,000 402,000 402,000
Accounts payable.................................. 1,443,000 1,670,000 2,572,000 2,572,000
Accrued liabilities............................... 1,378,000 1,724,000 1,247,000 2,747,000
Deferred service revenue.......................... 190,000 200,000 193,000 193,000
------------- ------------- ------------- -------------
Total current liabilities..................... 5,701,000 4,521,000 5,457,000 6,957,000
------------- ------------- ------------- -------------
Long-term debt, net of current portion (including
1996 $780,000; 1997 $375,000; and 1998 $0 payable
to the majority stockholder)...................... 1,521,000 1,280,000 771,000 771,000
------------- ------------- ------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; authorized
50,000,000 shares, issued 7,500,000 shares...... 75,000 75,000 75,000 75,000
Preferred stock, no par value, authorized
5,000,000 shares, issued none................... -- -- -- --
Additional paid-in capital........................ 247,000 247,000 247,000 247,000
Retained earnings................................. 3,780,000 5,626,000 6,930,000 5,820,000
------------- ------------- ------------- -------------
Total stockholders' equity.................... 4,102,000 5,948,000 7,252,000 6,142,000
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity.... $ 11,324,000 $ 11,749,000 $ 13,480,000 $ 13,870,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See Notes to Combined Financial Statements.
F-3
<PAGE>
TROY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Net sales............................... $ 21,477,000 $ 28,161,000 $ 33,434,000 $ 17,112,000 $ 18,322,000
Cost of goods sold, (including $144,000;
$158,000; $168,000; $102,000; and
$127,000 in rent paid to majority
stockholders)......................... 13,560,000 17,408,000 19,597,000 10,223,000 10,756,000
------------ ------------ ------------ ------------ ------------
Gross profit...................... 7,917,000 10,753,000 13,837,000 6,889,000 7,566,000
------------ ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative... 5,594,000 5,234,000 6,622,000 3,303,000 3,424,000
Research and development.............. 1,748,000 2,041,000 2,521,000 1,245,000 1,228,000
------------ ------------ ------------ ------------ ------------
7,342,000 7,275,000 9,143,000 4,548,000 4,652,000
------------ ------------ ------------ ------------ ------------
Operating income.................. 575,000 3,478,000 4,694,000 2,341,000 2,914,000
Interest expense, (including $46,000;
$61,000; $33,000; $19,000; and $11,000
paid to majority stockholders)........ 342,000 361,000 262,000 128,000 69,000
------------ ------------ ------------ ------------ ------------
Income before state income taxes
(credit)........................ 233,000 3,117,000 4,432,000 2,213,000 2,845,000
State income taxes (credit)............. (80,000) 50,000 35,000 18,000 43,000
------------ ------------ ------------ ------------ ------------
Net income........................ $ 313,000 $ 3,067,000 $ 4,397,000 $ 2,195,000 $ 2,802,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma net income (unaudited):
Historical income before income
taxes............................... $ 233,000 $ 3,117,000 $ 4,432,000 $ 2,213,000 $ 2,845,000
Pro forma provision for income
taxes............................... 93,000 1,247,000 1,773,000 885,000 1,138,000
------------ ------------ ------------ ------------ ------------
Pro forma net income.............. $ 140,000 $ 1,870,000 $ 2,659,000 $ 1,328,000 $ 1,707,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma net income per share:
Basic................................. $ 0.02 $ 0.25 $ 0.35 $ 0.18 $ 0.23
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted............................... $ 0.02 $ 0.25 $ 0.34 $ 0.17 $ 0.22
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted-average shares outstanding:
Basic................................. 7,500,000 7,500,000 7,500,000 7,500,000 7,500,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted............................... 7,500,000 7,500,000 7,759,000 7,735,000 7,807,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Combined Financial Statements.
F-4
<PAGE>
TROY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 1)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1994.............. 7,500,000 $ 75,000 $ 247,000 $ 518,000 $ 840,000
Net income............................ -- -- -- 313,000 313,000
----------- ------------- ------------- ------------- -------------
Balance, November 30, 1995.............. 7,500,000 75,000 247,000 831,000 1,153,000
Dividends............................. -- -- -- (118,000) (118,000)
Net income............................ -- -- -- 3,067,000 3,067,000
----------- ------------- ------------- ------------- -------------
Balance, November 30, 1996.............. 7,500,000 75,000 247,000 3,780,000 4,102,000
Dividends............................. -- -- -- (2,551,000) (2,551,000)
Net income............................ -- -- -- 4,397,000 4,397,000
----------- ------------- ------------- ------------- -------------
Balance, November 30, 1997.............. 7,500,000 75,000 247,000 5,626,000 5,948,000
Dividends (unaudited)................. -- -- -- (1,498,000) (1,498,000)
Net income (unaudited)................ -- -- -- 2,802,000 2,802,000
----------- ------------- ------------- ------------- -------------
Balance, May 31, 1998
(unaudited)........................... 7,500,000 $ 75,000 $ 247,000 $ 6,930,000 $ 7,252,000
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Combined Financial Statements.
F-5
<PAGE>
TROY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED
---------------------------------------- MAY 31,
1995 1996 1997 --------------------------
------------ ------------ ------------ 1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 313,000 $ 3,067,000 $ 4,397,000 $ 2,195,000 $ 2,802,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 637,000 680,000 617,000 307,000 262,000
Provision for doubtful accounts........ -- 209,000 65,000 49,000 151,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable................ (433,000) (1,738,000) (369,000) 766,000 (1,131,000)
Inventories........................ (448,000) (517,000) 404,000 (130,000) (794,000)
Prepaid expenses................... 14,000 (17,000) (125,000) (112,000) --
Increase (decrease) in:
Accounts payable................... (153,000) 616,000 227,000 (432,000) 902,000
Accrued expenses................... (287,000) (142,000) 346,000 (116,000) (477,000)
Deferred service revenue........... (73,000) (104,000) 10,000 (107,000) (7,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities............... (430,000) 2,054,000 5,572,000 2,420,000 1,708,000
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment and leasehold
improvements........................... (1,062,000) (301,000) (197,000) (147,000) (19,000)
(Increase) in other assets............... (112,000) (1,000) (561,000) (245,000) (260,000)
------------ ------------ ------------ ------------ ------------
Net cash (used in) investing
activities......................... (1,174,000) (302,000) (758,000) (392,000) (279,000)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings on notes payable.............. 10,185,000 12,875,000 17,498,000 11,372,000 4,691,000
Payments on notes payable................ (9,305,000) (13,143,000) (19,110,000) (10,867,000) (4,076,000)
Proceeds from issuance of debt........... 1,876,000 -- 1,000,000 -- --
Principal payments on debt............... (1,457,000) (848,000) (1,175,000) (592,000) (861,000)
Proceeds/(payments) from/on life
insurance loans........................ 201,000 -- (201,000) -- --
Increase (decrease) in checks issued not
presented for payment.................. 104,000 (476,000) (217,000) (471,000) 255,000
Dividends................................ -- (118,000) (2,551,000) (1,512,000) (1,498,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities............... 1,604,000 (1,710,000) (4,756,000) (2,070,000) (1,489,000)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash...... -- 42,000 58,000 (42,000) (60,000)
Cash, beginning of period.................. -- -- 42,000 42,000 100,000
------------ ------------ ------------ ------------ ------------
Cash, end of period........................ $ -- $ 42,000 $ 100,000 $ -- $ 40,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Combined Financial Statements.
F-6
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company provides on-demand distributive printing solutions, primarily to
Fortune 1000 and other large and mid-sized domestic and international
businesses. The Company's current product offering consists of high-quality
laser printers, impact printers, related consumables, including toners and
ribbons, and services. The Company's products provide proprietary solutions that
enable businesses to distribute and print magnetic ink character recognition
("MICR") encoded financial documents such as checks, money orders, payment
coupons and deposit and withdrawal slips.
REORGANIZATION
In May of 1998, the Company and Troy Systems International, Inc. entered
into a restructuring and reorganization arrangement. Prior to that date, these
two companies had common ownership. As a result of the restructuring and
reorganization; (i) the Company reincorporated in Delaware; (ii) Troy Systems
International, Inc. became a wholly-owned subsidiary of Troy Group, Inc. and the
former stockholders of Troy Systems International, Inc. received shares of Troy
Group, Inc.; and (iii) the Company effected a 910.7468-for-one stock split. This
reorganization has been accounted for as if it occurred as of the beginning of
the earliest period presented in these combined financial statements. The
reporting entity includes the combined financial statements of Troy Group, Inc.,
Troy Systems International, Inc. (the "Subsidiary") and Dirk Worldwide, Inc., a
foreign sales corporation (FSC) previously owned by the individual retirement
accounts of the stockholders. The FSC is included in these combined financial
statements because it provided an integral function in the Troy Group's tax
strategies and on July 14, 1998, the stockholders of the FSC contributed their
stock to Troy Group, Inc. The combined entities, Troy Group, Inc. and subsidiary
and Dirk Worldwide, Inc., are referred to in these combined financial statements
as Troy Group or the Company.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying combined financial statements include the accounts of the
Company, its wholly-owned subsidiary and the FSC referred to above. All material
intercompany balances and transactions are eliminated in combination and
consolidation.
CHECKS ISSUED NOT YET PRESENTED FOR PAYMENT
Through the use of concentration accounts, the Company's cash is accumulated
daily and applied to the outstanding balance of the revolving line of credit
(Note 5). Under this program, idle funds are minimized. The Company's liquidity
is thereby maintained in the form of its ability to draw funds against the
revolving line of credit. All checks issued not yet presented for payment are
classified as a liability.
F-7
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated using the straight-line method over their estimated useful lives,
currently five years. Improvements to leased property are amortized over the
lesser of the life of the lease or life of the improvements.
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped to the customer.
Service revenue is recognized over the period of the contract on a straight-line
basis.
PRODUCT RETURNS AND WARRANTIES
The Company records a provision for estimated product returns and warranties
at the time the revenue is recognized.
ADVERTISING POLICY
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was approximately $297,000,
$164,000 and $94,000 in fiscal years 1995, 1996 and 1997, respectively, net of
marketing development funds received from a supplier of $120,000 and $30,000 in
fiscal years 1995 and 1996, respectively. There were no marketing development
funds received in fiscal year 1997.
RESEARCH AND DEVELOPMENT POLICY
The Company expenses research and development costs as they are incurred.
The Company incurs research and development costs in developing new products.
INCOME TAXES
The Company and its wholly-owned subsidiary file separate federal and state
income tax returns. The Company, with the consent of its stockholders, has
elected to be taxed under sections of federal and certain state income tax laws,
which provide that, in lieu of corporation income taxes, the stockholders
separately account for their pro rata shares of the Company's items of income,
deductions, losses and credits. The Company anticipates paying dividends to the
stockholders for their estimated income tax liabilities.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to fair value of the shares to be received at the measurement date.
Nonemployee stock-based transactions are accounted for under the requirements of
Statement No. 123 "Accounting for Stock Based Compensation" which requires
compensation to be recorded based on the fair value of the securities issued or
the services received, whichever is more reliably measurable.
F-8
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and notes payable. The book value of these instruments are
considered to be representative of their fair value.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 EARNINGS PER SHARE
(EPS). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options (none in the fiscal years ended November
30, 1995 and 1996; 259,000 shares in the fiscal year ended November 30, 1997;
and 235,000 shares and 307,000 shares in the six months ended May 31, 1997 and
1998, respectively). Diluted EPS does not include contingently issuable shares
because the conditions for issuance have not been met.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information presented herein as of and in the six
months ended May 31, 1997 and 1998 reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation for the periods
presented. Such adjustments are of a normal recurring nature. The interim
financial information is not intended to be a complete presentation in
accordance with generally accepted accounting principles.
NOTE 2. PRO FORMA INFORMATION (UNAUDITED)
The Company plans to terminate the S corporation elections for itself and
its Subsidiary in connection with a planned public stock offering. The objective
of the pro forma financial information included in these financial statements is
to show what the significant effects might have been on the historical balance
sheet for these planned terminations and on the historical statements of
operations had the Company and its Subsidiary not been treated as S corporations
for income tax purposes.
F-9
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 2. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)
THE FOLLOWING PRO FORMA BALANCE SHEET ADJUSTMENTS HAVE BEEN MADE:
- DISTRIBUTIONS--The Company intends to make an S corporation distribution
to its current stockholders. The pro forma adjustments reflect a liability
for an estimated distribution of $1,500,000.
- DEFERRED INCOME TAXES--The Company will record a deferred income tax asset
that will result from the termination of the Company's and its
Subsidiary's S corporation elections. The pro forma adjustments reflect
the projected asset of $390,000.
- RETAINED EARNINGS--The net effect of the above entries will reduce
retained earnings.
The condensed balance sheet of the Company as of May 31, 1998 (unaudited)
reflecting these pro forma adjustments is as follows:
<TABLE>
<CAPTION>
MAY 31,
MAY 31, PRO FORMA 1998
1998 ADJUSTMENTS PRO FORMA
------------- ------------- -------------
<S> <C> <C> <C>
Current assets...................................................... $ 11,408,000 $ 200,000 $ 11,608,000
Long-term assets.................................................... 2,072,000 190,000 2,262,000
------------- ------------- -------------
Total assets.................................................... $ 13,480,000 $ 390,000 $ 13,870,000
------------- ------------- -------------
------------- ------------- -------------
Current liabilities................................................. $ 5,457,000 $ 1,500,000 $ 6,957,000
Long-term liabilities............................................... 771,000 -- 771,000
------------- ------------- -------------
Total liabilities............................................... 6,228,000 1,500,000 7,728,000
------------- ------------- -------------
Common stock........................................................ 75,000 -- 75,000
Additional paid-in capital.......................................... 247,000 -- 247,000
Retained earnings................................................... 6,930,000 1,110,000 5,820,000
------------- ------------- -------------
Total stockholders' equity...................................... 7,252,000 1,110,000 6,142,000
------------- ------------- -------------
Total liabilities and stockholders' equity...................... $ 13,480,000 $ 390,000 $ 13,870,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
THE FOLLOWING PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS HAVE BEEN MADE:
- INCOME TAXES--The pro forma information presented on the statements of
operations reflect a provision for income taxes at an effective rate of
40.0% in the fiscal years ended November 30, 1997, 1996 and 1995 and in
the six months ended May 31, 1998 and 1997.
- PRO FORMA NET INCOME PER SHARE--The pro forma net income per share is
based on the weighted-average number of shares of common stock outstanding
during the period.
F-10
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 3. INVENTORIES
Inventories consisted of the following as of November 30, 1996 and 1997 and
May 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials....................................... $ 2,786,000 $ 2,188,000 $ 3,290,000
Work-in-process..................................... 266,000 470,000 494,000
Finished goods...................................... 1,183,000 1,173,000 841,000
------------ ------------ ------------
$ 4,235,000 $ 3,831,000 $ 4,625,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following as of
November 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Machinery and equipment........................................... $ 4,547,000 $ 4,743,000
Furniture and fixtures............................................ 307,000 304,000
Leasehold improvements............................................ 1,202,000 1,202,000
------------ ------------
6,056,000 6,249,000
Less accumulated depreciation and amortization.................... 4,456,000 5,069,000
------------ ------------
$ 1,600,000 $ 1,180,000
------------ ------------
------------ ------------
</TABLE>
NOTE 5. NOTES PAYABLE
The Company has a $4,500,000 line of credit agreement with a bank. As of
November 30, 1997, there were no borrowings outstanding against the line of
credit. Borrowings bear interest at the bank's LIBOR rate (5.97% at November 30,
1997) plus 2.25% and are limited to 80% of certain eligible accounts receivable
plus 85% of certain specified accounts. Included in certain specified accounts
is inventory up to $700,000. The agreement expires June 30, 1998. In connection
with the line of credit agreement, the Company has a $400,000 standby letter of
credit agreement. This line of credit is secured by substantially all of the
Company's assets and is guaranteed by the majority stockholders in the amount of
$800,000. In connection with its borrowing arrangements, the Company is subject
to certain financial covenants (see Note 8). As of November 30, 1997, the
Company had approximately $4,400,000 in availability under this line of credit.
In addition, the Company has a separate $500,000 standby letter of credit
facility that expires in June 1999. The total amount of letters of credit
outstanding as of November 30, 1997 was $300,000.
F-11
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following as of November 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Notes payable, bank............................................................. $ 1,142,000
7% unsecured note payable to stockholder, due November 1998..................... 375,000
4% economic development note payable............................................ 404,000
5% industrial and business development note payable............................. 113,000
------------
2,034,000
Less current maturities......................................................... 754,000
------------
$ 1,280,000
------------
------------
</TABLE>
Notes payable, bank, bear interest based on the bank's reference rate (8.50%
as of November 30, 1997) plus 1.25% and 2.50% in excess of the bank's adjusted
treasuries rate (7.00% as of November 30, 1997); mature through 2004; and are
secured by substantially all assets. One note is secured by a third trust deed
on real property owned by a company related through common ownership to the
majority stockholders and is personally guaranteed by the majority stockholders
in the amount of $286,000 each. Another note is subject to certain financial
covenants (see Note 8).
The economic, industrial and business development notes payable mature
through 2005. The notes are secured by certain equipment and the personal
guarantees of the majority stockholders of the Company. One of the notes is
secured by a fourth trust deed on real property owned by a Company related
through common ownership to the majority stockholders.
As of November 30, 1997, future maturities of long-term debt are as follows:
1998 $754,000; 1999 $663,000; 2000 $299,000; 2001 $67,000; 2002 $70,000;
thereafter $181,000 (total $2,034,000).
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following as of November 30, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Compensation...................................................... $ 1,091,000 $ 1,539,000
Other............................................................. 287,000 185,000
------------ ------------
$ 1,378,000 $ 1,724,000
------------ ------------
------------ ------------
</TABLE>
NOTE 8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue any authorized but unissued shares of
preferred stock in one or more series and to designate the rights, preferences
and privileges of each such series.
F-12
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
The Company has reserved 1,564,298 shares for issuance under the Company's
1998 Stock Incentive Plan and 1996 Stock Option Plan, of which 326,957 shares
are subject to outstanding options as of November 30, 1997. Option prices for
the incentive stock options will be 100% of the fair market value of the stock
on the date the option is granted. For incentive options granted to 10% or more
stockholders, the option price is 110% of the fair market value of the stock on
the date the option is granted. Option prices for the nonqualified stock options
shall not be less than 85% of the fair market value of the stock on the date the
options are granted. In fiscal year 1996, Troy granted options to acquire
326,957 shares at a weighted-average option price of $0.42 per share. The
options vest over five to ten years from the grant date. Vesting will accelerate
upon the sale of more than 51% of the issued and outstanding shares of the
Company's voting common stock or upon the conversion of Troy to a public
company. There were no options granted in fiscal year 1997 and no options have
been exercised or expired in fiscal years 1997 or 1996.
As permitted under generally accepted accounting principles, grants under
these plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the stock option plan. Had compensation cost been determined based
on the minimum fair value method prescribed in FASB Statement No. 123, reported
historical net income before income taxes and pro forma net income per share for
fiscal year 1996 would not have changed and fiscal year 1997 net income before
income taxes, and basic and diluted pro forma net income per share would have
been reduced to $4,391,000, $0.59 and $0.57, respectively. In determining the
pro forma amounts above, the value of each grant is estimated at the grant date
using the minimum fair value method prescribed in Statement No. 123, with the
following weighted-average assumptions for grants in fiscal year 1996: no
dividends for all years, risk-free interest rate of 5.86% and 5.98%, expected
lives of 5 and 10 years, and expected amounts to be exercised of 100%. The
weighted average fair value of the options granted in fiscal year 1996 was $0.16
per share.
STOCK WARRANTS
On October 1, 1997, the Company issued warrants to a consultant to purchase
up to 300,000 shares of common stock of the Company at $3.50 per share. The
warrants vest at the rate of 33 1/3% each upon the occurrence of three separate
performance conditions relating to: (i) becoming publicly owned; (ii) certain
acquisition transactions; and (iii) the Company's market value. As of November
30, 1997 and May 31, 1998, none of these events have occurred and no expense has
been recorded. The effects of the warrants will be recorded as the performance
conditions are met at the then current fair value of the warrants vested. The
warrants expire five years after they vest. Effective in May 1998, in connection
with legal services being provided in connection with an offering of the
Company's common stock, the Company issued a warrant to purchase up to 50,000
shares of common stock of the Company at $3.50 per share. The effect of the
warrants will be recorded when the performance condition is met at the then
current fair value of the warrant vested. The warrant expires five years after
it vests.
F-13
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
RETAINED EARNINGS
The Company and its subsidiary are limited by the terms of certain debt
agreements to pay dividends up to the amount necessary for the stockholders to
pay their pro rata share of income taxes on the Company's income.
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS AND RENT EXPENSE
The Company leases its operating facilities under noncancelable operating
lease agreements, one of which is with a company related through common
ownership (Note 10). Rent expense in fiscal years 1995, 1996 and 1997 was
approximately $294,000, $288,000 and $352,000, respectively. Future minimum
rental commitments under these leases in the fiscal years ending November 30 are
as follows: 1998 $420,000; 1999 $420,000; 2000 $356,000; and 2001 $69,000 (total
$1,265,000 of which $700,000 is to the related party).
LEGAL PROCEEDINGS
From time to time, the Company is subject to litigation in the ordinary
course of its business. In February 1998, the Company was served with a
complaint by a former employee alleging, among other things, sexual harassment
by another former employee of the Company. The Company denies any liability in
this matter and intends to vigorously defend this litigation. However, this
litigation is in its early stages and the outcome of the litigation is
inherently uncertain and an adverse resolution of this litigation could result
in a monetary judgment against the Company. No amounts have been recorded in the
financial statements for this matter.
NOTE 10. RELATED PARTY TRANSACTIONS AND GUARANTEE OF INDEBTEDNESS
In fiscal year 1993, the Company entered into an agreement to lease
operating facilities from a company related through common ownership. The
agreement expires in September 2000 and requires monthly payments of
approximately $21,200.
The majority stockholders guarantee, to a maximum liability of $800,000, the
Company's obligations under its $4.5 million revolving line of credit and its
term loan with a bank.
In fiscal years 1995, 1996 and 1997, the Company made principal payments on
the notes payable to stockholders of $345,000, $175,000 and $373,000,
respectively.
The FSC included in these financial statements, Dirk Worldwide, Inc., was
previously owned by the individual retirement accounts of the Company's
stockholders and made distributions of its income to them. Total distributions
in fiscal years 1995, 1996 and 1997 were $-0-, $57,000 and $286,000,
respectively, and are recorded as dividends in the combined statements of
stockholders' equity.
NOTE 11. STATE INCOME TAXES
State income taxes in fiscal years 1995, 1996 and 1997 differ from the
computed "expected" taxes due to enterprise zone and other tax credits
generated.
F-14
<PAGE>
TROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1997 AND 1998 IS
UNAUDITED
NOTE 12. MAJOR VENDORS
One of the key components of certain of the Company impact products are
purchased from one vendor. If the Company were to lose its component supplier
for its impact printing products, it would be required to identify a new
supplier and substantially reengineer its products for use with an alternative
component. Net purchases from this vendor in fiscal years 1995, 1996 and 1997
were approximately $403,000, $255,000 and $255,000, respectively. Accounts
payable to this vendor as of November 30, 1996 and 1997 were approximately
$25,000 and $32,000, respectively.
The Company also purchases other key components from one vendor. Net
purchases from this vendor in fiscal years 1995, 1996 and 1997 were
approximately $1,000,000, $3,600,000 and $3,800,000, respectively. Accounts
payable to this vendor as of November 30, 1996 and 1997 were approximately
$340,000 and $540,000, respectively.
NOTE 13. MAJOR CUSTOMERS AND FOREIGN SALES
In fiscal year 1997, the Company had sales to a customer that individually
accounted for 16.6% of the Company total net sales and as of November 30, 1997
the trade receivables from this customer were $326,000. Sales to this customer
in fiscal years 1995 and 1996 were less than 10% of the Company's net sales.
In fiscal years 1995, 1996 and 1997, the Company had shipments to foreign
customers that accounted for 12.3%, 14.3%, and 13.7% of the Company's net sales.
The sales to foreign customers are all denominated in U.S. dollars therefore the
Company has not experienced any significant foreign currency gains or losses.
NOTE 14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
---------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash paid during the period
for:
Interest................... $ 337,000 $ 345,000 $ 272,000 $ 128,000 $ 68,000
---------- ---------- ---------- ------------ ------------
---------- ---------- ---------- ------------ ------------
State income taxes......... $ -- $ 65,000 $ 185,000 $ 46,000 $ 10,000
---------- ---------- ---------- ------------ ------------
---------- ---------- ---------- ------------ ------------
</TABLE>
F-15
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULE
To the Board of Directors
Troy Group
Santa Ana, California
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental Schedule II is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic combined financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic combined financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic combined financial
statements taken as a whole.
MCGLADREY & PULLEN, LLP
Anaheim, California
July 14, 1998
F-16
<PAGE>
TROY GROUP
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNT
FISCAL YEARS ENDED NOVEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT PROVISIONS
BEGINNING CHARGED TO BALANCE AT
OF YEAR EXPENSE CHARGE-OFFS END OF YEAR
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1995....................................................... $ 111,000 $ -- $ (4,000) $ 107,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
1996....................................................... $ 107,000 $ 209,000 $(143,000) $ 173,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
1997....................................................... $ 173,000 $ 65,000 $ (74,000) $ 164,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
</TABLE>
F-17
<PAGE>
[LOGO]
ON-DEMAND DISTRIBUTIVE
PRINTING SOLUTIONS
WHEELING, WV MANUFACTURING FACILITY
[picture of Troy's Wheeling, WV
manufacturing facility]
RESEARCH LAB
[picture of Troy's research facility]
TROY'S TONER MANUFACTURING EQUIPMENT
[picture of Troy's toner manufacturing line]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 4
Distributions............................................................. 10
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Dilution.................................................................. 13
Selected Combined Financial Data.......................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
Business.................................................................. 23
Management................................................................ 35
Certain Transactions...................................................... 41
Principal Stockholders.................................................... 42
Description of Capital Stock.............................................. 43
Shares Eligible for Future Sale........................................... 46
Underwriting.............................................................. 47
Legal Matters............................................................. 48
Experts................................................................... 49
Additional Information.................................................... 49
Index to Combined Financial Statements.................................... F-1
</TABLE>
------------------------
UNTIL , 1998, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,200,000 SHARES
[TROY GROUP, INC. LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
[CRUTTENDEN ROTH INCORPORATED LOGO]
[JOSEPHTAL & COMPANY INC LOGO]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Company in connection with the sale of
Common Stock being registered. All of the amounts shown are estimates, except
the SEC registration fee, the NASD filing fees and the Nasdaq listing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee....................................................... $ 5,980
NASD fee................................................................... 2,524
Nasdaq listing fee......................................................... 78,875
Blue Sky fees and expenses................................................. 2,000
Legal fees and expenses.................................................... 100,000
Accounting fees and expenses............................................... 150,000
Printing expenses.......................................................... 65,000
Transfer agent fees........................................................ 3,500
Warrants................................................................... 525,000
Miscellaneous.............................................................. 17,121
-----------------
Total...................................................................... $ 950,000
-----------------
-----------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware Law and the Company's Certificate of Incorporation provide that the
Company shall, under certain circumstances and subject to certain limitations,
indemnify any director, officer, employee or agent of the corporation made or
threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met. Any such
person is also entitled, subject to certain limitations, to payment or
reimbursement of reasonable expenses in advance of the final disposition of the
proceeding. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including one
by or in the right of the corporation.
The Company has also entered into indemnification agreements with all of the
directors and executive officers of the Company whereby the Company has agreed
to indemnify and hold harmless the directors and executive officers from and
against any claims, liability, damages or expenses incurred by them in or
arising out of their status, capacities and activities with respect to the
Company to the maximum extent permitted by Delaware law. The Company believes
that these agreements are necessary to attract and retain qualified persons as
directors and executive officers.
The Company also maintains a directors and officers insurance policy
pursuant to which directors and officers of the Company are insured against
liability for certain actions in their capacity as directors and officers.
Reference is also made to Section 6 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three year period ending February 28, 1998, the Company issued
the following shares of its Common Stock without registration under the
Securities Act:
1. On November 27, 1996, the Company granted options to purchase an
aggregate of 326,957 shares of the Company's Common Stock to two executive
officers of the Company.
2. Effective as of October 1, 1997, the Company issued a warrant to
purchase up to a maximum of 300,000 shares of Common Stock of the Company to
an investor in exchange for providing certain consulting services to the
Company.
3. In May 1998, the Company issued a warrant to purchase up to a
maximum of 50,000 shares of Common Stock of the Company to an attorney in
exchange for providing legal services to the Company in connection with the
Offering.
4. Effective as of May 31, 1998, the Company will issue an aggregate
1,124,772 shares of Common Stock to six existing stockholders in exchange
for the contribution of all of the outstanding capital stock of the
Subsidiary to the Company.
5. Concurrently with the consummation of the Offering, the Company
intends to grant options to purchase an aggregate of 380,000 shares of
Common Stock of the Company to certain officers and directors of the
Company.
All of the above sales were made in reliance on Rule 701, Regulation D and
Section 4(2) under the Securities Act. With regard to the reliance by the
Company upon the exemptions set forth in the previous sentence, certain
inquiries were made by the Company to establish that such sales qualified for
such exemptions from the registration requirements. In particular, the Company
confirmed that: (i) all offers of sales and sales were made by personal contact
from officers or directors of the Company or other persons closely associated
with the Company; (ii) each investor made representations that he or she was
sophisticated in relation to this investment (and the Company has no reason to
believe such representations were incorrect); (iii) each purchaser gave
assurance of investment intent and the certificates for the shares bear a legend
accordingly; and (iv) offers and sales within any offering were made to a
limited number of persons.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement
1.2 Form of Representatives' Warrant*
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
3.3 Certificate of Ownership and Merger dated May 18, 1998, between Troy Group
Newco, Inc. and Troy Systems, Inc.*
3.4 Agreement and Plan of Merger dated May 18, 1998 between Troy Group Newco,
Inc. and Troy Systems, Inc.*
4.1 Warrant dated October 1, 1997 issued to Broadland Capital Partners*
5.1 Opinion of Oppenheimer Wolff & Donnelly LLP*
10.1 Lease dated March 16, 1995 between the Company and Ragco*
10.2 Lease dated July 28, 1993 between Dirk Investments, Inc. and the Company*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.3 Lease Amendment to Lease dated July 28, 1993 between Dirk Investments,
Inc. and the Company*
10.4 Addendum to Lease dated March 16, 1995 between Dirk Investments, Inc. and
the Company*
10.5 Lease Amendment to Lease dated September 1, 1996 between Dirk Investments,
Inc. and the Company*
10.6 1996 Stock Option Plan*
10.7 1998 Stock Incentive Plan*
10.8 Incentive Stock Option Agreement dated November 27, 1996 in favor of
Robert Messina*
10.9 Incentive Stock Option Agreement dated November 27, 1996 in favor of Brian
Dirk*
10.10 Non-Competition Agreement dated November 27, 1996 between Robert Messina
and the Company*
10.11 Consulting Agreement dated October 1, 1997 between the Company and
Broadland Capital Partners*
10.12 Form of Indemnification Agreement for directors and executive officers of
the Company*
10.13 Reseller Agreement dated April 1, 1996 between the Company and
Hewlett-Packard Company(1)*
10.14 MICR Supplies Agreement dated February 6, 1998 between the Company and IBM
Printing Systems Company(1)*
10.15 Form of Tax Agreement Relating to S Corporation Distributions by and
between the Company and the Dirk Shareholders*
10.16 Non-negotiable Promissory Note of the Company dated November 30, 1993, as
amended November 1, 1995 and November 1, 1996*
10.17 Loan Agreement dated June 19, 1997 between the Company and Union Bank of
California*
10.18 First Amendment to Loan Agreement dated February 12, 1998 between the
Company and Union Bank of California*
10.19 Promissory Note dated February 6, 1998 in favor of Union Bank of
California*
10.20 Promissory Note dated June 1997 in favor of Union Bank of California*
10.21 Security Agreement dated February 6, 1998 by the Subsidiary*
10.22 Second Amendment to Loan Agreement dated April 27, 1998 between the
Company and Union Bank of California*
10.23 1998 Employee Stock Purchase Plan*
10.24 Letter dated October 3, 1997 to RAGCO from the Company*
10.25 Third Amendment to Business Loan Agreement, First Amendment to Security
Agreement and First Amendment to each of Two Certain Promissory Notes
dated May 8, 1998 between the Company and Union Bank of California*
10.26 Bill of Sale and Assignment and Assumption Agreement dated May 31, 1998
between Troy Group, Inc. and Troy Systems International, Inc.*
10.27 Form of Subscription Agreement*
10.28 Fourth Amendment to Business Loan Agreement and Second Amendment to One
Certain Promissory Note dated May 31, 1998 between the Company, the
Subsidiary and Union Bank of California*
21.1 Subsidiaries of the Registrant*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors
23.2 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on pages II-4 and II-5 hereto)*
27.1 Financial Data Schedule*
99.1 Consent of Brian P. Dirk*
99.2 Consent of Norman B. Keider*
99.3 Consent of John B. Zaepfel*
99.4 Consent of William P. O'Reilly*
99.5 Consent of Gene A. Bier*
</TABLE>
- ------------------------
(1) Confidential treatment has been requested with respect to designated
portions contained within such document. Such portions have been omitted and
filed separately with the Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
* Previously filed.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule is included herein and should be
read in conjunction with the financial statements referred to above:
Independent Auditors' Report on Financial Statement Schedule
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted as the required information is unapplicable
or the information is presented in the financial statements or related notes.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Santa Ana, California on this 29th day of July, 1998.
<TABLE>
<S> <C> <C>
TROY GROUP, INC.
By: /s/ PATRICK J. DIRK
-----------------------------------------
Patrick J. Dirk
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities indicated, on July 29, 1998.
NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------
Chairman of the Board,
/s/ PATRICK J. DIRK President and Chief
- ------------------------------ Executive Officer
Patrick J. Dirk (Principal Executive
Officer)
Chief Financial Officer,
* Treasurer and Secretary
- ------------------------------ (Principal Financial and
Del L. Conrad Accounting Officer)
/s/ PATRICK J. DIRK
- ------------------------------ * Attorney-in-fact
Patrick J. Dirk
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1.1 Underwriting Agreement.......................................................................
1.2 Form of Representatives' Warrant*............................................................
3.1 Certificate of Incorporation of the Company*.................................................
3.2 Bylaws of the Company*.......................................................................
3.3 Certificate of Ownership and Merger dated May 18, 1998, between Troy Group Newco, Inc. and
Troy Systems, Inc.*........................................................................
3.4 Agreement and Plan of Merger dated May 18, 1998 between Troy Group Newco, Inc. and Troy
Systems, Inc.*.............................................................................
4.1 Warrant dated October 1, 1997 issued to Broadland Capital Partners*..........................
5.1 Opinion of Oppenheimer Wolff & Donnelly LLP*.................................................
10.1 Lease dated March 16, 1995 between the Company and Ragco*....................................
10.2 Lease dated July 28, 1993 between Dirk Investments, Inc. and the Company*....................
10.3 Lease Amendment to Lease dated July 28, 1993 between Dirk Investments, Inc. and the
Company*...................................................................................
10.4 Addendum to Lease dated March 16, 1995 between Dirk Investments, Inc. and the Company*.......
10.5 Lease Amendment to Lease dated September 1, 1996 between Dirk Investments, Inc. and the
Company*...................................................................................
10.6 1996 Stock Option Plan*......................................................................
10.7 1998 Stock Incentive Plan*...................................................................
10.8 Incentive Stock Option Agreement dated November 27, 1996 in favor of Robert Messina*.........
10.9 Incentive Stock Option Agreement dated November 27, 1996 in favor of Brian Dirk*.............
10.10 Non-Competition Agreement dated November 27, 1996 between Robert Messina and the Company*....
10.11 Consulting Agreement dated October 1, 1997 between the Company and Broadland Capital
Partners*..................................................................................
10.12 Form of Indemnification Agreement for directors and executive officers of the Company*.......
10.13 Reseller Agreement dated April 1, 1996 between the Company and Hewlett-Packard Company(1)*...
10.14 MICR Supplies Agreement dated February 6, 1998 between the Company and IBM Printing Systems
Company(1)*................................................................................
10.15 Form of Tax Agreement Relating to S Corporation Distributions by and between the Company and
the Dirk Shareholders*.....................................................................
10.16 Non-negotiable Promissory Note of the Company dated November 30, 1993, as amended November 1,
1995 and November 1, 1996*.................................................................
10.17 Loan Agreement dated June 19, 1997 between the Company and Union Bank of California*.........
10.18 First Amendment to Loan Agreement dated February 12, 1998 between the Company and Union Bank
of California*.............................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.19 Promissory Note dated February 6, 1998 in favor of Union Bank of California*.................
10.20 Promissory Note dated June 1997 in favor of Union Bank of California*........................
10.21 Security Agreement dated February 6, 1998 by the Subsidiary*.................................
10.22 Second Amendment to Loan Agreement dated April 27, 1998 between the Company and Union Bank of
California*................................................................................
10.23 1998 Employee Stock Purchase Plan*...........................................................
10.24 Letter dated October 3, 1997 to RAGCO from the Company*......................................
10.25 Third Amendment to Business Loan Agreement, First Amendment to Security Agreement and First
Amendment to each of Two Certain Promissory Notes dated May 8, 1998 between the Company and
Union Bank of California*..................................................................
10.26 Bill of Sale and Assignment and Assumption Agreement dated May 31, 1998 between Troy Group,
Inc. and Troy Systems International, Inc.*.................................................
10.27 Form of Subscription Agreement*..............................................................
10.28 Fourth Amendment to Business Loan Agreement and Second Amendment to One Certain Promissory
Note, dated May 31, 1998 between the Company, the Subsidiary and Union Bank of
California*................................................................................
21.1 Subsidiaries of the Registrant*..............................................................
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors.....................................
23.2 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)........................
24.1 Power of Attorney (included on pages II-4 and II-5 hereto)*..................................
27.1 Financial Data Schedule*.....................................................................
99.1 Consent of Brian P. Dirk*....................................................................
99.2 Consent of Norman B. Keider*.................................................................
99.3 Consent of John B. Zaepfel*..................................................................
99.4 Consent of William P. O'Reilly*..............................................................
99.5 Consent of Gene A. Bier*.....................................................................
</TABLE>
- ------------------------
(1) Confidential treatment has been requested with respect to designated
portions contained within such document. Such portions have been omitted and
filed separately with the Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
* Previously filed.
<PAGE>
EXHIBIT 1.1
2,200,000 SHARES
TROY GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__________, 1998
CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO. INC.
AS REPRESENTATIVES OF THE UNDERWRITERS
c/o Cruttenden Roth Incorporated
18301 Von Karman Avenue
Suite 100
Irvine, CA 92612
Ladies and Gentlemen:
Troy Group, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell 2,200,000 shares of the Common Stock, $.01 par value, of the
Company (the "Common Stock") to the underwriters named in SCHEDULE I hereto
(the "Underwriters") for whom you are acting as the representatives (the
"Representatives"). Such 2,200,000 shares of Common Stock are hereinafter
referred to as the "Firm Shares." The Company has agreed to grant to the
Underwriters an option (the "Option") to purchase up to an additional 330,000
shares of Common Stock (the "Option Shares") on the terms and for the
purposes set forth in SECTION 1(b) hereof. The Company has also agreed to
sell to the Representatives a Warrant (the "Warrant") to purchase 220,000
shares of Common Stock (the "Warrant Shares") on the terms and for the
purposes set forth in SECTION 1(c) hereof. The Firm Shares, the Option
Shares and the Warrant Shares are hereinafter collectively referred to as the
"Shares."
The Company hereby confirms its agreements with each of the Underwriters
as follows:
1. AGREEMENT TO SELL AND PURCHASE.
(a) The Company hereby agrees to sell to each Underwriter, and upon the
basis of the representations, warranties and agreements of the Company herein
contained and subject to all the terms and conditions of this agreement (this
"Agreement"), each Underwriter agrees, severally and not jointly, to purchase
from the Company, at a price of $____ per share, that number of Firm Shares
(rounded up or down as determined by you in your discretion, in order to avoid
fractions of a share) obtained by multiplying the number of Firm Shares to be
sold by the Company by a fraction the numerator of which is the number of Firm
Shares set forth opposite the name of each Underwriter in SCHEDULE I hereto (or
such number of Firm Shares increased as set forth in SECTION 7 hereof) and the
denominator of which is the total number of Firm Shares.
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The difference of $0.__ per Firm Share between the initial public offering
price and the price at which the Company will sell the Firm Shares to the
Underwriter is the "Underwriting Discount."
(b) Subject to all the terms and conditions of this Agreement, the
Company hereby grants the Option to the Underwriters to purchase, severally
and not jointly, up to 330,000 Option Shares from the Company at the same
price per share as the Underwriters shall pay for the Firm Shares. The
Option may be exercised only to cover overallotments in the sale of the Firm
Shares by the Underwriters and may be exercised in whole or in part at any
time (but not more than once) on or before the 30th day after the date of
this Agreement upon notice (the "Option Shares Notice") by the
Representatives. Such notice shall set forth (i) the aggregate number of
Option Shares as to which the Underwriters are exercising the Option, (ii)
the names and denominations in which the certificates for the Option Shares
are to be registered and (iii) the time, date and place at which such
certificates will be delivered (which time and date may be simultaneous with,
but not earlier than, the Closing Date; and in such case the term "Closing
Date" shall refer to the time and date of delivery of certificates for the
Firm Shares and the Option Shares). Such time and date of delivery, if
subsequent to the Closing Date, is called the "Option Closing Date" and shall
be determined by the Representatives and shall not be earlier than three nor
later than five full business days after delivery of such notice of exercise.
If any Option Shares are to be purchased, each Underwriter agrees, severally
and not jointly, to purchase the number of Option Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may
determine) that bears the same proportion to the total number of Option
Shares to be purchased as the number of Firm Shares set forth on SCHEDULE I
opposite the name of such Underwriter bears to the total number of Firm
Shares. The Representatives may cancel the Option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(c) Subject to all the terms and conditions of this Agreement, the
Company hereby sells the Warrant to the Representatives to purchase,
severally and not jointly, the Warrant Shares from the Company at a price
per share equal to 120% of the initial public offering price per share. The
Warrant shall be allocated among the Representatives in the amount designated
by them on the Closing Date. On the Closing Date, the Company shall issue a
Warrant, in such denominations as shall be designated by the Representatives,
in the form attached hereto as EXHIBIT A.
2. DELIVERY AND PAYMENT.
(a) Delivery of the Firm Shares shall be made by the Company to the
Underwriters at the offices of Cruttenden Roth Incorporated, 18301 Von Karman
Avenue, Suite 100, Irvine, CA 92612 (or such other place as may be agreed to
by the Company and the Representatives) at 9:00 a.m. Eastern Standard Time on
___________________, or such other time and date not later than 1:30 p.m.
Eastern Standard Time on _________________________, as the Representatives
shall designate by notice to the Company against payment of the purchase
price by wire transfer in accordance with the Company's written wire
instructions (the time and date of such closing is herein referred to as the
"Closing Date").
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(b) To the extent the Option is exercised, delivery of the Option
Shares by the Company to the Representatives against payment by the
Representatives to the Company (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and
date (which may be the Closing Date) specified in the Option Shares Notice.
(c) Certificates evidencing the Shares to be issued and sold by the
Company shall be in definitive form and shall be registered in such names and
in such denominations as the Representatives shall request at least two
business days prior to the Closing Date or the Option Closing Date, as the
case may be, by written notice to the Company. For the purpose of expediting
the checking and packaging of certificates for such Shares, the Company
agrees to make such certificates available for inspection at least 24 hours
prior to the Closing Date, the Option Closing Date or the Warrant Closing
Date, as the case may be.
(d) The cost of original issue tax stamps, if any, in connection with
the issuance and delivery of that number of the Shares to be issued and sold
by the Company to the Underwriters shall be borne by the Company. The
Company will pay and hold harmless each Underwriter and any subsequent holder
of such Shares from any and all liabilities with respect to or resulting from
any failure or delay in paying Federal and state stamp and other transfer
taxes, if any, which may be payable or determined to be payable in connection
with the original issuance or sale to such Underwriter of such Shares.
(e) It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
Cruttenden Roth Incorporated, individually and not as the Representatives of
the Underwriters, may (but, other than as provided in SECTION 7, shall not be
obligated to) make payment for any Shares to be purchased by any Underwriter
whose funds shall not have been received by the Representatives by the
Closing Date or the Option Closing Date, as the case may be, for the account
of such Underwriter, but any such payment shall not relieve such Underwriter
from any of its obligations under this Agreement.
(f) Not later than 12:00 p.m. on the second business day following the
date the Shares are released by the Underwriters for sale to the public, the
Company shall deliver or cause to be delivered copies of the Prospectus in
such quantities and at such places as the Representatives shall request.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents, warrants and covenants to each of the
Underwriters that:
(a) The Company meets the requirements for use of Form S-1 and a
registration statement (Registration No. 333-51523) on Form S-1 relating to
the Firm Shares and Option Shares, including a Preliminary Prospectus (as
defined below) and such amendments to such registration statement as may have
been required to the date of this Agreement, has been prepared by the Company
in compliance with the provisions of the Securities Act of 1933, as
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amended (the "Securities Act"), and the rules and regulations (collectively
referred to as the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the
Commission. Such registration statement, as amended, including the financial
statements, exhibits and schedules thereto, in the form in which it was
declared effective by the Commission under the Securities Act, including any
information deemed to be a part thereof at the time of effectiveness pursuant
to Rule 430A or Rule 434 under the Securities Act, is called the
"Registration Statement." Any Registration Statement filed by the Company
pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b)
Registration Statement," and from and after the date and time of filing of
the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The prospectus, in the
form first used by the Underwriters to confirm sales of the Shares, is called
the "Prospectus." All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, the Preliminary Prospectus
or the Prospectus, or any amendments or supplements to any of the foregoing,
shall include any copy thereof filed with the Commission pursuant to its
Electronic Data Gathering and Retrieval System ("EDGAR"). The term
"Preliminary Prospectus" as used herein means a preliminary prospectus as
contemplated by Rule 430 or Rule 430A of the Rules and Regulations included
at any time as part of the Registration Statement. Copies of the
Registration Statement and of each related Preliminary Prospectus have been
delivered to the Underwriters. The Registration Statement and any Rule
462(b) Registration Statement have been declared effective by the Commission
under the Securities Act. The Company has complied with all requests of the
Commission for additional or supplemental information.
(b) No stop order or orders suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in
effect, and no proceedings for that purpose have been commenced or are
pending before or are contemplated by the Commission or any state securities
commission or other regulatory authority. Each Preliminary Prospectus and
the Prospectus when filed complied in all material respects with all
applicable provisions of the Securities Act and the Rules and Regulations and
will contain all material information required to be included therein. Each
of the Registration Statement, the Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and during
the period ending on the later of the Closing Date or, if applicable, the
Option Closing Date, complied and will comply in all material respects with
the Securities Act and the Rules and Regulations and did not and will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading. The Prospectus, as amended or supplemented, as of
its date and during the period ending on such day, as in the opinion of
counsel for the Underwriters, the Prospectus is no longer required by law to
be delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing representations and
warranties in this SECTION 3(b) do not apply to any statements or omissions
made in reliance on and in conformity with information relating to the
Underwriters furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement or Prospectus or any
amendment or supplement thereto. The Company acknowledges
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<PAGE>
that the statements set forth in the last paragraph on the cover page of the
Prospectus and under the heading "Underwriting" in the Prospectus constitute
the only information relating to the Underwriters furnished in writing to the
Company by the Representatives specifically for inclusion in the Registration
Statement. The Company has delivered to the Representatives one complete
manually signed copy of the Registration Statement and of each consent and
certificate of experts filed as a part thereof, and conformed copies of the
Registration Statement (without exhibits), the Preliminary Prospectus and the
Prospectus, as amended or supplemented, in such quantities and at such places
as the Representatives have reasonably requested for each of the
Underwriters. The Company has not distributed and will not distribute, prior
to the later of the Option Closing Date and the completion of the
Underwriters distribution of the Shares, any offering material in connection
with the offering and sale of the Shares, other than the Preliminary
Prospectus, the Prospectus or the Registration Statement and any other
material permitted under the Securities Act and the Rules and Regulations.
(c) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" (other
than for subsequent issuances, if any, pursuant to employee benefit plans
described in the Prospectus or upon exercise of outstanding options or
warrants described in the Prospectus). The Common Stock (including the
Shares) conforms in all material respects to the description thereof
contained in the Prospectus. All of the issued and outstanding shares of
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable and have been issued in compliance with federal and state
securities laws. None of the outstanding shares of Common Stock were issued
in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There
are no authorized or outstanding options, warrants, preemptive rights, rights
of first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company or any of its subsidiaries other than those accurately described in
the Prospectus.
(d) The Shares to be issued and sold by the Company to the Underwriters
hereunder have been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus; the certificates evidencing
the Shares will comply with all applicable requirements of Delaware law; and
none of the Shares will be issued or sold in violation of any preemptive
rights of shareholders of the Company.
(e) All of the outstanding shares of capital stock of the Company's
subsidiaries have been duly authorized and validly issued and are fully paid
and nonassessable, and are owned by the Company free and clear of any and all
liens, charges, encumbrances or claims.
(f) The consolidated financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the financial
condition and the stockholders' equity of the Company as of the respective
dates thereof and the consolidated statements of operations and cash flows of
the Company for the respective periods covered thereby, all in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the entire period involved, except as otherwise disclosed in the
Prospectus. No other financial statements
5
<PAGE>
or schedules of the Company are required by the Securities Act or the Rules
and Regulations to be included in the Registration Statement or the
Prospectus. The financial data set forth in the Prospectus under the
captions "Prospectus Summary--Summary Consolidated and Pro Forma Financial
Data," "Capitalization" and "Selected Consolidated Financial Data" fairly
present the information set forth therein on a basis consistent with that of
the audited financial statements contained in the Registration Statement.
McGladrey & Pullen, LLP, independent auditors (the "Accountants"), who have
reported on such financial statements and schedules, are independent
accountants with respect to the Company as required by the Securities Act and
the Rules and Regulations. The Company maintains a system of accounting
controls sufficient to provide reasonable assurances that: (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(g) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus and prior to the Closing
Date and, if later, the Option Closing Date, except as set forth in or
contemplated by the Registration Statement and the Prospectus, (i) there has
not been and will not have been any change in the capitalization of the
Company, (ii) the Company has not and will not have paid or declared any
dividends or other distributions of any kind on any class of its capital
stock, and (iii) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings,
business, operations or prospects, whether or not arising from transactions
in the ordinary course of business of the Company and its subsidiaries,
considered as one entity (any such change is herein called a "Material
Adverse Change"). During the Prospectus Delivery Period, neither the Company
nor any of its subsidiaries will engage in any action (including without
limitation the execution of any letter of intent for the consummation of any
material acquisition) that will require a post-effective amendment to the
Registration Statement or an amending supplement to the Prospectus unless
prior to or contemporaneously with the consummation of such action the
Company first prepares and files an amendment to the Registration Statement
and supplemental Prospectus satisfying the requirements of the Act and the
Rules and Regulations thereunder.
(h) Neither the Company nor any of its subsidiaries are, and none of
them intend to conduct their business in a manner in which they would become,
an "investment company" or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," or a company
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
(i) Except as set forth in the Registration Statement and Prospectus,
there are no legal or governmental actions, suits or proceedings pending or,
to the best of the Company's knowledge, threatened (i) against or affecting
the Company or any of its subsidiaries, (ii) which has as the subject thereof
any officer or director of, or property owned or leased by, the Company
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<PAGE>
or any of its subsidiaries or (iii) relating to environmental or
discrimination matters, where in any such case (A) there is a reasonable
possibility that such action, suit or proceeding might be determined
adversely to the Company or such subsidiary and (B) any such action, suit or
proceeding, if so determined adversely, would reasonably be expected to
result in a Material Adverse Change or adversely affect the consummation of
the transactions contemplated by this Agreement. No material labor dispute
with the employees of the Company or any of its subsidiaries exists or, to
the best of the Company's knowledge, is threatened or imminent.
(j) The Company and its subsidiaries have (i) all governmental
licenses, permits, consents, orders, approvals and other authorizations
necessary to carry on their business as contemplated in the Prospectus, (ii)
complied in all material respects with all laws, regulations and orders
applicable to them or their business and (iii) performed in all material
respects their obligations required to be performed by them thereunder.
(k) Neither the Company nor any of its subsidiaries is in default under
any contract or other instrument to which it is a party or by which any of
its property is bound or affected, except defaults which singly or in the
aggregate have not and will not result in a Material Adverse Change. To the
best knowledge of the Company, no other party under any contract or other
instrument to which it or its subsidiaries is a party is in default in any
material respect thereunder. Neither the Company nor any of its subsidiaries
is in violation of any provision of its respective articles or certificate of
incorporation or bylaws.
(l) Neither the Company nor any of its subsidiaries is aware of any
event or circumstance which, but for the giving of notice or the lapse of
time or both, would constitute an event of default under any material
agreement or instrument for borrowed money or any guarantee of any material
agreement or instrument for borrowed money to which the Company or any of its
subsidiaries or any of the respective properties or assets of the Company or
its subsidiaries are subject.
(m) The Company and its subsidiaries own or possess sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals,
trade secrets and other similar rights (collectively, "Intellectual Property
Rights") reasonably necessary to conduct their businesses as now conducted.
Neither the Company nor any of its subsidiaries has received any notice of
infringement or conflict with asserted Intellectual Property Rights of
others, which infringement or conflict, if the subject of an unfavorable
decision, would result in a Material Adverse Change.
(n) Except as would not, individually or in the aggregate, result in a
Material Adverse Change (i) neither the Company nor any subsidiaries is in
violation of any federal, state, local or foreign law or regulation relating
to pollution or protection of human health or the environment (including,
without limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of
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Environmental Concern (collectively, "Environmental Laws"), which violation
includes, but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business of the
Company or any of its subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, nor has the Company or
any of its subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges
that the Company or any of its subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company or any of its subsidiaries has received written notice, and
no written notice by any person or entity alleging potential liability for
investigatory costs, cleanup costs, governmental responses costs, natural
resources damages, property damages, personal injuries, attorneys' fees or
penalties arising out of, based on or resulting from the presence, or release
into the environment, of any Material of Environmental Concern at any
location owned, leased or operated by the Company or any of its subsidiaries,
now or in the past (collectively, "Environmental Claims"), pending or, to the
best of the Company's knowledge, threatened against the Company or any of its
subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law; and (iii) to the best of the Company's
knowledge, there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge, presence or disposal of any Material of Environmental
Concern, that reasonably could result in a violation of any Environmental Law
or form the basis of a potential Environmental Claim against the Company or
any of its subsidiaries against any person or entity whose liability for any
Environmental Claim the Company or any of its subsidiaries has retained or
assumed either contractually or by operation of law.
(o) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for
the consummation by the Company of the transactions contemplated hereby and
by the filing of the Registration Statement, except such as have been
obtained or made by the Company and are in full force and effect under the
Securities Act, and such as may be required under state securities or Blue
Sky laws or the Bylaws and rules of the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the purchase and distribution
by the Underwriters of the Shares.
(p) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company and is enforceable against the Company in accordance with the terms
hereof. The performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of the
Company or its subsidiaries pursuant to the terms or provisions of, or result
in a breach or violation of any of the terms or provisions of, or constitute
a default under, or give any other party a right to terminate any of its
obligations under, or result in the acceleration of any obligation under, the
respective articles or certificate of incorporation or bylaws of the Company
or its subsidiaries, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence
of indebtedness, lease, contract or other agreement or instrument to
8
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which the Company or any of its subsidiaries is a party or by which the
Company, any of its subsidiaries or any of their properties are bound or
affected, or violate or conflict with any judgment, ruling, decree, order,
statute, rule or regulation of any court or other governmental agency or body
applicable to the business or properties of the Company or any of its
subsidiaries.
(q) The Company is duly incorporated and validly existing in good
standing as a corporation under the laws of the State of Delaware, and each
of the Company's subsidiaries is duly incorporated and validly existing as a
corporation under the laws of the jurisdiction of its incorporation. Each of
the Company and its subsidiaries has full power and authority (corporate and
other) to conduct all the activities conducted by it, to own or lease all the
assets owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign corporation
in each jurisdiction in which it owns or leases real property or transacts
business requiring such qualification and in which the failure to so qualify
would result in a Material Adverse Change. Except as disclosed in the
Registration Statement, the Company does not own, directly or indirectly, any
shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any firm, partnership, joint
venture, association or other entity. Complete and correct copies of the
respective articles or certificate of incorporation and bylaws of the Company
and each of its subsidiaries and all amendments thereto have been delivered
to the Representatives, and no changes therein will be made subsequent to the
date hereof and prior to the Closing Date or, if later, the Option Closing
Date.
(r) The Company, or its subsidiaries, has good and marketable title to
all properties and assets described in the Prospectus as owned by it or them,
free and clear of all liens, charges, encumbrances or restrictions, except
such as are described in the Prospectus or are not material to the business
of the Company or its subsidiaries. The Company, or its subsidiaries, has
valid, subsisting and enforceable leases for the properties described in the
Prospectus as leased by it or them, with such exceptions as are not material
and do not materially interfere with the use made and proposed to be made of
such properties by the Company or its subsidiaries, and neither the Company
nor any of its subsidiaries, as applicable, is in default in any material
respects of any terms or provisions of any leases.
(s) The Company and its subsidiaries have filed all necessary federal,
state and foreign tax returns that are required to be filed by them and have
paid all taxes shown on such returns and on all assessments received by them
to the extent such taxes have become due, other than any which the Company or
its subsidiaries is contesting in good faith. All taxes with respect to
which the Company and its subsidiaries are obligated have been paid or
adequate accruals have been set up to cover any such taxes. The Company has
no knowledge of any material tax deficiency which has been assessed or
threatened against the Company or any of its subsidiaries. The Company has
made adequate charges and accruals in the financial statements included in
the Prospectus in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the Company
has not been finally determined.
(t) The Company and its subsidiaries maintain insurance of such types and
in such amounts as are generally deemed adequate and customary for their
businesses. The Company
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has no reason to believe that it or any subsidiary will not be able (i) to
renew their existing insurance coverage as and when such policies expire or
(ii) to obtain comparable coverage from similar institutions as may be
necessary or appropriate to conduct their business as now conducted and at a
cost that would not result in a Material Adverse Change. Neither the Company
nor any subsidiaries has been denied any insurance coverage which it has
sought or for which it has applied.
(u) With respect to any "employee benefit plan" (as defined under the
Employee Retirement Income Security Act of 1974, as amended, and the
regulations and published interpretations thereunder (collectively, "ERISA")
established or maintained by the Company, its subsidiaries or their "ERISA
Affiliates" (as defined below)), no event has occurred and, to the best
knowledge of the Company, there exists no condition or set of circumstances,
in connection with which the Company could be subject to any liability under
the terms of any such "employee benefit plan." "ERISA Affiliate" means, with
respect to the Company, any member of any group of organizations described in
Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as
amended, and the regulations and published interpretations thereunder (the
"Code") of which the Company is a member. No "reportable event" (as defined
under ERISA) has occurred or is reasonably expected to occur with respect to
any "employee benefit plan" established or maintained by the Company or any
of its ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates, if such "employee
benefit plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, its subsidiaries
nor any of their ERISA Affiliates has incurred or reasonably expects to incur
any liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975
or 4980B of the Code. Each "employee benefit plan" established or maintained
by the Company, its subsidiaries or any of their ERISA Affiliates that is
intended to be qualified under Section 401(a) of the Code is so qualified and
nothing has occurred, whether by action or failure to act, and to the best
knowledge of the Company, there exists no condition or set of circumstances,
which would cause the loss of such qualification.
(v) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement that is not described or filed as
required.
(w) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Underwriters was or will be, when made,
inaccurate, untrue or incorrect in any material respect.
(x) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action designed,
or which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares or the Common Stock.
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(y) No holder of securities of the Company has any right that, if
exercised, would require the Company to cause such securities to be included
in the Registration Statement.
(z) The Shares have been approved for trading, subject to notice that
the Registration Statement has been declared effective, on the Nasdaq
National Market.
(aa) Other than as contemplated by this Agreement, there is no broker,
finder or other party that is entitled to receive from the Company any
brokerage or finder's fee or other fee or commission as a result of any of
the transactions contemplated by this Agreement.
(bb) There are no business relationships or related-party transactions
involving the Company or any subsidiaries or any other person required to be
described in the Prospectus which have not been described as required.
(cc) Neither the Company nor any subsidiaries nor, to the best of the
Company's knowledge, any employee or agent of the Company or any
subsidiaries, has made any contribution or other payment to any official of,
or candidate for, any federal, state or foreign office in violation of any
law or of the character required to be disclosed in the Prospectus
4. CERTAIN AGREEMENTS OF THE COMPANY.
The Company agrees with each of the Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives and made available to the Underwriters within a reasonable
period of time prior to the filing thereof and the Underwriters shall not
have objected thereto in good faith.
(b) The Company will notify the Representatives promptly, and will
confirm such advice in writing, (A) of the receipt of any comments of, or
requests for additional or supplemental information from, the Commission, (B)
of the filing of the Prospectus pursuant to Rule 424 or Rule 434 under the
Securities Act, (C) of the time and date that any post-effective amendment to
the Registration Statement becomes effective, (D) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose or the threat
thereof, (E) of the happening of any event during the Prospectus Delivery
Period that in the judgment of the Company makes any statement made in the
Registration Statement or the Prospectus untrue in any material respect or
that requires the making of any changes in the Registration Statement or the
Prospectus in order to make any such statements made therein, in light of the
circumstances in which they are made, not misleading and (F) of receipt by
the Company or any representatives or attorney of the Company of any other
communication from the Commission relating to the Company, the Registration
Statement or any post-effective amendment thereto, any Preliminary Prospectus
or the Prospectus. If at any time the Commission shall issue any order
suspending the effectiveness
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of the Registration Statement, the Company will make every reasonable effort
to obtain the withdrawal of such order at the earliest possible moment. If
the Company has omitted any information from the Registration Statement
pursuant to Rule 430A of the Rules and Regulations, the Company will use its
best efforts to comply with the provisions of and make all requisite filings
with the Commission pursuant to Rules 424(b), 430A and 434, as applicable,
and will notify the Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives, without charge,
copies of the executed signature pages of the Registration Statement and of
any post-effective amendment thereto, including financial statements and
schedules, and all exhibits thereto, and such number of conformed copies of
the Registration Statement, with or without exhibits, and any supplement or
amendment thereto, as the Representatives shall reasonably request.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) Prior to the Effective Date, and thereafter during the Prospectus
Delivery Period, the Company will deliver to the Representatives, without
charge, as many copies of the Preliminary Prospectus and the Prospectus or
any amendment or supplement thereto as the Representatives may reasonably
request. The Company consents to the use of the Preliminary Prospectus and
the Prospectus, or any amendment or supplement thereto, by the Underwriters
and by all dealers to whom the Shares may be sold, both in connection with
the initial offering or sale of the Shares and for any period of time
thereafter during the Prospectus Delivery Period. If during such period of
time any event shall occur, as a result of which the Preliminary Prospectus
or the Prospectus, as then amended or supplemented, would include an untrue
statement of a material fact or omit to state a material fact necessary in
order to make any statement therein, in the light of the circumstances under
which it was made, not misleading, or it is necessary to supplement or amend
the Preliminary Prospectus or the Prospectus to comply with law, the Company
will forthwith prepare and duly file with the Commission an appropriate
supplement or amendment thereto, and will deliver to the Representatives,
without charge, such number of copies thereof as the Representatives may
reasonably request.
(f) The Company shall cooperate with the Representatives and counsel
for the Underwriters to qualify or register the Shares for sale under (or
obtain exemptions from the application of) state securities or blue sky laws
and Canadian provincial securities laws of those jurisdictions designated by
the Representatives, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required
for the distribution of the Shares. The Company shall not be required to
qualify as a foreign corporation or to take any action that would subject it
to general service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise the Representatives promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Shares for offering, sale or trading in any jurisdiction or
any initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.
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(g) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representatives and make available to the
Underwriters, upon request, copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will furnish
to the Representatives and make available to the Underwriters, upon request,
a copy of each annual or other report it shall be required to file with the
Commission.
(h) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in
which the Effective Date falls, an earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months ended
commencing after the Effective Date, and satisfying the provisions of Section
11(a) of the Securities Act.
(i) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or
reimburse if paid by the Underwriters, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to (A) the preparation,
printing and filing of the Registration Statement and exhibits thereto, each
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Registration Statement or the Prospectus, (B) the preparation and delivery of
certificates representing the Shares, (C) the printing of this Agreement and
any and all ancillary underwriting documents, (D) furnishing (including costs
of shipping and distributing) such copies of the Registration Statement, the
Prospectus and any Preliminary Prospectus, and all amendments and supplements
thereto, as may be requested for use in connection with the offering and sale
of the Shares by the Underwriters or by dealers to whom Shares may be sold,
(E) all fees and expenses associated with filing to list and listing Shares
on the Nasdaq National Market, (F) the filing fees incident to the NASD's
review and approval of the Underwriters participation in the offering and the
distribution of the Shares, (G) the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of each state
and the provincial securities laws of Canada, (H) the fees and disbursements
of counsel for the Underwriters in connection with state Blue Sky and NASD
filings (to a maximum of $12,500), (I) the fees and expenses of the Company's
counsel, accountants and other advisors, (J) the transfer agent for the
Shares, (K) all necessary issue and transfer and other stamp taxes in
connection with the issuance and sale of the Shares to the Underwriters, and
(L) any and all travel, lodging and informational meeting expenses for
Company personnel associated with the IPO and the selling process.
(j) The Company further agrees that, in addition to the costs and
expenses payable pursuant to subsection (i) of this Section 4, it will pay to
the Underwriters on the Closing Date by certified or bank cashiers check or,
at the election of the Underwriters, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to
three quarters of one percent (.75%) of the aggregate price to the public of
the Firm Shares, none of which has been paid to date. In the event the
Underwriters elect to exercise the over-allotment option described in Section
1(b) hereof, the Company agrees to pay to the Underwriters on the Option
Closing Date (by certified or bank cashiers check or, at the Representative's
election, by deduction from the proceeds of the offering) a non-accountable
expense allowance equal to three quarters of one percent (.75%) of the
aggregate price to the public of the Option Shares.
(k) If Cruttenden Roth is ready, willing and able to effectuate the
offering of the Common Stock as described in the Prospectus, but the Company
elects not to reasonably proceed, the Company will reimburse Cruttenden Roth
for up to $100,000 of its out-of pocket expenses, including up to $75,000 of
the fees and expenses of its counsel.
(l) The Company will not at any time, directly or indirectly, take any
action designed, or which might reasonably be expected, to cause or result
in, or which will constitute,
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stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of any of the Shares.
(m) The Company will apply the net proceeds from the offering and sale
of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds."
(n) During the period of 180 days commencing at the Closing Date, the
Company will not, without the Representatives' prior written consent, grant
options or warrants to purchase shares of Common Stock at a price less than
the fair market value price or issue any securities convertible into shares
of Common Stock at a conversion price less than the fair market value price
or grant any stock purchase rights at a price less than such price designated
in the Company's stock purchase plan as in effect as of the date of this
Agreement, other than as may occur under the terms of the Company's employee
and director stock option and stock purchase plans as described in the
Prospectus.
(o) The Company will not, and will cause each of its existing record
and beneficial holders of of Common Stock to enter into agreements with the
Underwriters to the effect that they will not for a period of 180 days after
the Effective Date, without the prior written consent of Cruttenden Roth
Incorporated, sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares (other than sales by the
Company pursuant to employee and director stock option and stock purchase
plans or other employee incentive compensation arrangements or in connection
with the acquisition by the Company or its subsidiaries of technologies,
product lines or businesses); provided that the recipients of shares in
connection with a bona fide acquisition describe above agree in writing that
they will not sell, contract to sell or otherwise dispose of any such shares
of Common Stock for a period of 180 days after the Effective Date.
(p) The Company will use all reasonable efforts to comply with, or
cause to be complied with, the conditions precedent to the several
obligations of the Underwriters in SECTION 5 hereof.
(q) The Company shall register the Common Stock under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and shall use its best
efforts to maintain such registration for so long as such registration shall
be required.
5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for the
Shares as provided herein on the Closing Date and, with respect to the Option
Shares, the Option Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in
SECTION 3 hereof as of the date hereof and as of the Closing Date as though
then made and, with respect to the Option Shares, as of the Option Closing
Date as though then made, to the timely performance by the Company of its
covenants and other obligations hereunder, and to each of the following
additional conditions:
(a) Notification that the Registration Statement has become effective
shall be
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<PAGE>
received by the Representatives not later than 10:00 a.m., Charlotte, North
Carolina time, on the first full business day after the Effective Date or at
such later date and time as shall be consented to in writing by the
Representatives and all filings required by Rule 424, Rule 430A and Rule 434
of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or
registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such
authorities shall have been complied with to the satisfaction of the staff of
the Commission or such authorities and (iv) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus shall
have been filed unless a copy thereof was first submitted to the
Representatives and made available to the Underwriters and the Underwriters
did not object thereto in good faith, and the Representatives shall have
received certificates, dated the Closing Date and, with respect to the Option
Shares, the Option Closing Date and signed by the Chief Executive Officer or
the Chairman of the Board of Directors of the Company and the Chief Financial
Officer of the Company (who may, as to proceedings threatened, rely upon the
best of their information and belief), to the effect of clauses (i), (ii) and
(iii) hereof.
The NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
Material Adverse Change, and there shall have been no material transaction,
contract or agreement entered into by the Company or any of its subsidiaries
other than in the ordinary course of business, in each case other than as set
forth in or contemplated by the Registration Statement and the Prospectus,
and (ii) the Company shall not have sustained any material loss or
interference with its business or properties from fire, explosion, flood or
other casualty, whether or not covered by insurance, or from any labor
dispute or any court or legislative or other governmental action, order or
decree, which is not set forth in the Registration Statement and the
Prospectus, if in the Representatives' judgment any such development is so
material as to make it impracticable or inadvisable to consummate the sale
and delivery of the Shares by the Underwriters at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted or threatened against the Company,
its subsidiaries or any of the Company's officers or directors in their
capacities as such, before or by any Federal, state or local court,
commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding could result in a Material Adverse Change.
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<PAGE>
(e) Each of the representations and warranties of the Company contained
herein shall be true and correct in all material respects at the Closing Date
and, with respect to the Option Shares, at the Option Closing Date, as if made
at the Closing Date and, with respect to the Option Shares, at the Option
Closing Date, and all covenants and agreements herein contained to be performed
on the part of the Company and all conditions herein contained to be fulfilled
or complied with by the Company at or prior to the Closing Date and, with
respect to the Option Shares, at or prior to the Option Closing Date, shall have
been duly performed, fulfilled or complied with in all material respects.
(f) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date, and
satisfactory in form and substance to the Representatives' counsel, from
Oppenheimer Wolff & Donnelly, LLP, counsel to the Company, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this Agreement.
(iii) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform to the descriptions thereof set
forth in the Prospectus. All of the outstanding shares of Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable and,
to the best of such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state securities
laws. The form of certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable requirements of the charter and
by-laws of the Company and the General Corporation Law of the State of Delaware.
(iv) This Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or
by general equitable principles.
(v) The Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to this
Agreement and, when issued and delivered by the Company pursuant to this
Agreement against payment and receipt by the Company of the consideration set
forth therein, will be validly issued, fully paid and nonassessable.
(vi) The Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To such counsel's
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<PAGE>
knowledge, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if any, has
been issued under the Securities Act and no proceedings for such purpose have
been instituted or are pending or are contemplated or threatened by the
Commission. Any required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) under the Securities Act has been made in the manner
and within the time period required by such Rule 424(b).
(vii) The Registration Statement, including any 424(b)
Registration Statement, the Prospectus and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements and supporting
schedules and other financial data included therein or in exhibits to or
excluded from the Registration Statement, as to which no opinion need be
rendered) comply as to form in all material respects with the applicable
requirements of the Securities Act.
(viii) The Shares have been approved for listing on the Nasdaq
National Market.
(ix) The statements (i) in the Prospectus under the captions "Risk
Factors--Shares Eligible for Future Sale," "Risk Factors--Possible Issuance of
Preferred Stock; Anti-Takeover Provisions," "Management--Limitation of Liability
and Indemnification of Officers and Directors," "Description of Capital Stock,"
"Shares Eligible for Future Sale," and (ii) in Item 14 and Item 15 of the
Registration Statement, insofar as such statements constitute matters of law,
summaries of legal matters, the Company's charter or by-law provisions,
documents or legal proceedings, or legal conclusions, has been reviewed by such
counsel and fairly present and summarize, in all material respects, the matters
referred to therein.
(x) The description of the Company's stock option, stock bonus and
other stock plans or arrangements set forth in the Prospectus is accurate.
(xi) To the knowledge of such counsel without any independent
investigation, there are no legal or governmental actions, suits or proceedings
pending or threatened which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(xii) To the knowledge of such counsel, there are no indentures,
mortgages, loans or credit agreements, notes, contracts, franchises, leases or
other instruments to which the Company or any of its subsidiaries is a party or
by which it or any of them may be bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject (each, an "Existing
Instrument"), required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto;
and the descriptions thereof and references thereto are correct in all material
respects.
(xiii) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated thereby and by
the Prospectus, except as required under the Securities Act, applicable state
securities or Blue Sky laws and from the NASD.
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<PAGE>
(xiv) The execution and delivery of this Agreement by the
Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of this Agreement, as to which no opinion need be
rendered) (i) have been duly authorized by all necessary corporate action on
the part of the Company; (ii) will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary; (iii)
will not constitute a breach of, or default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets
of the Company pursuant to any material Existing Instrument; or (iv) to the
knowledge of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company or any subsidiary.
(xv) The Company is not, and after receipt of payment for the
Shares will not be, an "investment company" within the meaning of the
Investment Company Act.
(xvi) To the knowledge of such counsel, there are no persons with
registration or other similar rights to have any equity or debt securities
registered for sale under the Registration Statement or included in the offering
contemplated by this Agreement, except for such rights as have been duly waived.
(xvii) To the knowledge of such counsel, based upon a certificate
of an appropriate officer of the Company as to matters of fact, neither the
Company nor any subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to the
Company or is in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any material Existing Instrument,
except in each such case for such violations or defaults as would not,
individually or in the aggregate, result in a Material Adverse Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company, representatives of the Underwriters and with counsel for the
Underwriters at which the contents of the Registration Statement and the
Prospectus, and any supplements or amendments thereto, and related matters were
discussed and, based on such counsel's participation in the above mentioned
conferences, review of the documents described above, their understanding of
applicable law and the experience they have gained in their practice under the
Act, such counsel shall advise the Underwriters that although such counsel
cannot guarantee the accuracy, completeness or fairness of any of the statements
contained in the Registration Statement or the Prospectus, in connection with
such counsel's representation, investigation, and due inquiry of the Company in
the preparation of the Registration Statement and Prospectus, nothing has come
to such counsel's attention which causes them to believe that the Registration
Statement or Prospectus (except as to the financial statements, schedules and
other financial and statistical information contained therein, as to which such
counsel expresses no comment), as of the effective date of the Registration
Statement, contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the
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<PAGE>
circumstances in which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware or the federal law of the United
States, to the extent they deem proper and specified in such opinion, upon the
opinion (which shall be dated the Closing Date or the Option Closing Date, as
the case may be, shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Representatives) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; PROVIDED,
HOWEVER, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials.
(g) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date, and
satisfactory in form and substance to the Representatives' counsel, from Raymond
F. Schuler and Associates, counsel to the Company, to the effect that:
(i) Each significant subsidiary (as defined in Rule 405 under the
Securities Act) has been duly incorporated and is validly existing as a
corporation under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus.
(ii) All of the issued and outstanding capital stock of each such
significant subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or, to the best knowledge of such counsel, any pending or threatened
claim.
(iii) The description of the Company's stock option, stock bonus
and other stock plans or arrangements set forth in the Prospectus is accurate.
(iv) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to subscribe for
or purchase securities of the Company arising (i) by operation of the charter or
by-laws of the Company or the General Corporation Law of the State of Delaware
or (ii) to the best knowledge of such counsel, otherwise.
(v) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(vi) To the knowledge of such counsel, there are no persons with
registration or other similar rights to have any equity or debt securities
registered for sale under the Registration Statement or included in the offering
contemplated by this Agreement, except for
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such rights as have been duly waived.
(vii) To the knowledge of such counsel, based upon a certificate
of an appropriate officer of the Company as to matters of fact, neither the
Company nor any subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to the
Company or is in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any material Existing Instrument,
except in each such case for such violations or defaults as would not,
individually or in the aggregate, result in a Material Adverse Change.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware or the federal law of the United
States, to the extent they deem proper and specified in such opinion, upon the
opinion (which shall be dated the Closing Date or the Option Closing Date, as
the case may be, shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Representatives) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; PROVIDED,
HOWEVER, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials.
(h) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date, from
Morris, Manning & Martin, L.L.P., as the Underwriters' counsel, with respect to
the Registration Statement, the Prospectus and this Agreement, which opinion
shall be satisfactory in all respects to the Representatives, and the Company
shall have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(i) On the date hereof, the Representatives shall have received from
McGladrey & Pullen, LLP a letter dated the date hereof addressed to the
Underwriters, in form and substance satisfactory to the Representatives,
containing statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to Statement
of Auditing Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial information
contained in the Registration Statement and the Prospectus (and the
Representatives shall have received additional conformed copies of such
accountants' letter for each of the several Underwriters).
(j) The Representatives shall have received, concurrently with the
execution and delivery of this Agreement and at the Closing Date with respect to
the Firm Shares and, with respect to the Option Shares, the Option Closing Date,
a certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, and in form
and substance satisfactory to the Representatives, to the effect that:
(i) The Registration Statement has become effective, and no order
suspending the effectiveness of the Registration Statement has been issued
and to the best knowledge of the
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respective signers no proceeding for that purpose has been initiated or is
threatened by the Commission;
(ii) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, such documents are true and correct in all material respects and
do not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not untrue or misleading
and (B) in the case of the certificate delivered at the Closing Date and,
with respect to the Option Shares, the Option Closing Date, since the
Effective Date no event has occurred as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements therein
not untrue or misleading in any material respect;
(iii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct in all material respects; and
(iv) Each of the covenants required herein to be performed by the
Company on or prior to the delivery of such certificate has been duly, timely
and fully performed and each condition herein required to be complied with by
the Company on or prior to the date of such certificate has been duly, timely
and fully complied with in all material respects.
(k) The Shares shall be qualified for sale (or exempt from such
qualification) in such states as the Representatives may reasonably request, and
any such necessary qualification shall be in effect and not subject to any stop
order or other proceeding on the Closing Date and the Option Closing Date.
(l) Prior to the Closing Date, the Shares shall have been duly authorized
for trading on the Nasdaq National Market.
(m) The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and, with respect to the Option Shares, the
Option Closing Date of any statement in the Registration Statement or the
Prospectus as to the accuracy at the Closing Date and, with respect to the
Option Shares, the Option Closing Date of the representations and warranties of
the Company herein, as to the performance by the Company of its obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the Underwriters' obligations hereunder.
(n) On the date hereof, the Company shall have furnished to the
Representatives an agreement in the form of EXHIBIT B hereto from each existing
stockholder and beneficial owner of Common Stock (as defined and determined
according to Rule 13d-3 under the Exchange Act, except that a one hundred eighty
day period shall be used rather than the sixty day period set forth therein),
and such agreements shall be in full force and effect on each of the Closing
Date and the Option Closing Date.
(o) On or before each of the Closing Date and the Option Closing Date,
the
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Representatives and counsel for the Underwriters shall have received such
information, documents and opinions as they may reasonably require for the
purposes of enabling them to pass upon the issuance and sale of the Shares as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the conditions or
agreements, herein contained.
If any condition specified in this SECTION 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the Closing
Date and, with respect to the Option Shares, at any time prior to the Option
Closing Date. Any such termination shall be without liability on the part of
any party to any other party, except that the provisions of SECTIONS 4(i), 4(j),
6 AND 7 shall at all times be effective and shall survive such termination.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter,
its officers and employees, and each person, if any, who controls any
Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense to which such
Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based
(i) upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, or any amendment thereto, including
any information deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus or the Prospectus (or any amendment or supplement thereto) if used
within the Prospectus Delivery Period and as amended or supplemented, or the
omission or alleged omission therefrom of a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; or (iii) in whole or in part upon any
inaccuracy in the representations and warranties of the Company contained
herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law (including the fees and
disbursements of counsel) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; PROVIDED, HOWEVER, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration
Statement, any Preliminary Prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect to any
Preliminary Prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any
22
<PAGE>
loss, claim, damage, liability or expense purchased Shares, or any person
controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to this Agreement and a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or
on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage,
liability or expense. The indemnity agreement set forth in this SECTION 6(a)
shall be in addition to any liabilities that the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act, against
any loss, claim, damage, liability or expense to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense as
such expenses are reasonably incurred by the Company, or any such director,
officer or controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action. The Company hereby acknowledges that the only information
that the Underwriters have furnished to the Company expressly for use in the
Registration Statement, any Preliminary Prospectus or the Prospectus (or any
amendment or supplement thereto) are the statements set forth (A) as the last
paragraph on the outside front cover page of the Prospectus, (B) as the last
paragraph on the inside front cover page of the Prospectus concerning
stabilization by the Underwriters and (C) in the table in the first paragraph
and as the second, seventh and eighth paragraphs under the caption
"Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct. The indemnity agreement set forth in this SECTION 6(b)
shall be in addition to any liabilities that each Underwriter may otherwise
have.
(c) Promptly after receipt by an indemnified party under this SECTION 6 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
SECTION 6, notify the indemnifying party in
23
<PAGE>
writing of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have
to any indemnified party for contribution or otherwise than under the
indemnity agreement contained in this SECTION 6 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; PROVIDED,
HOWEVER, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of any
such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnified party or parties shall have the
right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this SECTION 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (Cruttenden Roth Incorporated in the case of SECTION 6(b) and SECTION
6(e)), representing the indemnified parties who are parties to such action)
or (ii) the indemnifying party shall not have employed counsel satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action, in each of which
cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) The indemnifying party under this SECTION 6 shall not be liable for
any settlement of any proceeding effected without its written consent, provided
that such consent shall not be unreasonably withheld; but, if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding.
(e) If the indemnification provided for in SECTION 6 is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any
24
<PAGE>
losses, claims, damages, liabilities or expenses referred to therein, then
each indemnifying party shall contribute to the aggregate amount paid or
payable by such indemnified party, as incurred, as a result of any losses,
claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, from the
offering of the Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company,
on the one hand, and the Underwriters, on the other hand, in connection with
the statements or omissions or inaccuracies in the representations and
warranties herein which resulted in such losses, claims, damages, liabilities
or expenses, as well as any other relevant equitable considerations. The
relative benefits received by the Company, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus bear to the
aggregate initial public offering price of the Shares as set forth on such
cover. The relative fault of the Company, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in SECTION 6(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in SECTION 6(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this SECTION 6(e); PROVIDED, HOWEVER, that no
additional notice shall be required with respect to any action for which notice
has been given under SECTION 6(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this SECTION 6 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this SECTION 6.
Notwithstanding the provisions of this SECTION 6, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Shares underwritten by it
and distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
SECTION 6 are
25
<PAGE>
several, and not joint, in proportion to their respective underwriting
commitments as set forth opposite their names in SCHEDULE I.
(h) The obligations of the Company under this SECTION 6 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Securities Act; and the obligations of the
Underwriters under this SECTION 6 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Securities
Act.
7. DEFAULT OF UNDERWRITERS.
If any Underwriter defaults in its obligation to purchase Shares hereunder
and if the total number of Shares that such defaulting Underwriter agreed but
failed to purchase is ten percent or less of the total number of Shares to be
sold hereunder, the non-defaulting Underwriters shall be obligated severally and
not jointly to purchase (in the respective proportions which the number of
Shares set forth opposite the name of each non-defaulting Underwriter in
Schedule I hereto bears to the total number of Shares set forth opposite the
names of all the non-defaulting Underwriters or in such other proportions as the
Representatives may specify), the Shares that such defaulting Underwriter or
Underwriters agreed but failed to purchase. If any Underwriter so defaults and
the total number of Shares with respect to which such default or defaults occur
is more than ten percent of the total number of Shares to be sold hereunder, and
arrangements satisfactory to the other Underwriters and the Company for the
purchase of such Shares by other persons (who may include the non-defaulting
Underwriters) are not made within 36 hours after such default, this Agreement,
insofar as it relates to the sale of the Shares, will terminate without
liability on the part of the non-defaulting Underwriters or the Company except
for (i) the provisions of SECTION 6 hereof, and (ii) the expenses to be paid or
reimbursed by the Company pursuant to SECTION 4(i) hereof. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this SECTION 7. In any such case, the Representatives shall
have the right to postpone the Closing Date or the Option Closing Date, as the
case may be, but in no event longer then seven (7) days, in order that the
required changes, if any, in the Registration Statement and Prospectus or in any
other documents or agreements may be made. Nothing herein shall relieve a
defaulting Underwriter from liability for its default hereunder.
8. SURVIVAL CLAUSE.
The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company and its officers and the
Underwriters set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, or any Underwriter or any controlling person of an
Underwriter, (ii) any termination of this Agreement and (iii) delivery of and
payment for the Shares.
9. TERMINATION.
26
<PAGE>
(a) The Underwriters' obligations under this Agreement may be terminated
at any time on or prior to the Closing Date (or, with respect to the Option
Shares, on or prior to the Option Closing Date), by notice to the Company from
the Representatives, without liability on the part of the Underwriters to the
Company, if, prior to delivery and payment for the Shares (or the Option Shares,
as the case may be), in the Representatives' sole judgment:
(i) there shall have occurred any Materially Adverse Change; or
the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the
Representatives may interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have
been insured;
(ii) the Company shall have failed or been unable to comply with
any of the terms or provisions of this Agreement to be performed by it within
the respective times herein provided for, unless compliance therewith or
performance thereof shall have been expressly waived by the Representative in
writing;
(iii) trading in any of the equity securities of the Company shall
have been suspended by the Commission, by an exchange that lists the Shares
or by the Nasdaq National Market;
(iv) trading in securities generally on the New York Stock
Exchange, the Nasdaq National Market or in the over-the-counter market shall
have been suspended or limited or minimum or maximum prices shall have been
generally established on such exchange or market, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchanges or
markets or by order of the Commission or any court or other governmental
authority;
(v) a general banking moratorium shall have been declared by
either Federal, New York, Delaware or North Carolina state authorities; or
(vi) any outbreak or material escalation of hostilities or
declaration by the United States of a national emergency or war or other
calamity or crisis shall have occurred the effect of any of which is such as
to make it, in the Representatives' sole, reasonable judgment, impracticable
or inadvisable to market the Shares on the terms and in the manner
contemplated by the Prospectus.
(b) Any termination of this Agreement pursuant to this SECTION 9 shall be
without liability of any character (including, but not limited to, loss of
anticipated profits or consequential damages) on the part of any party thereto,
except that the Company shall remain obligated to pay the costs and expenses
provided in SECTION 4(i) hereof and the Company and the Underwriters shall
remain obligated under SECTION 6 hereof.
10. MISCELLANEOUS.
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<PAGE>
(a) Notice given pursuant to any of the provisions of this Agreement shall
be in writing and, unless otherwise specified, shall be mailed, delivered or
telecopied
(i) if to the Company:
Troy Group, Inc.
2331 South Pullman Street
Santa Ana, California 92705
Attention: President
with a copy to:
Oppenheimer Wolff & Donnelly LLP
10 Almaden Boulevard, Suite 600
San Jose, California 95113-2237
Attention: Thomas C. Thomas, Esq.
(ii) if to the Underwriters:
Cruttenden Roth Incorporated
18301 Von Karman Avenue
Suite 100
Irvine, CA 92612
Attention: Corporate Finance Department
Josephthal & Co. Inc.
200 Park Avenue
25th Floor
New York, New York 10166
Attention: Corporate Finance Department
Morris, Manning & Martin, L.L.P.
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326
Attention: Oby T. Brewer III, Esq.
(b) This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and of the controlling persons, directors and
officers referred to in SECTION 6 hereof, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successors and assigns" as used in this Agreement
shall not include a purchaser, as such purchaser, of Shares from the
Underwriters.
(c) This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
(d) This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
28
<PAGE>
(e) In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
(f) The Company and the Underwriters each hereby irrevocably waive, to the
extent permissible under applicable law, any right they may have to a trial by
jury in respect of any claim based upon or arising out of this Agreement or the
transactions contemplated hereby.
29
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the Underwriters.
Very truly yours,
TROY GROUP, INC.
By:________________________________
Patrick J. Dirk, Chairman and
Chief Executive Officer
Confirmed as of the date first above mentioned:
CRUTTENDEN ROTH INCORPORATED
(for themselves and as Representatives of the Underwriters named in
Schedule I hereto)
By: Cruttenden Roth Incorporated
By:_______________________________
30
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
No. of Shares
Underwriters to be Purchased
---------------------------- ---------------
<S> <C>
Cruttenden Roth Incorporated
TOTAL 2,200,000
</TABLE>
31
<PAGE>
EXHIBIT A
FORM OF WARRANT
See Exhibit 1.2.
32
<PAGE>
EXHIBIT B
FORM OF LOCK-UP AGREEMENT
33
<PAGE>
LOCK-UP AGREEMENT (180 DAY)
CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO. INC.
AS REPRESENTATIVES OF THE UNDERWRITERS
c/o Cruttenden Roth Incorporated
18301 Von Karman Avenue
Suite 100
Irvine, CA 92612
RE: Troy Group, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares
of Common Stock of the Company ("Common Stock") or securities convertible
into or exchangeable or exercisable for Common Stock. The Company proposes
to carry out a public offering of Common Stock (the "Offering") for which you
will act as the representatives (the "Representatives") of the underwriters.
The undersigned recognizes that the Offering will be of benefit to the
undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that you
and the other underwriters are relying on the representations and agreements
of the undersigned contained in this letter in carrying out the Offering and
in entering into underwriting arrangements with the Company with respect to
the Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not, without the prior written consent of
Cruttenden Roth Incorporated (which consent may be withheld in its
sole discretion), directly or indirectly, sell, offer, contract or grant any
option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule 13d-3
under the Exchange Act) by the undersigned, or publicly announce the
undersigned's intention to do any of the foregoing, for a period commencing
on the date hereof and continuing through the close of trading on the date
180 days after the date of the prospectus first used by the underwriters to
confirm sales of the Common Stock in the Offering, otherwise than (i) as a
bona fide gift or gifts, provided the donee or donees thereof agree to be
bound by this Lock-Up Agreement or (ii) as a distribution to limited partners
or shareholders of the undersigned, provided that the distributees thereof
agree in writing to be bound by the terms of this Lock-Up Agreement. The
undersigned also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent and registrar against the
transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except
in compliance with the foregoing restrictions.
<PAGE>
This Agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Dated: ______________________, 1998 _____________________________________
Printed Name of Holder
By: ________________________________
Signature
_____________________________________
Printed Name of Person Signing (AND
INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON
BEHALF OF AN ENTITY)
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Amendment No. 3 to the Registration
Statement on Form S-1 (No. 333-51523) of our report, dated July 14, 1998,
relating to the combined financial statements of Troy Group, Inc. and Subsidiary
and Dirk Worldwide, Inc. We also consent to the reference to our Firm under the
captions "Experts" and "Selected Financial Data" in the Prospectus.
MCGLADREY & PULLEN, LLP
Anaheim, California
August 3, 1998
