<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999
REGISTRATION NO. 333-51523
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 7
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.
MICHAEL J. KOLAR, ESQ. LAUREN Z. BURNHAM, ESQ.
Oppenheimer Wolff & Donnelly LLP Morris, Manning & Martin, L.L.P.
101 Park Center Plaza, Suite 300 1600 Atlanta Financial Center
San Jose, California 95113 3343 Peachtree Road, N.E.
(408) 795-3000 Atlanta, Georgia 30326
(404) 233-7000
</TABLE>
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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....................... $25,875,000 $7,194
</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 JULY 21, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
2,500,000 SHARES
[TROY GROUP, INC. LOGO]
COMMON STOCK
------------
This is an initial public offering of shares of Troy Group, Inc. All of the
2,500,000 shares of common stock are being offered by Troy. We anticipate that
the initial public offering price will be between $7.00 and $9.00 per share.
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "TROY."
----------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 5.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price................................................... $ $
Underwriting discounts and commissions.................................. $ $
Proceeds, before expenses, to Troy...................................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to an
additional 375,000 shares of common stock to cover over-allotments.
The underwriters expect to deliver shares on or about , 1999.
[CRUTTENDEN ROTH LOGO]
[PENNSYLVANIA MERCHANT GROUP LOGO]
[H.C. WAINWRIGHT & CO. LOGO]
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
TROY OUTPUT ENHANCEMENT PRODUCTS
Software, firmware, hardware and imaging supplies that enhance the
functionality of standard output devices.
[Schematic diagram showing enhanced functionality of Troy printer]
TROY CONNECTIVITY PRODUCTS
Software, firmware and hardware that enable and improve communications over
networks and the Internet.
[Schematic diagram showing Troy Connectivity Solutions enabling Internet output
to various output devices.]
<PAGE>
PRODUCTS UNDER DEVELOPMENT
TROY INTERNET CHECK
Will enable e-merchants to print a guaranteed check at the merchant's
location instantly over the Internet.
[Schematic diagram showing remote Internet printing of MICR encoded check at
e-merchant]
TROY INTERNET PRINTING SOLUTION
Will enable a user at one location to print at another location over the
Internet regardless of the computing platform or protocol.
[Schematic diagram showing Internet printing connectivity among various output
devices]
<PAGE>
TABLE OF CONTENTS
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PAGE
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Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Unaudited Pro Forma Consolidated Statement of Operations.................. 15
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 32
Management................................................................ 43
Certain Transactions...................................................... 49
Principal Stockholders.................................................... 51
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 56
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Combined Financial Statements.................................... F-1
</TABLE>
------------------------
THROUGH AND INCLUDING , 1999 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO A DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING
AS AN UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR SUBSCRIPTION.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL THE INFORMATION THAT YOU SHOULD
CONSIDER IN INVESTING IN OUR COMMON STOCK. WE ENCOURAGE YOU TO READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE SECTION TITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS.
OUR BUSINESS
We are a leading worldwide provider of enterprise output solutions.
Enterprise output solutions are the software, firmware and hardware that allow
computer data to be presented in printed form, and which are designed to meet
the needs of an entire organization rather than a single department or group.
These solutions enable organizations to electronically transmit and output
information across computer networks that allow data from one location to be
shared, used and printed at multiple locations, which are known as distributed
computing environments. Our solutions consist of connectivity and output
enhancement products that are compatible with most operating systems and
protocols. Our connectivity products include software, firmware and hardware
that enable output devices such as printers and fax machines to better
communicate over networks and the Internet. Our output enhancement products
include software, firmware, hardware and imaging supplies that enhance the
functionality of these output devices. Our products and solutions reduce costs,
decrease processing time, enhance data integrity, provide security and allow
companies to facilitate e-commerce and better manage business processes.
Our products have been adopted in a wide variety of industries, including
telecommunications, financial services, computer hardware, automotive, personnel
and others. We have more than 4,300 active customers and have sold our products
in 55 countries. Our customers include companies such as AT&T Corporation,
BankAmerica Corporation, Brother Industries, Eastman Kodak, Farmer's Insurance
Group, Ford Motor Company, IBM, Manpower, State Farm Insurance and Wells Fargo &
Company. We market our products to Fortune 1000 companies through a direct sales
force and to other businesses through our network of distributors and
value-added resellers. Since 1993, we have had a strategic relationship with
Hewlett-Packard, covering development and marketing of our output enhancement
products. This relationship has evolved to include our network and Internet
technology. We also have strategic relationships with ADP, IBM, Standard
Register and Wind River.
OUR MARKET
The emergence and adoption of networks and the Internet is rapidly changing
the way organizations generate and distribute information. Historically, most
business information was created using legacy computer systems, printed and
delivered to users through physical means such as facsimiles, hand deliveries,
inter-office mail and the postal service. Technologies are now available to
effectively distribute information electronically to multiple end users both
within and outside an organization. In addition, many organizations are now
looking for entirely new output solutions that enable information to be
distributed to any number of output devices using the Internet. We believe
traditional information distribution and enterprise output solutions have not
kept pace with these technological advancements and new business requirements.
The lack of common computing platforms, protocols and other standards has
limited an organization's ability to take advantage of these technologies. As a
result, we believe that there is a need for enterprise output solutions that
allow organizations to electronically transmit and output information across
distributed computing environments without regard to protocol.
OUR CONNECTIVITY PRODUCTS
Our network connectivity products include print server firmware and hardware
products and a software-only solution. These products enable an organization to
distribute and output information across distributed computing environments. Our
network connectivity products are recognized worldwide for supporting a large
number of protocols and network operating systems. As a result, they are well
suited for enterprises that have deployed many different kinds of networks,
computers and operating systems over wide geographic areas.
Our current Internet connectivity product, PrintraNet, is a software and
firmware solution that enables a user at one location to print to another
location over the Internet. PrintraNet offers a
1
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number of advantages, including lower cost and higher quality than fax
transmissions, and eliminates software compatibility issues associated with
e-mail. Our Internet connectivity products under development will be designed to
enable output devices, including currently installed printers manufactured by
Hewlett-Packard, IBM, Lexmark and Xerox, to communicate over the Internet
regardless of the sending device's protocol. In addition, we will provide our
multi-protocol solutions to these and other output device manufacturers and end
users to allow new output devices to communicate over the Internet. We believe
that we will have significant competitive advantages in this market because we
were one of the first to develop Internet printing technology and have extensive
protocol experience.
OUR OUTPUT ENHANCEMENT PRODUCTS
Our output enhancement products include software, firmware, hardware and
imaging supplies that enable standard laser printers to print MICR lines
(magnetic ink characters used on checks and other financial documents),
graphics, barcodes and forms. These products also enable a printer to perform
other functions not offered by most printer manufacturers such as auditing and
status checking, and provide security. Our MICR technology, including
proprietary imaging supplies, has helped us to become a worldwide leader in
financial document printing solutions.
By combining our MICR enhanced distributed output solutions with our
Internet software, we are currently developing technology that will offer the
capability to print a MICR encoded check remotely, including over the Internet.
This check will have all of the same attributes of a traditional check and will
be presented by a merchant through normal banking channels. We believe that this
capability will offer us a significant new growth opportunity due to the rapid
rise in e-commerce and the limited payment methods available to today's
e-commerce consumer. Our integrated solution will allow e-commerce consumers to
pay for goods and services with a check in a similar manner and with comparable
speed and security as is available for credit cards.
OUR BUSINESS STRATEGY
Our objective is to be a leading worldwide provider of enterprise output
solutions. Our strategy for achieving this objective includes:
- Accelerating the development and marketing of our Internet products;
- Introducing and enhancing products through research and development;
- Expanding and seeking new OEM relationships;
- Acquiring related businesses, products or technologies;
- Leveraging strategic alliances; and
- Expanding distribution channels to increase our focus on selling to
mid-size and smaller businesses.
OUR HISTORY AND STRUCTURE
We were originally incorporated in California in 1996 and reincorporated in
Delaware in May 1998. We are the result of various mergers and acquisitions
involving a company originally founded in 1982 by our existing shareholders. In
October 1998, we merged XCD Incorporated, a leading supplier of connectivity
solutions, into our subsidiary, Troy XCD, Inc. As discussed below under "Recent
Development," in May 1999 we acquired the remaining outstanding shares of
Telgate Equipment Corporation, a Canadian software development company now
referred to as Troy Telgate. Today, our subsidiaries include Troy XCD, Troy
Telgate and Troy Systems International, Inc. Our principal executive offices are
located at 2331 South Pullman Street, Santa Ana, California 92705, and our
telephone number at that location is (949) 250-3280. Our trademarks include
TROY-Registered Trademark- and PrintraNet-TM-. Other trademarks, trade names or
service marks used in this prospectus belong to their holders.
------------------------
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THE
RISKS FACED BY US DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 5.
2
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RECENT DEVELOPMENT
On May 8, 1999, we acquired the remaining outstanding shares of Telgate
Equipment Corporation for a net amount of $242,000 in cash and 58,700 shares of
our common stock. Prior to the acquisition, we owned approximately 25% of
Telgate's outstanding stock. This new subsidiary, now referred to as Troy
Telgate, is engaged in developing software that will allow remote printing of a
MICR encoded check over the Internet.
For the nine months ended April 30, 1999, Troy Telgate reported revenue of
$1,015,000 and net income of $72,000 based upon its unaudited financial
information.
THE OFFERING
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<S> <C>
Common stock offered............................ 2,500,000 shares
Common stock to be outstanding after the
offering...................................... 10,230,130 shares
Use of proceeds................................. For working capital and general corporate purposes,
including possible acquisitions, and to repay
indebtedness. See "Use of Proceeds" on page 12.
Proposed Nasdaq National Market symbol.......... TROY
</TABLE>
The table above and, unless otherwise specified, other references to our
outstanding common stock in this prospectus exclude:
- 1,564,298 shares reserved for issuance under our stock option plans, under
which options to acquire 326,957 shares are outstanding at a weighted
average exercise price of $0.42 per share and options to acquire 755,000
shares will be granted upon completion of the offering at an exercise
price equal to the offering price,
- 200,000 shares reserved for issuance under our 1998 Employee Stock
Purchase Plan, which will commence upon completion of the offering,
- up to 350,000 shares issuable upon exercise of outstanding warrants, of
which 250,000 have an exercise price of $3.50 per share, 50,000 have an
exercise price of $7.00 per share and 50,000 that will have an exercise
price equal to the price to the public in this offering, and
- 250,000 shares issuable upon exercise of the representatives' warrants.
See "Management--Stock Option and Incentive Plan" on page 47, "Description
of Capital Stock" on page 52 and "Underwriting" on page 56.
3
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SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of more complete financial information provided
in our pro forma and consolidated financial statements. On October 30, 1998,
Troy and Troy Systems converted from S corporations to C corporations for
federal and state income tax purposes. The pro forma net income and pro forma
diluted net income per share data in this table give effect to the October 30,
1998 conversion by Troy and Troy Systems from S corporations to C corporations
for federal and state income tax purposes and assume that Troy and Troy Systems
were subject to corporate income taxes at an effective combined federal and
state income tax rate of 40.0% for the periods presented. Please see Note 1
beginning on page F-7 in the notes to our consolidated financial statements.
Operating income for the fiscal year ended November 30, 1998 includes a
charge of $857,000 for in-process research and development in connection with
the Troy XCD acquisition. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 20 and Note 2
beginning on page F-11 in the notes to our consolidated financial statements.
The as adjusted balance sheet data below give effect to the sale of
2,500,000 shares of common stock that we are offering, assuming an initial
public offering price of $8.00 per share and the application of the estimated
net proceeds of this offering. See "Use of Proceeds" on page 12.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.............................. $ 17,583 $ 21,477 $ 28,161 $ 33,434 $ 35,758 $ 18,322 $ 23,466
Gross profit........................... 7,017 7,917 10,753 13,837 14,262 7,566 9,299
Purchased in-process research and
development.......................... -- -- -- -- 857 -- --
Operating income....................... 581 575 3,478 4,694 4,465 2,914 3,521
Net income............................. $ 327 $ 313 $ 3,067 $ 4,397 $ 4,434 $ 2,802 $ 2,025
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income................... $ 218 $ 140 $ 1,870 $ 2,659 $ 2,371 $ 1,707 $ 2,025
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma diluted net income per
share................................ $ 0.03 $ 0.02 $ 0.25 $ 0.34 $ 0.31 $ 0.22 $ 0.25
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average diluted shares
outstanding.......................... 7,500 7,500 7,500 7,759 7,745 7,807 8,020
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
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<CAPTION>
MAY 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
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BALANCE SHEET DATA:
Cash...................................................................................... $ 42 $ 13,581
Working capital........................................................................... 7,595 23,281
Total assets.............................................................................. 22,420 35,391
Short-term notes payable.................................................................. 1,247 --
Current portion of long-term debt......................................................... 959 59
Long-term debt, net of current portion.................................................... 2,564 367
Stockholders' equity...................................................................... 10,915 28,230
</TABLE>
4
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES
OF OUR COMMON STOCK. IF THE EVENTS DESCRIBED BELOW OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF FUTURE OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE RECENTLY EXPANDED OUR BUSINESS TO OFFER CONNECTIVITY SOLUTIONS AND DO
NOT HAVE EXTENSIVE EXPERIENCE IN DEVELOPING AND MARKETING PRODUCTS FOR THIS
MARKET
Until recently, we focused mainly on developing and selling output
enhancement solutions that enabled businesses to distribute and print financial
documents. In October 1998, we acquired Troy XCD, including its products and
management. Following this acquisition, we expanded our business to offer output
solutions that allow enterprises to distribute and print information across
multi-protocol computing environments both within and outside the organization.
Because this is a recent focus for us, we do not have extensive experience in
this area, and we cannot assure you that we will be successful in developing or
marketing these types of connectivity solutions. In addition, our new focus on
connectivity solutions could cause our historical business to suffer. If we are
not successful in developing or selling connectivity solutions or if our
historical business declines as a result of our efforts in this area, our
business will be materially and adversely affected. See "Business--Industry"
beginning on page 32 and "--Business Strategy" beginning on page 35.
OUR INTERNET OUTPUT SOLUTIONS ARE STILL UNDER DEVELOPMENT AND EVEN IF
SUCCESSFULLY DEVELOPED MAY NOT GAIN MARKET ACCEPTANCE
Our Internet output solutions, including our e-commerce check payment
solution, are still under development, and we cannot assure you that we will be
able to complete these development efforts successfully or on a timely basis. In
addition, we cannot assure you that our Internet output solutions, even if
successfully developed, will be accepted by the marketplace. See
"Business--Industry" beginning on page 32 and "--Products Under Development" on
page 37.
WE FACE RISKS ASSOCIATED WITH OUR STRATEGY OF GROWING THROUGH ACQUISITIONS
We intend to acquire technologies, product lines and businesses that will
complement our business and enable us to achieve our objective of becoming the
leading worldwide provider of enterprise output solutions. Acquisitions involve
risks, including that:
- we have limited experience in making acquisitions,
- we may not be able to assimilate the acquired products, technologies or
businesses into our ongoing business,
- an acquired company may take a disproportionate amount of management time
and energy, causing our existing business to suffer,
- we may find it difficult to retain key employees of the acquired
businesses,
- an acquisition may dilute our stockholders' equity if additional equity
securities are issued, and
- we may be required to amortize acquisition expenses and acquired assets
over a relatively short period, causing our earnings to be below analysts'
expectations.
See "Business--Business Strategy" beginning on page 35.
5
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MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES, AND THIS
COMPETITION MAY RESULT IN PRICE REDUCTIONS, LOWER GROSS MARGINS AND LOSS OF
MARKET SHARE
We face significant competition in developing and selling enterprise output
solutions. Many of our competitors have substantially greater financial,
development, marketing and personnel resources than we have. We cannot assure
you that we will be able to compete successfully against our current or future
competitors. Increased competition may result in price reductions, lower gross
margins and loss of market share. Any of these results could reduce our
earnings. See "Business--Competition" beginning on page 40.
OUR GROWTH STRATEGY FOCUSES TO A SIGNIFICANT EXTENT ON OUR INTERNET OUTPUT
SOLUTIONS AND THEREFORE DEPENDS ON THE CONTINUED DEVELOPMENT AND GROWTH OF THE
INTERNET
Our growth strategy depends to a significant extent on developing and
marketing our Internet output solutions. The successful implementation of this
strategy therefore depends on the continued development and growth of the
Internet. Rapid growth in the use of and interest in the Internet is a recent
development, and we cannot be certain that this growth will continue or that a
sufficiently broad base of organizations will use the Internet as a medium to
distribute and print information. The Internet may not prove to be a viable
medium for distributing and printing information for a number of reasons,
including:
- inadequate development of the necessary network infrastructure for
communication, access and server reliability,
- lack of development of complementary products, such as high-speed
communication lines,
- security and confidentiality concerns,
- delays in the development of or adoption of new standards and protocols
required to handle increased levels of Internet activity, and
- increased government regulation.
OUR BUSINESS DEPENDS ON THE CONTINUED DEMAND FOR PRINTED DOCUMENTS, INCLUDING
FINANCIAL DOCUMENTS
Because we focus on output solutions that allow enterprises to distribute
and print information, our business depends on the continued demand for printed
documents. Demand for these solutions could decline if businesses and
organizations move toward "paperless" environments and reduce their dependence
on printed documents. In addition, our output enhancement solutions are
dependent on the demand for printed financial documents. Demand for printed
financial documents may be reduced as a result of competition from alternate
financial document delivery or payment methods, such as electronic banking,
electronic commerce, on-line services and other electronic media. We cannot
assure you that changes in the business environment or competition from
alternate financial document delivery or payment methods will not significantly
erode the demand for our products and cause our business to suffer. See
"Business--Industry" beginning on page 32 and "--Business Strategy" beginning on
page 35.
TECHNOLOGY IN OUR INDUSTRY EVOLVES RAPIDLY, AND WE MUST CONTINUE TO ENHANCE
EXISTING PRODUCTS AND DEVELOP NEW PRODUCTS OR OUR BUSINESS WILL SUFFER
Rapid technological advances, obsolescence and large fluctuations in demand
characterize the market for our current products. Our existing and
development-stage products may easily become obsolete if our competitors
introduce newer or better technologies. To be successful, we must continually
6
<PAGE>
enhance our existing products and develop and introduce new products. If we fail
to adequately anticipate or respond to technological developments or customer
requirements, or if we are significantly delayed in developing and introducing
products, our business will suffer. See "Business--Business Strategy" beginning
on page 35 and "--Research and Development" beginning on page 39.
A LARGE CUSTOMER ACCOUNTS FOR A MATERIAL PORTION OF OUR SALES AND OUR EARNINGS
WILL SUFFER IF WE LOSE THIS CUSTOMER
For the six months ended May 31, 1999, Cannon IV, Inc., one of our
consumable products resellers, accounted for 10.9% of our net sales. This
reseller also accounted for 17.1% of our net sales for the fiscal year ended
November 30, 1998, and 16.6% of our net sales for the fiscal year ended November
30, 1997. We believe that a significant portion of this reseller's sales are to
a single customer. We also sell products directly to the reseller's customer.
Direct sales to Cannon IV's significant customer were 5.2% of our net sales for
the six months ended May 31, 1999, 6.8% of net sales for the fiscal year ended
November 30, 1998, and 5.7% of net sales for the fiscal year ended November 30,
1997. We cannot assure you that this reseller will continue to buy products from
us, or that we or this reseller will continue to be able to sell our products to
its significant customer. There would be a material adverse effect on our
business if sales to this reseller or direct or indirect sales to its
significant customer decline or cease for any reason. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" beginning on page 21.
WE MAINTAIN STRATEGIC SUPPLY, OEM AND MARKETING ARRANGEMENTS, AND TERMINATION OF
THESE RELATIONSHIPS COULD ADVERSELY AFFECT OUR REVENUES AND EARNINGS
We maintain and depend on strategic relationships with a number of
companies, including ADP, Hewlett-Packard, IBM, Standard Register and Wind
River. These relationships include supply, OEM and marketing arrangements which
are important to our business. Certain of these relationships are not covered by
written agreements and could be terminated at any time. If our relationship with
any of these companies were to end, our revenues and earnings could fall. We
cannot assure you that we will be able to maintain our strategic relationships
with these companies. See "Business--Strategic Relationships" beginning on page
39.
WE SELL A SIGNIFICANT PORTION OF OUR PRODUCTS INTERNATIONALLY, WHICH EXPOSES US
TO CURRENCY FLUCTUATIONS AND OTHER RISKS
We sell a significant amount of our products to customers outside the United
States. International sales accounted for 20.5% of our net sales in the six
months ended May 31, 1999. International sales represented 16.2% of sales in
fiscal 1998 and 13.7% of sales in fiscal 1997. We expect that shipments to
international customers will continue to account for a material portion of our
net sales. Sales outside the United States involve the following risks, among
others:
- foreign governments may impose tariffs, quotas and taxes,
- political and economic instability may reduce demand for our products,
- restrictions on the export or import of technology may reduce or eliminate
our ability to sell in certain markets, and
- potentially limited intellectual property protection may cause us to
refrain from selling in certain markets.
Because we denominate our international sales in U.S. dollars, currency
fluctuations could also cause our products to become less affordable or less
price competitive than those of foreign manufacturers. We cannot assure you that
these factors will not have a material adverse effect on our international
sales. Any adverse impact on our international sales would affect our results of
operations and
7
<PAGE>
would cause our business to suffer. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 20.
PATRICK J. DIRK WILL CONTINUE TO OWN A MAJORITY OF OUR SHARES AND WILL BE ABLE
TO ELECT OUR BOARD AND CONTROL OUR BUSINESS AND OPERATIONS
After the offering, Patrick J. Dirk, our Chairman of the Board, President
and Chief Executive Officer, will beneficially own 5,692,857 shares of common
stock, or 55.6% of the shares of common stock outstanding. As a result, Mr. Dirk
will be able to elect our Board of Directors and control our business and
operations. See "Principal Stockholders" on page 51.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AS A RESULT OF MANY FACTORS
Our quarterly operating results fluctuate due to various factors. Some of
the factors that influence our quarterly operating results include:
- the mix of products sold in the quarter,
- life cycle stages of the products sold in the quarter,
- the availability and cost of components and materials,
- costs and benefits of new product introductions, and
- customer order and shipment timing.
Because of these factors, our quarterly operating results are difficult to
predict and are likely to vary in the future. If our earnings are below
financial analysts' expectations in any quarter, our stock price is likely to
drop. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 20.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS OR TO PROTECT OURSELVES AGAINST INFRINGEMENT CLAIMS OF OTHERS
We cannot be certain that the steps we have taken to protect our
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate our proprietary rights. Any such infringement or
misappropriation could have a material adverse effect on our future financial
results. We also cannot be certain that we have not infringed the proprietary
rights of others. Any such infringement could cause third parties to bring
claims against us, resulting in significant costs, possible damages and
substantial uncertainty. See "Business--Patents and Proprietary Rights"
beginning on page 41.
WE DEPEND ON OUR EXECUTIVE OFFICERS FOR OUR SUCCESS
We are significantly dependent upon Patrick J. Dirk and our other executive
officers. There could be a material adverse effect on our business if we lose
the services of Mr. Dirk or any other executive officer. We do not have
employment or noncompete agreements with any of our executive officers, other
than with Robert S. Messina, our Executive Vice President. See "Management"
beginning on page 43.
COMPLIANCE WITH GOVERNMENT REGULATIONS MAY CAUSE US TO INCUR UNFORESEEN EXPENSES
Our business is subject to a number of federal, state and local laws and
regulations. These regulations include laws and regulations promulgated by the
Environmental Protection Agency and similar state agencies regarding storing,
shipping, disposing, discharging and manufacturing hazardous materials and
hazardous and non-hazardous waste. Although we believe that our operations
materially comply
8
<PAGE>
with all current laws and regulations, we cannot assure you that these
regulations will not change. We also cannot assure you that unforeseen
environmental incidents will not occur, or that past contamination or
non-compliance with environmental laws will not be discovered on our current or
former properties. Any of these events could result in significant expense or
require changes in our operations, which could materially and adversely affect
our business. See "Business--Environmental and Regulatory Matters" beginning on
page 41.
OUR FORMER STATUS AS AN S CORPORATION COULD EXPOSE US TO LIABILITY
From December 1989 to October 30, 1998, Troy and Troy Systems elected S
corporation status under the Internal Revenue Code. Although we believe that
Troy and Troy Systems met the S corporation requirements under the Code during
this period, the IRS has not challenged or made a determination as to our
status. If the IRS determines that Troy or Troy Systems did not meet the Code
requirements for S corporations, we could be liable for unpaid federal and state
income taxes for all or a part of the time that we elected S corporation status,
plus interest and possible penalties. See "Use of Proceeds" beginning on page 12
and "Certain Transactions" beginning on page 49.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO USE THE PROCEEDS OF THIS OFFERING
We intend to use the majority of the proceeds of this offering for working
capital and general corporate purposes, including possible acquisitions.
Approximately $4.3 million will be used to repay indebtedness. We have not
identified any more specific uses for the balance. As a result, our management
will have broad discretion to use a significant portion of the net proceeds as
we may determine. See "Use of Proceeds" beginning on page 12.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY YEAR 2000 COMPLIANCE ISSUES
Many computer systems and applications use two-digit date fields to identify
a given year. The so-called "Year 2000" or "Y2K" problem is the failure of
date-sensitive computing systems and applications to properly recognize and
process dates into and after the year 2000. These problems may cause incorrect
processing of financial and operational information, and could result in
business interruptions. We are currently seeking to identify and remediate our
Year 2000 risk. We have assessed the Year 2000 compliance status of our existing
software and hardware products, as well as our own internal software, hardware
and other non-information technology systems (such as telephones, environmental
systems and others). Based on our assessment, we believe that we have identified
necessary corrective actions to address Year 2000 problems in these areas, and
do not anticipate incurring significant additional costs to achieve Year 2000
compliance. Although we believe that our assessment was appropriate, we cannot
assure you that we have identified all the potential Year 2000 issues in our
products and internal systems. Additionally, while we have evaluated the Year
2000 compliance of our material vendors, distributors and other significant
business partners and believe that they are or will become Year 2000 compliant
on a timely basis, we have no assurance that they will successfully achieve Year
2000 compliance for their products and internal systems. If we or one of our
significant business partners fails to identify and correct all Year 2000
problems, there could be a material adverse effect on our business. Our
customers' Year 2000 issues could also cause them to delay purchases of our
products, which could impact our business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Compliance with Year
2000" beginning on page 27.
A SIGNIFICANT NUMBER OF SHARES ARE OR WILL BECOME AVAILABLE FOR SALE AND THEIR
SALE COULD DEPRESS OUR COMMON STOCK PRICE
Sales of a substantial number of shares of our common stock in the public
market after this offering could adversely affect the market price for our
common stock and make it more difficult for us to sell equity securities at
times and prices that we determine to be appropriate. Of our 10,230,130 shares
of common stock outstanding after the offering, 2,500,000 shares sold in the
offering
9
<PAGE>
are expected to be freely tradable. The remaining 7,730,130 shares will be
restricted shares. All of our existing stockholders have agreed that they will
not, without the prior written consent of Cruttenden Roth Incorporated, directly
or indirectly sell any of these restricted shares for 180 days after the date of
this prospectus. After this lock-up period expires, 1,265,358 of these
restricted shares will be eligible for immediate public sale. Volume limitations
and other conditions of Rule 144 will apply to public sale of the balance of the
restricted shares although certain holders have been granted registration rights
which, if exercised, would cause their shares to be registered and eligible for
immediate sale. Public sales after this offering may include shares issued under
outstanding options and warrants. We also intend to file one or more
Registration Statements on Form S-8 following this offering. Under these
Registration Statements, holders of vested stock options may generally exercise
and immediately sell their shares to the public. See "Shares Eligible for Future
Sale" on page 55.
POSSIBLE ISSUANCES OF PREFERRED STOCK AND ANTI-TAKEOVER PROVISIONS COULD AFFECT
THE PRICE OF OUR COMMON STOCK
Our Certificate of Incorporation authorizes our Board of Directors to issue
up to 5,000,000 shares of Preferred Stock. The Board can fix the rights,
preferences, privileges and restrictions (including voting rights) of shares of
Preferred Stock without stockholder approval. We do not presently intend to
issue shares of Preferred Stock. However, your rights as a holder of common
stock will be subject to, and may be adversely affected by, the rights of any
future Preferred Stock holders. Preferred Stock issuances may also cause
significant dilution in your interests as a stockholder. By issuing Preferred
Stock, we could also make it more difficult for a third party to acquire us.
Our stockholders do not have the right to cumulate their votes to elect
directors. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. These provisions, along
with Mr. Dirk's significant voting control and the ability of our Board of
Directors to issue shares of Preferred Stock, could prevent or delay any change
in our control. In turn, this could adversely affect common stock market prices.
See "Description of Capital Stock" beginning on page 52.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND TRADING PRICES
OF OUR COMMON STOCK MAY BE VOLATILE
There is currently no public market for our common stock. We cannot assure
you that an active trading market for our common stock will develop, or, if one
develops, that trading will continue. We will establish the initial public
offering price through our negotiations with the representatives of the
underwriters and you should not view the price as any indication of prices that
will prevail in the trading market. The stock market from time to time
experiences 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 our common stock. In addition, market
prices for shares of our common stock are likely to be highly volatile. Some
specific factors which may have a significant effect on common stock market
prices include:
- fluctuations in our operating results,
- our announcements or our competitors' announcements of technological
innovations or new products,
- regulatory actions,
- developments regarding patents or proprietary rights, and
- changes in stock market analyst recommendations regarding our common
stock, other comparable companies or the technology industry generally.
See "Underwriting" beginning on page 56.
10
<PAGE>
NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price for a share of common stock is
substantially higher than the pro forma net tangible book value per share of
common stock. If you purchase shares of common stock in the offering, you will
incur immediate and substantial dilution. Dilution is an accounting concept that
refers to the difference between what an investor pays for shares of a company
and the book value of the shares immediately after the transaction. Whenever the
book value is less than the investor paid, the investor suffers dilution.
Additional dilution in your shares is likely to occur upon exercise of
outstanding stock options and warrants. See "Dilution" on page 14.
WE DO NOT INTEND TO PAY DIVIDENDS
We intend to use any future earnings to grow our business and do not intend
to pay dividends in the foreseeable future. See "Dividend Policy" on page 12.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 2,500,000 shares of common stock
that we are offering are estimated to be approximately $17.3 million after
deducting the underwriting discount and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that net
proceeds will be $20.0 million.
The net proceeds from the offering will be used for working capital and
general corporate purposes, including acquisitions, and to repay indebtedness
under our term loans and revolving line of credit with Comerica Bank-California.
Potential acquisitions could include other technologies, product lines or
businesses that are complementary to our business. As of the date of this
prospectus, we have not designated any other specific use for the net proceeds
of the offering. Accordingly, our management will retain broad discretion in
deciding how to use a substantial portion of the net proceeds of the offering.
We are conducting the offering at this time to ensure that we have sufficient
capital for acquisitions when suitable candidates are identified and to enable
us to more readily use our common stock in acquisitions. See "Business--Business
Strategy" on page 35. Pending the uses described above, we intend to invest the
net proceeds of the offering in short-term, interest-bearing securities. We have
no current arrangements, commitments or understandings to acquire any business.
Our bank term loans had outstanding balances of approximately $397,000 and
$2,700,000 as of May 31, 1999. The first of these term loans bears interest at
the bank's reference rate (7.75% as of May 31, 1999) and matures on November 1,
2000. The second of these term loans bears interest at the bank's reference rate
plus 0.50% and matures on November 1, 2003. Our revolving line of credit had an
outstanding balance of approximately $1,247,000 as of May 31, 1999 and bears
interest at .25% below the bank's reference rate. As of May 31, 1999, the
interest rate on our revolving line of credit was 7.50%. The revolving line of
credit has no expiration date. The proceeds from the term loans and the
revolving line of credit were used for working capital and to fund the Troy XCD
and Troy Telgate acquisitions.
DIVIDEND POLICY
Following the completion of the offering, our Board of Directors intends to
retain our earnings, if any, to support our operations and to finance expansion,
and does not intend to declare or pay cash dividends on the common stock in the
foreseeable future. Any dividends will be at the discretion of the Board of
Directors and will depend on our financial condition, results of operations,
capital requirements and such other factors as our Board of Directors may deem
relevant. In addition, our current revolving credit facility prohibits us from
paying cash dividends except for distributions for tax payments and pro rata
adjustments thereto.
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization and short-term notes
payable as of May 31, 1999, and as adjusted to give effect to the sale of
2,500,000 shares of common stock that we are offering, assuming an initial
public offering price of $8.00 per share and the application of the estimated
net proceeds of this offering. This table should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus. See "Use of Proceeds" on page 12 and "Description of Capital Stock"
beginning on page 52.
<TABLE>
<CAPTION>
MAY 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Short-term notes payable.................................................................. $ 1,247 $ --
--------- -----------
--------- -----------
Current portion of long-term debt......................................................... $ 959 $ 59
--------- -----------
--------- -----------
Long-term debt, net of current portion.................................................... $ 2,564 $ 367
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; 7,730,130 shares
issued and outstanding, actual; 10,230,130 shares issued and outstanding, as
adjusted.............................................................................. 77 102
Additional paid-in capital.............................................................. 2,349 19,639
Retained earnings....................................................................... 8,489 8,489
--------- -----------
Total stockholders' equity............................................................ 10,915 28,230
--------- -----------
Total capitalization.............................................................. $ 13,479 $ 28,597
--------- -----------
--------- -----------
</TABLE>
13
<PAGE>
DILUTION
Our net tangible book value as of May 31, 1999 was approximately $7.3
million or $0.94 per share. Net tangible book value per share represents our
total tangible assets less our total liabilities, divided by the number of
shares of our common stock outstanding.
After giving effect to the sale of the shares of common stock that we are
offering and after deducting underwriting discounts, commissions and estimated
offering expenses, and without taking into account any other changes in our net
tangible book value after May 31, 1999, our net tangible book value as of May
31, 1999 would have been approximately $25.2 million, or $2.46 per share. This
represents an immediate increase in net tangible book value of $1.52 per share
to our existing stockholders and an immediate dilution in net tangible book
value of $5.54 per share to new investors in this offering. Dilution is an
accounting concept that refers to the difference between what an investor pays
for shares of a company and the book value of the shares immediately after the
transaction. Whenever the book value is less than the investor paid, the
investor suffers dilution. The dilution to investors in the offering is as
illustrated in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share....................................... $ 8.00
Net tangible book value per share as of May 31, 1999................................ $ 0.94
Increase per share attributable to new investors in this offering................... 1.52
---------
Adjusted net tangible book value per share after the offering(1)...................... 2.46
---------
Dilution per share to new investors................................................... $ 5.54
---------
---------
</TABLE>
The following table summarizes, as of May 31, 1999, the number of shares of
common stock purchased from us by existing stockholders and by new investors in
the offering, the total consideration reflected in our accounts and the average
price paid per share. The table assumes an initial public offering price of
$8.00 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.............................. 7,730,130 75.6% $ 1,933,000 8.8% $ 0.25
New investors...................................... 2,500,000 24.4 20,000,000 91.2 8.00
------------ ----- ------------- -----
Totals........................................... 10,230,130 100.0% $ 21,933,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
14
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations is
presented to give effect to the October 30, 1998 acquisition of Troy XCD as if
the acquisition had been completed on December 1, 1997. Our historical statement
of operations data are derived from our audited consolidated financial
statements for the year ended November 30, 1998 included elsewhere in this
prospectus, and reflect
- a pro forma adjustment for income taxes on S corporation income; and
- one month of operations of Troy XCD from the date of acquisition, October
30, 1998 to November 30, 1998.
The historical statement of operations data of Troy XCD includes eleven
months of operations consisting of the audited results of operations of Troy XCD
for the nine months ended September 30, 1998, (for which financial statements
are included elsewhere in this prospectus) and the unaudited results of
operations from December 1, 1997 to December 31, 1997 and from October 1, 1998
to October 30, 1998. The pro forma condensed consolidated statement of
operations does not necessarily indicate the results of operations which would
have occurred had the acquisition been completed at such time, nor does it
necessarily indicate future results that may be expected. The unaudited pro
forma condensed consolidated statements of operations should be read in
conjunction with our historical consolidated financial statements and those of
Troy XCD, including the notes thereto, that are included elsewhere in this
prospectus.
15
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA
TROY GROUP, TROY XCD, ----------------------------
INC. INC. ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales......................................... $ 35,758,000 $ 5,070,000 $ -- $ 40,828,000
Cost of goods sold................................ 21,496,000 3,352,000 -- 24,848,000
------------- ------------- ------------- -------------
Gross profit................................ 14,262,000 1,718,000 -- 15,980,000
Operating expenses................................ 9,797,000 3,170,000 (571,000 (1) 12,396,000
------------- ------------- ------------- -------------
Operating income (loss)..................... 4,465,000 (1,452,000) 571,000 3,584,000
Interest expense.................................. 101,000 164,000 120,000(2) 385,000
------------- ------------- ------------- -------------
Income (loss) before income taxes........... 4,364,000 (1,616,000) 451,000 3,199,000
Pro forma provision for income taxes.............. 1,993,000 (596,000) (143,000 (3) 1,254,000
------------- ------------- ------------- -------------
Net income (loss)........................... $ 2,371,000 $ (1,020,000) $ 594,000 $ 1,945,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per share:
Basic......................................... $ 0.32 $ 0.25
------------- -------------
------------- -------------
Diluted....................................... $ 0.31 $ 0.25
------------- -------------
------------- -------------
Weighted-average shares outstanding:
Basic......................................... 7,514,000 157,000(4) 7,671,000
------------- ------------- -------------
------------- ------------- -------------
Diluted....................................... 7,745,000 171,000(4) 7,916,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
GENERAL
On October 30, 1998, the Company completed the acquisition of Troy XCD in a
transaction that has been accounted for as a purchase. The cost of the
acquisition (including closing costs) was funded through bank borrowings and the
issuance of common stock.
Troy XCD operations for the one month period ended October 30, 1998 includes
a deferred compensation charge of $1,250,000. This amount was included in the
liabilities of Troy XCD assumed by us and was, or will be, paid subsequent to
October 30, 1998.
Pro forma condensed consolidated statement of operations adjustments:
(1) Amortization with respect to intangibles acquired in the acquisition of
Troy XCD, net of adjustment for in process research and development
expense of $857,000 that is not a recurring cost. The following lists the
acquired intangible assets of Troy XCD and their cost and estimated
lives:
<TABLE>
<CAPTION>
INTANGIBLE ASSET COST LIFE
- ---------------------------------------------------- ---------- ---------
<S> <C> <C>
Customer list....................................... $ 100,000 5 years
Core technology..................................... 953,000 7 years
Assembled workforce................................. 150,000 5 years
Goodwill............................................ 863,000 7 years
</TABLE>
(2) Increase in interest expense resulting from the financing of Troy XCD
acquisition. This amount is based upon an assumed increase in our bank
borrowings of $1,638,000, equal to the cash purchase price of Troy XCD,
and using our 1998 weighted average bank interest rate of
16
<PAGE>
7.875%. Our borrowings bear interest at a variable rate based upon the
reference rate per annum announced by our bank. Based upon the debt
incurred in connection with this acquisition, a 1/8% increase in the
interest rates would cause the annual interest expense to increase by
approximately $2,000.
(3) Adjustment to provision for income taxes to reflect the tax benefit of
other intangibles amortization and interest expense at 40%.
(4) Adjustment to reflect the weighted average number of shares of common
stock and the dilutive effect of stock warrants issued in connection with
the acquisition for the full fiscal year.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated data presented below as of and for the fiscal years ended
November 30, 1996, 1997 and 1998 are derived from our audited consolidated
financial statements, included elsewhere in this prospectus. The consolidated
financial data as of and for the fiscal years ended November 30, 1994 and 1995
are derived from our audited consolidated financial statements which are not
included in this prospectus. The consolidated financial data as of and for the
six months ended May 31, 1998 and 1999 are derived from our unaudited
consolidated financial statements included elsewhere in this prospectus. Such
unaudited consolidated financial statements have been prepared by us on a basis
consistent with our annual audited consolidated financial statements and, in the
opinion of our management, contain all normal recurring adjustments necessary
for a fair presentation of the consolidated financial position and the results
of operations for the applicable periods. Operating results in the six months
ended May 31, 1999 are not necessarily indicative of the results that may be
expected in the entire fiscal year ending November 30, 1999 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" beginning on page 20, our consolidated financial statements and
related notes beginning on page F-1 and other financial information included
elsewhere in this prospectus.
Pro forma net income and pro forma diluted net income per share data give
effect to the October 30, 1998 conversion by Troy and Troy Systems from S
corporations to C corporations for federal and state income tax purposes and
assume that Troy and Troy Systems were subject to corporate income taxes at an
effective combined federal and state income tax rate of 40.0%. See Note 1
beginning on page F-7 in the notes to our consolidated financial statements.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales......................................... $ 17,583 $ 21,477 $ 28,161 $ 33,434 $ 35,758 $ 18,322 $ 23,466
Cost of goods sold................................ 10,566 13,560 17,408 19,597 21,496 10,756 14,167
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 7,017 7,917 10,753 13,837 14,262 7,566 9,299
Selling, general and administrative expenses...... 5,058 5,594 5,234 6,622 6,394 3,424 4,036
Research and development expenses................. 1,378 1,748 2,041 2,521 2,546 1,228 1,742
Purchased in process research and development..... -- -- -- -- 857 -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income.................................. 581 575 3,478 4,694 4,465 2,914 3,521
Interest expense.................................. 217 342 361 262 101 69 162
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes (credit)............... 364 233 3,117 4,432 4,364 2,845 3,359
Provision for income taxes (credit)............... 37 (80) 50 35 (70) 43 1,334
--------- --------- --------- --------- --------- --------- ---------
Net income........................................ $ 327 $ 313 $ 3,067 $ 4,397 $ 4,434 $ 2,802 $ 2,025
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma provision for income taxes.............. $ 146 $ 93 $ 1,247 $ 1,773 $ 1,993 $ 1,138
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma net income.............................. $ 218 $ 140 $ 1,870 $ 2,659 $ 2,371 $ 1,707
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma diluted net income per share............ $ 0.03 $ 0.02 $ 0.25 $ 0.34 $ 0.31 $ 0.22 $ 0.25
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average diluted shares outstanding....... 7,500 7,500 7,500 7,759 7,745 7,807 8,020
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................... $ -- $ -- $ 42 $ 100 $ 308 $ 40 $ 42
Working capital............................ 955 1,426 3,910 5,173 5,806 5,951 7,595
Total assets............................... 8,312 9,597 11,324 11,749 18,918 13,480 22,420
Short terms notes payble................... 1,000 1,880 1,612 -- 1,190 615 1,247
Current portion of long-term debt.......... 1,305 990 688 754 959 402 959
Long-term debt, net of current portion..... 1,183 2,067 1,521 1,280 2,374 771 2,564
Stockholders' equity....................... 865 1,153 4,102 5,948 8,265 7,252 10,915
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
The following discussion and other parts of this prospectus contain
forward-looking information that involves risks and uncertainties. Our actual
results could differ materially from those anticipated by forward-looking
information due to many factors, including those set forth under "Risk Factors"
beginning on page 5 and elsewhere in this prospectus.
BACKGROUND
We are a leading worldwide provider of enterprise output solutions that
enable organizations to electronically transmit and output information across
distributed computing environments. Our products consist of connectivity and
output enhancement solutions that work with many operating systems and
protocols. We were originally incorporated in California in 1996 and were
reincorporated in Delaware in May 1998. We are the result of various mergers and
acquisitions involving a company originally founded in 1982 by the existing
shareholders. In October 1998, we acquired Troy XCD, a leading supplier of
connectivity solutions. In May, 1999, we acquired Troy Telgate, a Canadian
software development company.
Prior to the offering, Troy and Troy Systems elected to be treated for
federal and state income tax purposes as S corporations, except that Troy
Systems elected to be taxed as a C corporation under California income tax laws.
On October 30, 1998, Troy and Troy Systems terminated their S corporation
elections. The statements of operations data for all periods prior to October
30, 1998 include a pro forma provision for federal and state income taxes as if
we 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 Note 1 in the notes to our
consolidated financial statements.
Effective October 1, 1997, as amended through June 8, 1999, we issued
warrants to a consultant to purchase up to 250,000 shares of our common stock.
The warrants vest upon the occurrence of two separate performance conditions.
Warrants to purchase 50,000 shares will vest when we complete this offering with
the remainder vesting on completion of certain acquisitions. The exercise price
of the 50,000 warrants vesting upon completion of this offering will equal the
offering price. The exercise price for the 200,000 warrants vesting upon certain
acquisitions is set at $3.50 per share. The effect 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 vesting. In connection
with the acquisition of Troy XCD, 50,000 of these warrants vested under the
acquisition criteria. As a result, we recorded $210,000 for these warrants as
part of the purchase price of Troy XCD. Another 50,000 of these warrants vested
on May 8, 1999 in connection with the Troy Telgate acquisition. We recorded
$214,000 for these warrants as part of the purchase price in that transaction.
Amounts recorded in connection with the vesting of the remaining warrants to
purchase 100,000 shares could materially impact our financial statements.
On October 30, 1998 in connection with the purchase of Troy XCD, we issued
warrants to another consultant to purchase 50,000 shares of common stock at
$7.00 per share and recorded another purchase price adjustment of $69,000 for
that transaction. The warrants were exercisable immediately when issued and
expire five years after the October 30, 1998 grant date.
For legal services being provided in connection with this offering, in May
1998 we issued a warrant to purchase up to 50,000 shares of our common stock at
$3.50 per share. This warrant was amended in June 1999 to make it immediately
exercisable. The effect of this warrant was recorded in June 1999 at the then
current fair value when the warrant was amended and became vested. See
"Description of
20
<PAGE>
Capital Stock--Warrants" on page 53 and Note 9 beginning on page F-15 in the
notes to our consolidated financial statements included elsewhere in this
prospectus.
OVERVIEW
Net sales are generated from the sale of our connectivity and output
enhancement products and services. We recognize revenue from the sale of our
products when the goods are shipped to the customer and we recognize service
revenue over the period of the contract on a straight-line basis. In the six
months ended May 31, 1999 and the fiscal years ended November 30, 1998 and 1997,
a reseller of our imaging supplies, Cannon IV Inc., accounted for 10.9%, 17.1%
and 16.6%, respectively, of our net sales, of which we believe a significant
portion was sold to a single customer. We also sell our products directly to
this reseller's significant customer. Direct sales to Cannon IV's significant
customer were 5.2%, 6.8% and 5.7% of our net sales for the six months ended May
31, 1999, the fiscal year ended November 30, 1998 and the fiscal year ended
November 30, 1997, respectively. We do not have a written or oral contract with
Cannon IV or its significant customer. All sales are made through purchase
orders.
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 the 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. We expense 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 and consulting expenses. We
expense research and development costs as they are incurred.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from our consolidated statements of operations expressed as
a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR
ENDED NOVEMBER 30, MAY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................................. 61.8 58.6 60.1 58.7 60.4
--------- --------- --------- --------- ---------
Gross profit....................................................... 38.2 41.4 39.9 41.3 39.6
Selling, general and administrative expenses....................... 18.6 19.8 17.9 18.7 17.2
Research and development expenses.................................. 7.2 7.5 7.1 6.7 7.4
Purchased in process research and development...................... -- -- 2.4 -- --
--------- --------- --------- --------- ---------
Operating income................................................... 12.4 14.1 12.5 15.9 15.0
Interest expense................................................... 1.3 0.8 .3 0.4 0.7
--------- --------- --------- --------- ---------
Income before income taxes (credit)................................ 11.1 13.3 12.2 15.5 14.3
Provision for income taxes (credit)................................ 0.2 0.1 (.2) 0.2 5.7
--------- --------- --------- --------- ---------
Net income......................................................... 10.9% 13.2% 12.4% 15.3% 8.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma provision for income taxes............................... 4.4% 5.3% 5.6% 6.2%
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net income............................................... 6.7% 8.0% 6.6% 9.3%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED MAY 31, 1999 COMPARED TO SIX MONTHS ENDED MAY 31, 1998
NET SALES. Our net sales were $23.5 million for the six months ended May
31, 1999, with $19.3 million attributable to output enhancement products and
$4.2 million attributable to connectivity products. This represented an increase
in net sales of $5.1 million or 28.1% from $18.3 million in the six months ended
May 31, 1998. This increase was due primarily to an increase of $4.2 million in
sales of print server software, firmware and hardware as a result of the Troy
XCD and Troy Telgate acquisitions, an increase of $1.3 million in sales of our
proprietary imaging supplies and services and an increase of $496,000 in sales
of our laser printers. This increase was offset by a $838,000 decrease in sales
of our impact printers. We believe 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 $3.4 million or 31.7%
to $14.2 million in the six months ended May 31, 1999 from $10.8 million in the
six months ended May 31, 1998. This increase was primarily due to increased net
sales. Cost of goods sold as a percentage of net sales increased to 60.4% in the
first six months of 1999 from 58.7% in the first six months of 1998.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$1.7 million or 22.9% to $9.3 million in the six months ended May 31, 1999 from
$7.6 million in the six months ended May 31, 1998. Gross profit as a percentage
of net sales decreased to 39.6% in the first six months of 1999 from 41.3% in
the first six months of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $612,000 or 17.9% to $4.0 million in the
six months ended May 31, 1999 from $3.4 million in the six months ended May 31,
1998. Of this increase, $724,000 was due to the acquisitions of Troy XCD and
Troy Telgate, partially offset by reduced compensation for sales, marketing and
management
22
<PAGE>
personnel and sales commissions. Selling, general and administrative expenses as
a percentage of net sales decreased to 17.2% in the first six months of 1999
from 18.7% in the first six months of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $514,000 or 41.9% to $1.7 million in the six months ended May 31,
1999 from $1.2 million in the six months ended May 31, 1998. Of this increase,
$408,000 was due to the acquisitions of Troy XCD and Troy Telgate. Research and
development expenses as a percentage of net sales increased to 7.4% in the first
six months of 1999 from 6.7% in the first six months of 1998.
OPERATING INCOME. As a result of the above factors, operating income
increased by $607,000 or 20.8% to $3.5 million in the six months ended May 31,
1999 from $2.9 million in the six months ended May 31, 1998. Operating income as
a percentage of net sales decreased to 15.0% in the first six months of 1999
from 15.9% in the first six months of 1998.
INTEREST EXPENSE. Interest expense increased by $93,000 to $162,000 in the
six months ended May 31, 1999 from $69,000 in the six months ended May 31, 1998.
This increase was due to increased borrowings under our line of credit and term
debt.
INCOME TAXES. Income taxes increased to $1.3 million in the six months
ended May 31, 1999 from $43,000 in the six months ended May 31, 1998. This
increase resulted when Troy and Troy Systems terminated their S corporation tax
elections as of October 30, 1998 and were thereafter taxed as C corporations.
After giving effect to the pro forma adjustments, income taxes as a percentage
of pretax income was 40% for both periods.
FISCAL YEAR ENDED NOVEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1997
NET SALES. Net sales were $35.8 million for the fiscal year ended November
30, 1998. Net sales of output enhancement products were $35.4 million. Net sales
of connectivity products for the period were $352,000 as of the result of the
October 30, 1998 acquisition of Troy XCD. Net sales increased by $2.3 million or
7.0% from $33.4 million in the fiscal year ended November 30, 1997. This
increase was due primarily to a $2.5 million increase in sales of our laser
printers, a $1.9 million increase in sales of our proprietary imaging supplies,
and to a lesser extent to an $800,000 increase in sales of our services and
print server software, firmware and hardware. These increases were partially
offset by a $2.8 million decrease in sales of our impact printers. Net sales
were not significantly effected by price changes.
COST OF GOODS SOLD. Cost of goods sold increased by $1.9 million or 9.7% to
$21.5 million in the fiscal year ended November 30, 1998 from $19.6 million in
the fiscal year ended November 30, 1997. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales increased
to 60.1% in fiscal 1998 from 58.6% in fiscal 1997.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$425,000 or 3.1% to $14.3 million in the fiscal year ended November 30, 1998
from $13.8 million in the fiscal year ended November 30, 1997. This increase was
primarily due to increased net sales partially offset by the effect of the
decline in sales of our impact printers which yielded a higher gross margin.
Gross profit as a percentage of net sales decreased to 39.9% in fiscal 1998 from
41.4% in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $228,000 or 3.4% to $6.4 million in the
fiscal year ended November 30, 1998 from $6.6 million in the fiscal year ended
November 30, 1997. Selling, general and administrative expenses as a percentage
of net sales decreased to 17.9% in fiscal 1998 from 19.8% in fiscal 1997. This
decrease was due primarily to renovation costs incurred during 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $25,000 or 1.0% to $2.5 million in the fiscal year ended November
30, 1998 from $2.5 million in the fiscal year
23
<PAGE>
ended November 30, 1997. Research and development expenses as a percentage of
net sales decreased to 7.1% in fiscal 1998 from 7.5% in fiscal 1997.
PURCHASED IN PROCESS RESEARCH AND DEVELOPMENT. During the fourth quarter of
1998, we incurred a one time charge associated with the acquisition of Troy XCD
of $857,000. This charge was to expense purchased in process research and
development that had not reached technological feasibility and had no
alternative future uses.
Troy XCD's network connectivity products include print server firmware,
hardware and a software-only solution. These products enable computer systems to
distribute and output information across distributed computing environments.
Troy XCD's network connectivity products are recognized worldwide for supporting
a large number of protocols and network operating systems. As a result, they are
well suited for enterprises that have deployed many different kinds of networks,
computers and operating systems over wide geographic areas.
Troy XCD's current Internet connectivity product, PrintraNet, is a software
and firmware solution that enables a user at one location to print to another
location over the Internet. PrintraNet offers a number of advantages, including
lower cost and higher quality than fax transmissions, and eliminates sofware
compatibility issues associated with e-mail. Troy XCD's Internet connectivity
products under development will be designed to enable output devices, including
currently installed printers manufactured by Hewlett-Packard, IBM, Lexmark and
Xerox, to communicate over the Internet regardless of the sending device's
protocol. In addition, Troy XCD will provide multi-protocol solutions to these
and other output device manufacturers and end users to allow new output devices
to communicate over the Internet. We believe that Troy XCD will have significant
competitive advantages in this market because they were one of the first to
develop Internet printing technology and have extensive protocol experience.
On October 30, 1998, Troy XCD had 16 in-process research and development
projects. These projects included the development of hardware, software and
firmware for interface cards, print servers and remote Internet printing. We
valued each of these projects using an income approach methodology. A number of
factors were used to determine value including the assignment of probability to
the projected product revenue streams, estimated gross margin contributions and
estimated stage of completion. Of these 16 projects, four accounted for over 95%
of the value assigned to the in-process research and development. A summary of
these projects is as follows:
<TABLE>
<CAPTION>
IN-PROCESS
ESTIMATED ANTICIPATED RESEARCH AND
COSTS COST TO COMPLETION DEVELOPMENT
PROJECT NO. NATURE INCURRED COMPLETE DATE VALUE
- ----------------- --------------------------------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 Ethernet interface card...................... $ 143,000 $ 13,000 Dec. 1998 $ 453,000
2 Print server hardware and firmware........... 26,000 9,000 March 1999 254,000
3 Data products firmware....................... 53,000 31,000 Sept. 1999 63,000
4 Internet firmware and software............... 90,000 130,000 Dec. 1999 66,000
5 Others, twelve projects...................... Various Various Various 21,000
-------------
$ 857,000
-------------
-------------
</TABLE>
In-process research and development projects are time consuming and
difficult to complete. As of the acquisition date, the estimated remaining costs
to bring the projects under development to technological feasibility were
approximately $400,000. These outlays are expected to occur over a period of
approximately thirteen months following the acquisition. There is substantial
risk associated with the completion of each project, and there is no assurance
that each research and development project will yield either technological
functionality or commercial success. Furthermore, as is common to research and
development efforts, Troy XCD has previously experienced developmental setbacks
where the time
24
<PAGE>
required to fully develop critical technology driven steps and to complete
reliability testing have been underestimated. If the research and development
projects are not completed as planned, they will neither satisfy the
technological requirements of a rapidly changing market nor be cost effective.
The following is a description of the significant research and development
projects that were under development at the acquisition date:
PROJECT NUMBER 1. Troy XCD was in the process of developing an Ethernet
interface card with features including graphical interface, custom e-mail filter
for Internet printing and multi-language management utility support. Troy XCD
was completing the graphical interface and debugging the Ethernet interface
card. Once completed, various regulatory approvals will be required.
PROJECT NUMBER 2. Troy XCD was in the process of developing print server
hardware and firmware for a Hewlett-Packard family of EIO printers which will
support DEC LAT and Banyan VINES protocols. The design, layout and testing of
the printed circuit board needed to be completed.
PROJECT NUMBER 3. Troy XCD was in the process of developing modification
features for project number 1, the Ethernet interface card, including specific
virtual printer functions and status commands, pass-through functions for
control files and programming via the PCI bus. This product was at an untested
prototype stage.
PROJECT NUMBER 4. Troy XCD was in the process of developing firmware and
software that would allow remote Internet printing with increased levels of
print quality and color. Troy XCD was in the process of developing new security
and printing protocols.
As noted above, the projects in development as of the acquisition date are
expected to reach technological feasibility over the thirteen-month period
subsequent to that date. Cash flows from the sale of products incorporating
these technologies are expected to commence in fiscal 1999 and are forecasted
using a product life cycle approach. The low end of the range of estimated
future revenues was used to project future cash flows.
In estimating gross margins, we considered historical gross margin levels,
budgeted gross margin levels and estimated margins of unique projects. The
margins reflect historical experience and are expected to diminish over the
product life cycle. Future selling, general and administrative expense
expectations also reflect historical experience, adjusted to reflect the
specific economics of each project. Research and development costs were included
in the valuation of the in-process research and development projects based upon
the estimated project completion costs and historical experience.
The expected operating margins for the in-process research and development
were reduced for charges for working capital employed and core technology
charges. The core technology charges represent an implied royalty charge that
quantifies the cost to the in-process technology for its utilization of the
developed or "core" technology.
In addition to contributory asset and core technology assessments, the
in-process research and development cash flow assumptions explicitly exclude any
contribution from research and development efforts remaining to be completed as
of the acquisition date. The relative contribution of completed research and
development efforts was assessed based upon several factors. These factors
include the development costs incurred to date, relative time spent on the
projects, the associated risks and an analysis of each of the primary tasks
completed versus the tasks required to complete the efforts. As of the
acquisition date, the individual in-process research and development projects
were approximately 15% to 90% complete.
The free cash flows, net of the various charges discussed above, generated
by the in-process technologies in future periods were discounted to their net
present value by applying appropriate discount rates. The estimated future cash
flows were discounted for the cost of money at rates ranging
25
<PAGE>
from 10% to 16%, depending on the level of risk associated with a particular
technology and the current return on investment requirements of the market.
These discount rates reflect "risk premiums" of 0% to 60% over the 10% weighted
average cost of capital and were calculated using a capital asset pricing model.
An additional discount rate was applied for probability risk and project
completion uncertainty.
There have been no events or changes in circumstances through the date of
this prospectus that suggest that our valuation assumptions were not reasonable.
Troy XCD has continued to develop the in-process technologies and anticipates
deploying these technologies in end-products in a timeframe and manner
consistent with the valuation projections.
OPERATING INCOME. As a result of the above factors, operating income
decreased by $229,000 or 4.9% to $4.5 million in the fiscal year ended November
30, 1998 from $4.7 million in the fiscal year ended November 30, 1997. Operating
income as a percentage of net sales decreased to 12.5% in fiscal 1998 from 14.1%
in fiscal 1997, primarily as a result of the in process research and development
charge.
INTEREST EXPENSE. Interest expenses decreased by $161,000 to $101,000 in
the fiscal year ended November 30, 1998 from $262,000 in the fiscal year ended
November 30, 1997. This decrease was due to reduced borrowings under our line of
credit, retirement of debt, and lower negotiated interest rates.
INCOME TAXES. Income taxes decreased by $105,000 to a credit of $(70,000)
in the fiscal year ended November 30, 1998 from $35,000 in the fiscal year ended
November 30, 1997. When Troy and Troy Systems terminated their S corporation
elections on October 30, 1998, we recorded a net deferred tax asset of $103,000.
This was done by recording a credit to income tax expense for temporary
differences between the reported amounts of assets and liabilities and their tax
bases. We expect that our effective combined federal and state tax rate will be
approximately 40% of pretax income in future periods.
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 our proprietary imaging supplies, 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 our impact printers and services. All of our
net sales for the fiscal year ended November 30, 1997 were attributable to
output enhancement products. 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 our proprietary imaging supplies. 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.
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
26
<PAGE>
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 our California and West Virginia facilities and an increase in
rental expense at our West Virginia facility. Selling, general and
administrative expenses as a percentage of net sales increased to 19.8% 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, we engaged in significant development
activities relating to our higher speed laser printers and provided certain
specialized impact printer services to one of our 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 14.1% 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 our 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.
BACKLOG
We sell our products on a purchase order basis rather than through long-term
contracts. Because we typically ship product within 30 days of order and
customers may cancel or reschedule deliveries, we do not consider backlog to be
a reliable indicator of future financial results.
COMPLIANCE WITH YEAR 2000
Many computer systems and applications were historically designed to use
two-digit date fields to designate a year. As a result, date-sensitive computing
systems may recognize the year 2000 as 1900, or not at all, which may cause
systems to incorrectly process financial and operational information.
Our potential areas of exposure to this so-called Year 2000 problem include
our products, our own internal information technology, or "IT" systems and other
"non-IT systems" having embedded technology or software, such as manufacturing
equipment and mechanical and telephone systems. Year 2000 issues may also affect
the business and operations of our vendors, customers and other business
partners.
STATE OF READINESS. In response to the Year 2000 problem, we are currently
reviewing all of our areas of potential exposure. The following summarizes our
progress to date:
- All of our current products and products under development have been
reviewed and are believed to be Year 2000 compliant.
- We are currently reviewing the internal IT systems of Troy XCD with the
assistance of an outside consultant and expect to complete the review in
July 1999. A prior review of Troy's internal IT systems indicated that our
internal accounting systems are Year 2000 compliant, and that certain
network server software programs are not Year 2000 compliant and will need
to be
27
<PAGE>
replaced or upgraded. We expect to replace this software by July 1999.
Certain of our PC's which were non-compliant have already been replaced.
- We have evaluated the Year 2000 compliance of our material vendors,
distributors and other significant business partners and believe that they
have achieved or will achieve Year 2000 compliance on a timely basis.
COSTS. We do not separately track our internal Year 2000 costs such as
personnel time spent on Year 2000 matters, but believe that they have been
immaterial to date. Our external costs to date have been less than $30,000. This
amount includes the fees and expenses of our outside consultant and the cost of
replacing non-compliant PC's. Although we have not completed our assessment of
all of our internal IT and non-IT systems, the information that we have been
provided to date leads us to believe that additional costs to identify and
remediate potential Year 2000 problems, including the required network server
software replacement are not expected to exceed $20,000. We also do not expect
that our Year 2000 identification and remediation efforts will cause a
significant diversion of the efforts of our employees or management away from
other duties or information technology initiatives. We cannot assure you,
however, that our further assessment will not identify Year 2000 problems
requiring significant cost or efforts to remediate or that we will not encounter
unforeseen difficulties or expense in obtaining Year 2000 solutions.
RISKS. Based upon our current information, we believe that our most
reasonably likely, worst case scenario as a result of the Year 2000 problem is
the risk that one or more of our significant vendors, customers or business
partners will not be Year 2000 compliant and that we fail to determine or react
to their Year 2000 problem on a timely basis. If the operations of any of our
significant vendors, customers or other business partners are disrupted due to
the Year 2000 problem, and we are unable to develop and implement an effective
contingency plan, our ability to purchase adequate supplies of raw materials,
manufacture, distribute and receive payment for our products, or to otherwise
carry on essential activities could be materially adversely impacted. Although
we have assessed the Year 2000 readiness of these third parties and believe that
they are or will be Year 2000 compliant, we cannot assure you that we have
indentified all Year 2000 risks related to these partners of that we can
adequately plan around these risks.
CONTINGENCY PLAN. To date, we have not developed any detailed contingency
plans to address the risk that our material customers, vendors and other
business partners do not become Year 2000 compliant, as we have not identified
any current, material exposure to this risk. We have also not developed any
detailed contingency plans to address any failure of our internal IT or non-IT
systems to become Year 2000 compliant. To the extent that we identify third
party or other Year 2000 compliance issues that cannot be addressed on a timely
basis, we will seek to develop appropriate contingency plans in order to
mitigate our risks.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables set forth our unaudited consolidated quarterly results
of operations for each of the quarters in the fiscal years ended November 30,
1997 and 1998 and each of the three months ended February 28 and May 31, 1999.
This quarterly information is unaudited, but has been prepared on the same basis
as the audited consolidated financial statements and, in the opinion of our
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 our audited consolidated
financial statements and related notes included elsewhere in this prospectus.
The results of
28
<PAGE>
operations for any quarter do not necessarily indicate the results that may be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
1997 1998
-------------------------------------------------- -------------------------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 FEB. 28 MAY 31 AUG. 31
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales......................... $ 8,826 $ 8,286 $ 7,479 $ 8,843 $ 8,928 $ 9,394 $ 9,456
Cost of goods sold................ 5,290 4,933 4,249 5,125 5,358 5,398 5,681
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit...................... 3,536 3,353 3,230 3,718 3,570 3,996 3,775
Selling, general and
administrative expenses......... 1,527 1,776 1,645 1,674 1,578 1,846 1,543
Research and development
expenses........................ 582 663 588 688 630 598 632
Purchased in process, research and
development..................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)........... 1,427 914 997 1,356 1,362 1,552 1,600
Interest expense.................. 58 70 59 75 39 30 22
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
(credits)....................... 1,369 844 938 1,281 1,323 1,522 1,578
Income taxes (credits)............ 11 7 7 10 20 23 24
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income........................ $ 1,358 $ 837 $ 931 $ 1,271 $ 1,303 $ 1,499 $ 1,554
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
1999
--------------------
NOV. 30 FEB. 28 MAY 31
----------- --------- ---------
<S> <C> <C> <C>
Net sales......................... $ 7,980 $ 11,400 $ 12,066
Cost of goods sold................ 5,059 6,799 7,368
----------- --------- ---------
Gross profit...................... 2,921 4,601 4,698
Selling, general and
administrative expenses......... 1,427 2,121 1,915
Research and development
expenses........................ 686 810 932
Purchased in process, research and
development..................... 857 -- --
----------- --------- ---------
Operating income (loss)........... (49) 1,670 1,851
Interest expense.................. 10 78 84
----------- --------- ---------
Income (loss) before income taxes
(credits)....................... (59) 1,592 1,767
Income taxes (credits)............ (137) 637 697
----------- --------- ---------
Net income........................ $ 78 $ 955 $ 1,070
----------- --------- ---------
----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------------------------------------------------
1997 1998
-------------------------------------------------- -------------------------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 FEB. 28 MAY 31 AUG. 31
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............... 59.9 59.5 56.8 58.0 60.0 57.5 60.1
----- ----- ----- ----- ----- ----- -----
Gross profit..................... 40.1 40.5 43.2 42.0 40.0 42.5 39.9
Selling, general and
administrative expenses........ 17.3 21.5 22.0 18.9 17.7 19.6 16.3
Research and development
expenses....................... 6.6 8.0 7.9 7.8 7.1 6.4 6.7
Purchased in process, research
and development................ -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Operating income (loss).......... 16.2 11.0 13.3 15.3 15.2 16.5 16.9
Interest expense................. 0.7 0.8 0.8 0.8 0.4 0.3 0.2
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes
(credits)...................... 15.5 10.2 12.5 14.5 14.8 16.2 16.7
Provision for income taxes
(credits)...................... 0.1 0.1 0.1 0.1 0.2 0.2 0.3
----- ----- ----- ----- ----- ----- -----
Net income....................... 15.4% 10.1% 12.4% 14.4% 14.6% 16.0% 16.4%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
1999
------------------------
NOV. 30 FEB. 28 MAY 31
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0%
Cost of goods sold............... 63.4 59.6 61.1
----- ----- -----
Gross profit..................... 36.6 40.4 38.9
Selling, general and
administrative expenses........ 17.9 18.6 15.9
Research and development
expenses....................... 8.6 7.1 7.7
Purchased in process, research
and development................ 10.7 -- --
----- ----- -----
Operating income (loss).......... (0.6) 14.7 15.3
Interest expense................. 0.1 0.7 0.7
----- ----- -----
Income (loss) before income taxes
(credits)...................... (0.7) 14.0 14.6
Provision for income taxes
(credits)...................... (1.7) 5.6 5.7
----- ----- -----
Net income....................... 1.0% 8.4% 8.9%
----- ----- -----
----- ----- -----
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has been through cash generated from
operations and borrowings under our revolving credit facility and term loans.
Cash flows used in operating activities were $38,000 in the six months ended
May 31, 1999 compared to $1.7 million provided by operating activities in the
six months ended May 31, 1998 and $4.6 million in the fiscal year ended November
30, 1998. The cash flows used in operating activities in
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<PAGE>
the six months ended May 31, 1999 were comparatively lower than in fiscal 1998
due primarily to increases in accounts receivable and inventories and a decrease
in accrued expenses and accounts payable. The receivable increase resulted
primarily from higher sales in 1999. The increase in inventories resulted
primarily from increased levels to meet anticipated sales. The decrease in
accrued expenses is primarily the result of payment of an assumed compensation
liability to the employees of Troy XCD.
Cash flows used in investing activities were $908,000 in the six months
ended May 31, 1999 compared to $279,000 in the six months ended May 31, 1998 and
$3.4 million in the fiscal year ended November 30, 1998. Fiscal 1998 included
higher than historical levels of equipment and leasehold improvement purchases
and included approximately $1.6 million for the acquisition of Troy XCD. For the
balance of the fiscal year ending November 30, 1999, we plan to spend
approximately $300,000 on additional purchases of equipment.
Cash flows provided by financing activities were $680,000 in the six months
ended May 31, 1999 compared to cash flows used in financing activities of $1.5
million in the six months ended May 31, 1998 and $1.0 million in the fiscal year
ended November 30, 1998. Fiscal 1998 included approximately $3.4 million of S
corporation distributions and net additional borrowings of approximately $2.4
million. For the balance of the fiscal year ending November 30, 1999, we plan to
pay down approximately $4.3 million of debt from the proceeds of the offering.
See "Use of Proceeds" on page 12.
We currently have two bank term loans and a revolving line of credit. One of
these term loans had an outstanding balance of approximately $397,000 as of May
31, 1999. This term loan currently bears interest at a rate of 7.75% and matures
on November 1, 2000. The other term loan had an outstanding balance of
approximately $2.7 million as of May 31, 1999 and currently bears interest at a
rate of 8.25%. This second term loan matures on November 1, 2003. Our revolving
line of credit had an outstanding balance of approximately $1.2 million as of
May 31, 1999 and currently bears interest at a rate of 7.50%. The revolving line
of credit has no expiration date. Under the line of credit, we are permitted to
borrow 80% of eligible accounts receivable and 50% of eligible inventories (up
to a maximum of $2.5 million for eligible inventories). As of May 31, 1999, the
amount available under the line of credit was approximately $3.5 million. See
"Use of Proceeds" on page 12.
We believe that cash generated by operating activities, the net proceeds
from the offering and funds available under our credit facility will be
sufficient to finance our operating activities for at least the next 12 months.
To the extent that the funds generated from these sources are insufficient to
finance our operating activities, we would need to raise additional funds
through public or private financing. We cannot assure you that additional
financing will be available on terms favorable to us, or at all.
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 our financial position, results of
operations or cash flows and any effect will be limited to the form and content
of our disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2
provides guidance on applying generally accepted
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<PAGE>
accounting principles in recognizing revenue on software transactions. The SOP
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. Our management does not believe the adoption of SOP 97-2 will
have a material effect on our consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
new standard is effective for fiscal years starting after June 30, 1999 and is
not expected to have a material impact on our consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes. Market risk is attributed to all market risk sensitive
financial instruments, including long term debt.
We do not engage in trading activities and do not participate in foreign
currency transactions or utilize derivative financial instruments. Accordingly,
our exposure to market risk is through our bank debt which bears interest at
variable rates. The debt consists of two term loans and a revolving line of
credit. The term loans require monthly principal payments of $75,000. All
borrowings bear interest based upon the reference rate per annum as announced by
the bank (7.75% at May 31, 1999). Based upon the balance of the bank debt at May
31, 1999, an immediate and sustained increase in the reference rate of 1% would
cause our annual interest expense to increase by approximately $48,000. See Note
7 beginning on page F-14 in the notes to our consolidated financial statements.
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<PAGE>
BUSINESS
OVERVIEW
We are a leading worldwide provider of enterprise output solutions that
enable organizations to electronically transmit and output information across
distributed computing environments. Our solutions consist of connectivity and
output enhancement products that are compatible with most operating systems and
protocols. Our connectivity products include software, firmware and hardware
that enable output devices such as printers and fax machines to better
communicate over networks and the Internet. Our output enhancement products
include software, firmware, hardware and imaging supplies that enhance the
functionality of these output devices. Our products and solutions reduce costs,
decrease processing time, enhance data integrity, provide security and allow
companies to facilitate e-commerce and better manage business processes.
Our products have been adopted in a wide variety of industries, including
telecommunications, financial services, computer hardware, automotive, personnel
and others. We have more than 4,300 active customers and have sold our products
in 55 countries. Our customers include companies such as AT&T Corporation,
BankAmerica Corporation, Brother Industries, Eastman Kodak, Farmer's Insurance
Group, Ford Motor Company, IBM, Manpower, State Farm Insurance and Wells Fargo &
Company. We market our products to Fortune 1000 companies through a direct sales
force and to other businesses through our network of distributors and
value-added resellers. Since 1993, we have had a strategic relationship with
Hewlett-Packard, covering development and marketing of our output enhancement
products. This relationship has evolved to include our network and Internet
technology. We also have strategic relationships with ADP, IBM, Standard
Register and Wind River.
INDUSTRY
In today's increasingly competitive market, an organization's ability to
make effective business decisions and respond to customers' ever increasing
demands depends to a large extent upon its ability to rapidly collect, organize
and distribute information. Information and documents regularly distributed by
businesses include checks, income statements, budgets, sales forecasts,
invoices, inventory listings, payroll reports, portfolio statements and packing
slips.
Historically, most of this information was created using legacy computer
systems, printed and typically delivered to users through physical means such as
facsimiles, hand deliveries, inter-office mail and the postal service. However,
over the past decade, there has been a dramatic migration of critical corporate
information from mainframe computer systems to distributed computing
environments. This shift has been driven largely by the widespread emergence and
adoption of enterprise software applications, networks and the Internet.
Although many enterprise software applications include basic reporting
functionality, they generally do not adequately address an enterprise's need to
electronically transmit and output information across distributed computing
environments.
The emergence and adoption of networks and the Internet is also changing the
way organizations generate and distribute information. Technologies are now
available to effectively distribute information electronically to multiple end
users both within and outside an organization. In addition, many organizations
are now looking for entirely new output solutions that enable distribution of
information to any number of output devices using the Internet. Due to this
fundamental shift in the way corporations store and manage data, IT departments
are now faced with the challenge of providing users with secure access to
business information residing in a broad range of distributed and fragmented
systems.
Today, organizations have the ability to deliver information through a
variety of mediums, including printers, fax machines and e-mail.
Traditional information distribution uses a print-and-distribute approach
whereby documents are printed, copied and physically distributed. This process
is inefficient, labor intensive, expensive and has
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security risks. Often, the blank forms needed in this process are purchased from
a commercial printer and never used.
Faxing is another common method for remote information distribution. The
general quality and reliability of fax machine output has become inadequate for
today's business requirements. For example, a fax transmission of a photograph
is slow, has low resolution and does not offer color as a finishing option. In
addition, fax transmissions rely on the use of often expensive
telecommunications services.
E-mail is a rapidly growing method for remote information distribution.
However, e-mail often presents software incompatibilities and can be time
consuming. In addition, e-mailed documents can be easily altered which may
present significant security issues.
To address the shortcomings of these methods, we believe that organizations
are seeking a unifying technology strategy that enables disparate devices to
efficiently send information over networks and the Internet for high quality
output by a wide range of output devices. Recently, Hewlett-Packard has
developed a comprehensive solution for distributing input from a broad range of
intelligent devices to compatible output devices. This solution, based upon
their JetSend protocol, allows JetSend enabled devices to transmit information
over the Internet for output on JetSend enabled output devices. In addition, the
Internet Engineering Task Force is in the process of adopting a related protocol
that is also intended to unify many disparate input and output devices so that
the Internet can be the universal transmission medium. There are also efforts
underway by major facsimile manufacturers to develop a common protocol to enable
facsimile machines to transmit and receive information over the Internet. To
date, however, there is no universal Internet output protocol.
Another significant area of change is the improved capabilities of laser
printers. Today, inexpensive laser printers have the ability to print most
common business documents. However, standard laser printers do not have the
capability to produce unique output such as financial documents. Unlike purchase
orders and invoices, financial document printing presents a number of
challenges. Perhaps the most significant is the printing of MICR lines, the
unique characters on the bottom of a check. The MICR line is printed with a
magnetic ink or toner that when magnetized emits a magnetic signal that
identifies each unique character. If the shape and/or the magnetics of the
characters do not meet specified standards, the banking system will reject the
document, which will then require costly manual handling. Due to the
difficulties in printing high quality MICR lines, the printing of financial
documents was historically done by third party commercial printers. Although
today's laser printers are capable of high quality output, they cannot print
MICR lines without customized software and specialty toners.
Another recent trend is the rapid rise in e-commerce. To date, businesses
and consumers have generally used credit cards as the primary method of payment
in e-commerce transactions. Most online merchants have very limited or no
options for those purchasers who desire to pay for goods and services by check.
Even when payment by check is permitted, a purchaser must send the check, which
then must clear through the banking system before the goods or services are
received. This process often takes 7-10 days. As a result, online merchants are
not able to offer their customers the same level of convenience and payment
options available in traditional stores.
Due to the shortcomings of traditional information distribution methods, we
believe that there is a need for enterprise output solutions that allow
organizations to electronically transmit and output information across
distributed computing environments.
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<PAGE>
TROY SOLUTION
Our software, firmware, hardware and imaging supplies are designed to
address the critical information distribution and output requirements of
enterprises and end users. Our products are designed to provide the following
benefits:
BROADEST NETWORK PROTOCOL SUPPORT & SOFT PRINT SERVER. Our network
connectivity products are recognized worldwide for supporting a large number of
protocols and network operating systems. With our technologies, enterprises are
able to electronically transmit and output information across distributed
computing environments. Our connectivity products support Windows NT and UNIX,
in addition to legacy systems such as Digital Equipment Corporation VAX
computers, Banyan VINES networks, HP 3000 computers and IBM AS/400 computers. In
addition, we are continuing to develop the soft print server. Our soft print
server will allow printer manufacturers and other OEM customers to significantly
reduce manufacturing costs by incorporating networking capabilities directly in
the processor on their printer controller, rather than requiring a separate
processor, memory and interface logic. Our soft print server runs on printers
with Wind River Vx Works, a commonly used embedded real-time operating system.
INTERNET OUTPUT CAPABILITIES. Our existing Internet output capability,
PrintraNet, allows a user at one location to print to another location over the
Internet. Our Internet connectivity products under development will allow our
customers' printers and fax machines to seamlessly receive documents over the
Internet, regardless of the protocol used by the sending device. We believe that
we will have significant competitive advantages in this market because we were
one of the first to develop Internet printing technology and have extensive
protocol experience.
ADVANCED OUTPUT ENHANCEMENT SOLUTIONS. Our output enhancement products
provide customers with functions not offered by most major original equipment
manufacturers. Our technology enables standard laser printers to print MICR
lines, graphics, barcodes and forms. It also enables a printer to perform other
functions such as auditing, status checking and security. These features
increase an enterprise's flexibility and customer service, eliminate costs
associated with forms obsolescence and enhance document security. This
technology works over networks and the Internet.
PROPRIETARY IMAGING SUPPLIES. We are recognized by our customers as a high
quality developer and manufacturer of proprietary imaging supplies. Our imaging
supplies are formulated for specific output devices. As new output devices are
developed, our chemical engineers combine their expertise with our advanced
research and development equipment to design proprietary formulations. Our
imaging supplies are then produced in a sophisticated, computerized
manufacturing facility. We are the only authorized MICR toner manufacturer for
Hewlett-Packard LaserJet printers and are the only authorized MICR toner
manufacturer for the IBM 3900 and InfoPrint 4000 family of high-speed laser
printers. The majority of our output enhancement products require our
proprietary imaging supplies.
E-COMMERCE CHECK PAYMENT SOLUTIONS. By combining our MICR enhanced
distributed output solutions with our Internet software, we are currently
developing technology that will offer the capability to print a MICR encoded
check remotely, including over the Internet. This check will have all of the
same attributes of a traditional check and will be presented by a merchant
through normal banking channels. We believe that this capability will offer us a
significant new growth opportunity due to the rapid rise in e-commerce and the
limited payment methods available to today's e-commerce consumer. Our integrated
solution will allow e-commerce consumers to pay for goods and services with a
check in a similar manner and with comparable speed and security as is available
for credit cards.
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<PAGE>
BUSINESS STRATEGY
Our objective is to be a leading worldwide provider of enterprise output
solutions. Our strategy for achieving this objective includes:
ACCELERATING THE DEVELOPMENT AND MARKETING OF OUR INTERNET PRODUCTS. We
believe that the Internet will play a significant role in future commerce. We
intend to focus significant technical effort toward the development of Internet
output solutions. We also intend to focus on developing and marketing our
e-commerce check payment solution. By building on our current product lines and
utilizing our expertise in managing various protocols, we believe that we will
have significant competitive advantages in this market.
INTRODUCING AND ENHANCING PRODUCTS THROUGH RESEARCH AND DEVELOPMENT. We
achieved a leadership position in network solutions and our output enhancement
solutions by investing in research and development, introducing higher quality
products and focusing on satisfying the needs of both our OEM customers and end
users. We intend to continue to invest in research and development to enhance
our current technologies and introduce new products.
EXPANDING AND SEEKING NEW OEM RELATIONSHIPS. We intend to aggressively
expand existing and seek new OEM relationships. We intend to expand our
relationships with Hewlett-Packard, IBM, Brother and Standard Register by
developing solutions that support their products. We believe that this strategy
provides us with the opportunity to expand our market share and maintain and
enhance our technological position and expertise.
ACQUIRING RELATED BUSINESSES, PRODUCTS AND TECHNOLOGIES. A significant
aspect of our growth strategy has been the acquisition of complementary
businesses in order to achieve market presence, increase our customer base and
expand our product offerings to our customers and business partners. We intend
to acquire businesses or license products and technologies in the Internet and
network output solutions market. We currently have an experienced team, both
internal and external, executing and implementing our acquisition strategy.
LEVERAGING STRATEGIC ALLIANCES. We currently partner with various software,
firmware and hardware companies that offer solutions which assist us in meeting
our customers' enterprise output needs. We intend to continue to aggressively
pursue new strategic alliances that we believe will enable us to enter new
markets, expand our channels of distribution and enhance our product and service
offerings. We currently have management resources dedicated to developing
strategic alliances.
EXPANDING DISTRIBUTION CHANNELS TO INCREASE OUR FOCUS ON SELLING TO SMALL
AND MID-SIZE BUSINESSES. We believe that an increasing number of small and
mid-sized businesses will begin to use networks, the Internet and advanced
output solutions to facilitate their business needs. We intend to continue to
expand our distribution channels to increase our sales to these businesses.
CURRENT PRODUCTS AND SERVICES
Our current product offerings consist of connectivity and output enhancement
solutions.
CONNECTIVITY SOLUTIONS
We offer a wide range of products that allow output devices to better
communicate over networks and the Internet. Our major product lines include:
PRINT SERVERS. Our print servers enable printers, plotters and other output
devices to be shared by many different kinds of computers on a network. Our
print servers are recognized worldwide for supporting a large number of
protocols and network operating systems. This support makes our print
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<PAGE>
servers especially well-suited to enterprise networks that have deployed many
different kinds of computers and network operating systems over a wide
geographic area.
INTERNET OUTPUT SOLUTIONS. Our current Internet output product, PrintraNet,
is a software and firmware solution that enables a user at one location to print
to another location over the Internet. PrintraNet requires PrintraNet software
and firmware on both the sending and receiving device. Our
Internet products under development are designed to enable output devices to
communicate over the Internet regardless of the sending device's protocol.
OUTPUT ENHANCEMENT SOLUTIONS
MICR SOLUTIONS. We offer three levels of high-quality MICR solutions based
on laser technology. Our laser solutions range in print speeds from 8 to 40
pages per minute and combine laser-quality business documents with high-quality
MICR. We have a value-priced line of font and toner kits that provide a
high-quality MICR solution on a user's existing Hewlett-Packard LaserJet. Our
font and toner kits upgrade a laser printer to accommodate MICR encoding, and
store custom logos, signatures and MICR fonts on the printer.
At the mid-level, we offer a new line of basic MICR printers combining all
the features and quality of a laser printer. We install these check printing
capabilities at our manufacturing facility. These value-priced, mid-level MICR
solutions are for customers who have printing requirements that include business
documents combined with checks. These printers are also ideal for check
producers who maintain secure operating environments and do not need printer
security features.
Our most advanced MICR printers incorporate added security features such as
built-in MICR sensors, password protection, keylocks and other important
security features. This high quality line of MICR printers is ideal for
customers who require a more dedicated and fully secure check printing solution.
We also offer one high-speed MICR solution based on impact technology. Our
impact MICR printers are designed to run in tandem with large, very high speed
laser printers manufactured by IBM and Xerox.
For those customers whose software does not support MICR printing, we also
offer our own MICR software solution. This solution is currently offered as a
part of our strategic relationship with Hewlett-Packard as a PeopleSoft Alliance
Solution Center partner and enables PeopleSoft users to distribute and print
financial documents.
IMAGING SUPPLIES. Both our laser and impact printing solutions require our
ongoing imaging supplies, sales of which represent the largest portion of our
revenue. Our laser systems require toner cartridges while our impact systems
require MICR ribbons for operation. We are the only authorized MICR toner
manufacturer for Hewlett-Packard LaserJet printers and are the only authorized
MICR toner manufacturer for the IBM 3900 and InfoPrint 4000 family of high-speed
laser printers. In addition to our MICR toner and ribbons which support our
printers, we also offer other toners, ribbons and accessories for use by other
printing devices. These additional supplies include 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), standard toner (for selected
manufacturers of printers and fax machines), paper handling accessories and
check security paper.
OUTPUT DEVICE ACCESSORIES. We have recently introduced our Paper Presenter.
This unique printer accessory delivers a printed page to a convenient location
for the user. Our Paper Presenter makes it possible to use a printer safely
inside an enclosure with other computer equipment and still deliver a printed
page outside the enclosure to the waiting user. This new product is ideal for
kiosk setups,
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<PAGE>
under the counter at a hotel, or in a locked enclosure at a bank teller station.
Our Paper Presenter is compatible with both Hewlett-Packard LaserJets and our
MICR printers and is easily installed.
PRODUCTS UNDER DEVELOPMENT
Our connectivity and output enhancement products under development include:
SOFT PRINT SERVER. The soft print server is a software-only product that
incorporates the technologies of our other print servers. It is designed to
allow printer manufacturers and other OEM customers to incorporate networking
capabilities directly into the processor on their print controller. The soft
print server runs on printers with Wind River Vx Works, a commonly used embedded
real-time operating system. The soft print server reflects our emphasis on
software products, and we expect to release it during the second half of 1999.
ADVANCED INTERNET OUTPUT SOLUTIONS. Our Internet output products under
development will be designed to enable output devices, including currently
installed printers manufactured by Hewlett-Packard, IBM, Lexmark and Xerox, to
communicate over the Internet regardless of the sending device's protocol. Such
devices could potentially include printers, fax machines, scanners, copiers,
digital cameras and more. For example, a scanner that uses Hewlett-Packard's
JetSend protocol could send a document to a printer that uses another Internet
printing protocol.
E-COMMERCE CHECK PAYMENT SOLUTIONS. By combining our MICR enhanced
distributed output solutions with our Internet software, we are currently
developing technology that will offer the capability to print a MICR encoded
check remotely, including over the Internet. This check will have all of the
same attributes of a traditional check and will be presented by a merchant
through normal banking channels. We believe that this capability will offer us a
significant new growth opportunity due to the rapid rise in e-commerce and the
limited payment methods available to today's e-commerce consumer. Our integrated
solution will allow e-commerce consumers to pay for goods and services with a
check in a similar manner and with comparable speed and security as is available
for credit cards.
OTHER OUTPUT ENHANCEMENT PRODUCTS. We also have audit function, barcoding
and electronic forms enhancements in various stages of release. These
enhancements will reside on the printer DIMM (dual in-line memory module). The
DIMM is either bundled with the printer or sold separately. The audit features
will monitor any check data printed, including the account on which the check is
drawn, the amount of the check, and the check number and date. This feature
allows for easy reconciliation, specific user monitoring, check authorization,
batch run summaries and specific timeframe totals. The barcode feature will
support UPC symbol barcodes as well as newer, intelligent barcode standards.
These codes are considered "intelligent" barcodes because they are
two-dimensional, compacting many times the amount of data of more simple
barcodes in very limited space. Other output enhancement features include
electronic forms. This feature stores forms on the DIMM resident on the printer.
These stored forms decrease processing time and allow continued use of the
forms, regardless of changes in application software.
CASE STUDIES
The following case studies illustrate how two of our customers, State Farm
Insurance and Automatic Data Processing, use our products to further their
business objectives:
STATE FARM specializes in selling and servicing personal line insurance
products through nearly 16,500 agents for over 66.2 million policies in the
United States and Canada. Starting in 1993, State Farm began using our financial
document printing solutions to provide local payment capability. Our solutions
significantly enhanced customer service and cash management while maintaining
centralized financial control at State Farm's corporate headquarters. In
addition, State Farm takes our financial
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document solutions on the road during major catastrophes (tornadoes, floods,
hurricanes and other natural disasters) to quickly print out critical claims
checks to their policyholders.
AUTOMATIC DATA PROCESSING INC. (ADP) formed a strategic alliance with us in
February 1997 to offer onsite, client-based payroll check printing for their
425,000 clients worldwide. ADP is recognized as one of the largest independent
computing service organizations in the world. Two ADP software solutions work
with our financial document printing solutions: PC/PAYROLL-TM-, which supports a
"print-back" capability allowing payroll checks to be printed at the client
site, and SOFTPAY-TM-, a PC software package linked to ADP's payroll and direct
deposit services. Both ADP software programs in conjunction with our financial
document printing solutions allow ADP's clients to issue checks on site. In
addition to printing only at issuance time to better control funds, the benefits
of in-house check printing include eliminating delays and deliveries for faster
printing and distribution, and eliminating manual check writing to prevent
errors, incorrect checks and bank charges.
SALES AND MARKETING
We market products to Fortune 1000 companies through our direct sales force
of 25 persons (20 domestically and five internationally) and market products to
small and mid-size businesses primarily through our network of distributors and
value-added resellers. We market our products internationally in 55 countries,
primarily through a distributor network.
We have more than 4,300 active customers, including financial institutions,
insurance companies, payroll processing companies, corporations and government
agencies. AT&T Corporation, BankAmerica Corporation, Brother Industries, Eastman
Kodak, Farmer's Insurance Group, Ford Motor Company, IBM, Manpower, State Farm
Insurance and Wells Fargo & Company are among our customers, each of whom
purchased products during the last 12 months.
We believe that an increasing number of small and mid-size businesses will
begin to use networks and the Internet to facilitate their business needs. As a
result, we have increased the number of sales and support staff dedicated to
recruiting and training additional distributors and value-added resellers that
can help address the needs of these types of businesses.
We also intend to aggressively expand our existing OEM relationships and
seek new relationships. We intend to expand our relationships with Brother,
Hewlett-Packard, IBM and Standard Register by developing product solutions that
support their products. We believe that this strategy provides us with the
opportunity to expand our market share of products and maintain and enhance our
technological position and expertise. We currently have management resources
dedicated to recruiting and developing new OEM relationships.
We promote our products through our web sites, trade shows, advertising and
direct marketing materials as well as referrals from our strategic business
partners, including Hewlett-Packard, IBM, ADP, Standard Register and Wind River.
We offer technical support, maintenance and on-site services, portions of
which are provided by third parties. We provide technical support through an 800
line from 7:00 AM to 5:00 PM (PST) and through our web-sites. We also provide
on-site service through yearly maintenance contracts or on a time and material
basis.
In addition to our technical support, maintenance and on-site services, for
over five years, we have maintained the MICR Technology Center, a research group
dedicated to providing solutions for MICR document processing problems. Members
of the testing facility for this research group 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.
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<PAGE>
STRATEGIC RELATIONSHIPS
For over six years, we have maintained a strategic relationship with
Hewlett-Packard in which we purchase Hewlett-Packard laser printers and modify
and enhance the printers. We then repackage, relabel and sell the printers as
MICR-enabled financial document printers under the Troy name. In addition, we
are a member of Hewlett-Packard's Engineering Support Partner Group, a select
group of third party solutions partners. As a member of this group, we work with
Hewlett-Packard on architecture issues for new product development and with
Hewlett-Packard's marketing group to implement joint marketing programs. We
believe that our current relationship with Hewlett-Packard gives us a
competitive advantage in marketing our products, primarily because of their
reputation as the leading provider of laser printers throughout the world.
Under a joint marketing relationship with IBM, we sell our impact MICR
printers in conjunction with their high-speed laser printers. IBM also has an
agreement with us to purchase all of its MICR toner requirements for the IBM
3900 and InfoPrint 4000 family of high speed laser printers.
We are a Wind River, WindLink partner. Wind River is promoting our soft
print server on its web site, in its third party catalog and with a datasheet.
We have participated in the most recent Wind River international sales meeting
and will do additional joint marketing activities with Wind River over the
coming year.
Our strategic alliance with ADP was formed to offer a printer and software
solution for onsite, client-based payroll check printing to ADP's 425,000
clients worldwide. ADP is one of the largest independent computing service
organizations in the world. ADP's payroll software is fully compatible with our
MICR printers. We offer ADP-approved MICR laser printers, toll-free technical
support, accessories, imaging supplies, product warranties and maintenance
agreements.
We are an OEM supplier to Standard Register. Standard Register is a
recognized leader in delivering document management systems, products and
services to healthcare, financial and general business markets. We private label
MICR and multi-purpose printers for Standard Register to be used in conjunction
with their various document management solutions including LINKUP-TM-, a check
printing software system, and PATIENT LINKUP-TM-, a hospital admissions and
document routing system.
Our strategic alliance with Hewlett-Packard includes our appointment as a
PeopleSoft Alliance Solution Center partner. PeopleSoft's Alliance Solution
Center (ASC), located in their new Pleasanton headquarters, opened last year to
develop global, enterprise-wide software solutions and services. One of the
primary functions of the ASC is to execute joint research and development
projects between Hewlett-Packard, PeopleSoft and other strategic partners such
as Troy. Under our current agreement, we will provide MICR and multi-purpose
printers and software which will enable PeopleSoft customers to print financial
documents, barcodes, labels and standard business documents.
RESEARCH AND DEVELOPMENT
We have assembled a highly trained staff of software, electrical, mechanical
and chemical engineers. In addition, we invest significantly in highly
sophisticated research and development equipment. As of May 31, 1999, we
employed 44 persons in our research and development efforts.
Our principal research and development activities consist of:
- developing software and firmware solutions for connecting output devices
to networks and the Internet;
- developing e-commerce check payment solutions;
- developing new products that provide solutions for our strategic business
partners; and
- creating proprietary imaging supplies.
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<PAGE>
We seek customer feedback in the product design process in order to meet
changing requirements and are committed to developing functional and integrated
printing solutions in a rapid and efficient manner.
COMPETITION
The market for our products is highly competitive and subject to rapid
technological change. We currently compete principally on the basis of the
quality, flexibility, convenience and security of our printing solutions. We
believe that we compete favorably with respect to these factors as a result of:
- the breadth of our products' features;
- our knowledge, technical exposure and professionalism developed over time;
- our strategic relationships; and
- an historical commitment to quality.
Although the prices of our products are generally higher than those of our
competitors, we have been able to maintain these prices as a result of advanced
technological features (including security), higher levels of quality and
value-added services.
CONNECTIVITY SOLUTIONS. The market for our network products is highly
competitive and subject to rapid technological change. We currently compete
principally on the basis of the extensive multiprotocol capabilities,
functionality and high performance of our products. In the print server market,
Intel, Osicom/DPI, Axis Communications, Emulex and Lantronix offer competing
products that are suitable for multiprotocol enterprise network printing
applications. There are many other commodity print servers, including very
low-cost Taiwanese products, but such commodity print servers are not usually
suitable for enterprise networks due to inadequate protocol support and
features, limited customer support and low performance. Although Hewlett-Packard
makes print servers, we do not generally consider them a direct competitor. This
is because we are a Hewlett-Packard partner that provides the DEC and Banyan
VINES connectivity solutions that are not available on Hewlett-Packard products.
As a result, Hewlett-Packard often calls upon us to help them close printer
sales at customer sites that require DEC or Banyan connectivity.
To our knowledge, the only direct competitor for our new soft print server
software-only print server product is Auco, a Redwood City, California-based
software company. Other competition for soft print server are individual
protocol stacks available from a number of companies and in the public domain,
but such protocol stacks require a significant amount of additional software
development by the OEM in order to provide similar functionality to soft print
server.
Both the multi-protocol Internet document distribution market and the
e-commerce check payment market are just emerging. To our knowledge, there are
currently no direct competitors. Because of the projected growth of this market,
we will most likely experience increased competition in the future.
OUTPUT ENHANCEMENT SOLUTIONS. The primary competitors in MICR are ACOM
Computer, Inc., Delphax Systems, IBM, Lexmark International, Inc., Oce, Source
Technologies and Xerox. We also compete with companies who provide a MICR font
and toner solution without a printer. We believe that our current relationship
with Hewlett-Packard gives us a competitive advantage in the MICR printing
market primarily because of Hewlett-Packard's reputation as the leading provider
of laser printers to companies throughout the world.
IMAGING SUPPLIES. We compete in the toner and ribbon market primarily on
the basis of quality and service. Color Image is our most significant competitor
with respect to toner products. Our significant competitors with respect to
ribbons are Nu-Kote International, Commander Imaging Products Inc. and Fuji
Copian Corporation. We position ourselves with a pricing strategy that reflects
our quality, reliability, precision of formulation and available customer
support. Many small companies also offer
40
<PAGE>
remanufactured MICR cartridges that are typically lower priced but less reliable
than new MICR cartridges such as those offered by us.
We also have 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
We have certain proprietary printing system components, manufacturing
processes, information, knowledge, trademarks and tradenames. We rely on a
combination of patent, trademark, trade secret and other intellectual property
laws, nondisclosure agreements with employees and internal confidentiality
measures to protect our intellectual property rights and confidential
information. We seek patents from time to time on our products and processes.
The decision to seek additional patents is based on our 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. We also rely on know-how and continuing
technological innovations to develop and maintain our competitive position.
As of May 31, 1999, we held seven United States patents and one United
Kingdom patent. Our existing patents primarily cover components of our impact
printing systems. We have also filed applications for four additional United
States patents which are currently pending. There can be no assurance that our
issued patents will provide meaningful protection of our 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 us or that, if
asserted, that we would prevail or be able to obtain any necessary licenses.
We also rely on proprietary manufacturing processes and techniques,
materials expertise and trade secrets applicable to the manufacture of our
products. We believe that these proprietary rights may provide us with a
competitive advantage as important, if not more important, than patent
protection. We seek 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 us with adequate protection of our proprietary information
or with adequate remedies in the event of unauthorized use or disclosure. In
addition, there can be no assurance that our competitors will not independently
develop or otherwise gain access to processes, techniques or trade secrets that
are similar or superior to ours. 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
Our 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. We are also required to have permits from a number of
governmental agencies in order to conduct various aspects of our business.
Compliance with these laws and regulations is not expected to have a material
adverse effect on our capital expenditures, earnings or our competitive
position. 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 our
operations.
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<PAGE>
EMPLOYEES
As of May 31, 1999, we employed approximately 175 persons. None of our
employees are represented by a labor union or covered by a collective bargaining
agreement. We have not experienced any work stoppages and consider relations
with our employees to be good.
FACILITIES
We currently lease approximately 37,000 square feet of space for our
headquarters in Santa Ana, California. Our other facilities are located in
Irvine, California where we lease approximately 14,000 square feet used by Troy
XCD, in Coquitlam, British Columbia where we lease approximately 4,000 square
feet used by Troy Telgate and in Wheeling, West Virginia where we lease
approximately 77,000 square feet for a manufacturing facility. We consider our
present facilities to be sufficient for our current operations.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTOR, DIRECTOR NOMINEES AND OTHER KEY EMPLOYEES
The following table contains certain information about our executive
officers and directors as of May 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Patrick J. Dirk............................. 59 Chairman of the Board, sole Director, President and Chief
Executive Officer of Troy, Chairman of the Board and Chief
Executive Officer of Troy Systems International and Chairman
of the Board, Chief Executive Officer and sole director of
Troy XCD
Robert S. Messina........................... 49 Executive Vice President of Troy and President and Chief
Operating Officer of Troy Systems International
Brian P. Dirk(1)............................ 35 Vice President and Director Nominee of Troy and Vice President
International Sales of Troy Systems International
Del L. Conrad............................... 53 Chief Financial Officer, Treasurer and Secretary of Troy and
Vice President, Chief Financial Officer and Secretary of Troy
XCD
Norman B. Keider(1)(2)...................... 67 Director nominee
John B. Zaepfel(1)(3)....................... 62 Director nominee
William P. O'Reilly(1)(2)................... 53 Director nominee
Gene A. Bier(1)(3).......................... 60 Director nominee
Dr. Harold L. Clark(1)...................... 63 Director nominee
</TABLE>
- ------------------------
(1) Will become a director upon completion of this offering.
(2) Member of the Compensation Committee upon completion of this offering.
(3) Member of the Audit Committee upon completion of this offering.
EXECUTIVE OFFICERS, DIRECTOR AND DIRECTOR NOMINEES
PATRICK J. DIRK has been our Chairman of the Board, sole director, President
and Chief Executive Officer since he co-founded Troy with his wife in May 1982.
Mr. Dirk is also the founder, Chairman of the Board and Chief Executive Officer
of Troy Systems International, and is the Chairman of the Board, Chief Executive
Officer and sole director of Troy XCD. Since March 1984, Mr. Dirk has served as
a director of Eltrax Systems, Inc., a managed network services company that
provides communication products and services for enterprise wide networks. Mr.
Dirk co-founded Eltrax in March 1984 and served as its 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 manufacturer of automated
lettering machines and related products, serving most recently as President and
a director from 1980 to 1982. Mr. Dirk also serves as a member of the boards of
directors and advisory boards of several private companies, none of which
compete with Troy. Mr. Dirk devotes substantially all of his efforts to Troy and
its subsidiaries.
ROBERT S. MESSINA has been the Executive Vice President of Troy since April
1998 and the President and Chief Operating Officer of Troy Systems International
since December 1996. From December 1995 through December 1996, Mr. Messina
served as the Executive Vice President and General Manager of Troy Systems
International and from July 1994 through December 1995 he served as its 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.
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<PAGE>
BRIAN P. DIRK has been our Vice President since May 1996. He was a member of
our Board of Directors from that date until October 30, 1998. He will again
become a Director upon the completion of this offering. Mr. Dirk's primary
responsibility is Vice President of Business Development. His duties include
managing our acquisition strategies and staff. Prior to this, he served as Vice
President of International and Federal Government Sales. Since joining us in
1989, Mr. Dirk has held various training and management positions, including
Director of Business Development, International Sales Manager, Special Projects
Manager, Telesales Representative and Purchasing Agent. Mr. Dirk is the son of
Patrick J. Dirk, our Chairman of the Board and Chief Executive Officer.
DEL L. CONRAD has been our Chief Financial Officer, Treasurer and Secretary
since April 1998 and also serves as Vice President, Chief Financial Officer and
Secretary of Troy XCD. Mr. Conrad served as the Vice President of Finance and
Administration of Troy Systems International from March 1995 to April 1998. From
August 1991 to March 1995, he served as a consultant 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 this 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 accounting and 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 this 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. He currently serves 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 this offering.
Mr. O'Reilly has been the Chief Executive Officer of Eltrax Systems, Inc. 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. Mr. O'Reilly served
as Digital Signal's Chief Executive Officer from 1986 to 1989. In 1980, Mr.
O'Reilly founded Lexitel Corporation, a long distance carrier that was
subsequently acquired by ALC Communications, Inc., and served as its 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.
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<PAGE>
GENE A. BIER will become a director upon completion of this 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 Systems, Inc. and served as
its Chairman from September 1989 to March 1990. 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 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.
DR. HAROLD L. CLARK will become a director upon completion of this offering.
Since October 1998, Dr. Clark has been the Chief Executive Officer and Chairman
of Micro-Mart.com, an Internet-based computer products reseller. Prior to this
position, Dr. Clark served as XCD's Chairman from July 1995 until it became Troy
XCD in October 1998. From April 1993 to August 1995, Dr. Clark was the Chief
Executive Officer and Co-Chairman of AmeriQuest Technologies, Inc., a
distributor of computer technology solutions to value-added resellers, systems
integrators, distributors and computer dealers. Dr. Clark also acted as a
consultant to AmeriQuest from August 1995 to December 1995. From April 1993 to
December 1993, Dr. Clark was the President and Chief Executive Officer of an
AmeriQuest subsidiary, CDS Distribution, Inc. Dr. Clark was the President of
Everex Systems, Inc., a supplier of server, workstation, notebook and desktop
solutions from February 1991 to December 1992. From October 1984 to April 1990,
Dr. Clark was President and Vice Chairman of Ingram MicroD Inc., a wholesale
distributor of technology products and services, and a provider of assembly and
integration services. Dr. Clark currently serves as a director of Internet
Appliance, Inc., an Internet and intranet technology provider.
OTHER KEY EMPLOYEE
THOMAS O. TULOWITZKI has been a Senior Vice President Engineering of Troy
Systems since March 1996 and directs research and development of our output
enhancement products. From February 1991 to March 1996, Mr. Tulowitzki served as
a Manager of Sustaining Engineering for Danka Business Systems PLC, an
independent supplier of photcopiers, facsimiles and other and related automated
office equipment. From September 1989 to January 1991, he was self employed.
From August 1964 to August 1989, Mr. Tulowitzki held various technical and
management positions with Xerox.
BOARD OF DIRECTORS COMPENSATION
Our directors are elected annually and serve until the next annual meeting
of stockholders or until their successors are duly elected and qualified. We do
not currently pay fees to the members of the Board of Directors.
Effective upon completion of this 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 this 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 as to
10,000 shares 90 days after this offering and as to 5,000 shares per year over
the next four years.
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<PAGE>
COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee which will become active upon completion of this offering. The Audit
Committee provides assistance to the Board in satisfying its fiduciary
responsibilities relating to accounting, auditing, operating and reporting
practices and reviews the annual financial statements, the selection and work of
our 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 and makes
recommendations to the Board concerning executive officer and director
compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the commencement of this offering, we had no Compensation Committee
but the Board of Directors performed equivalent functions. Mr. Patrick Dirk
served as our Chairman and Chief Executive Officer and set the compensation of
the executive officers. Upon completion of this offering, Messrs. Keider and
O'Reilly will become members of the Compensation Committee. Messrs. O'Reilly and
Patrick Dirk, our Chairman of the Board, President and Chief Executive Officer,
are both members of the Board of Directors of Eltrax Systems, Inc. Mr. O'Reilly
is the Chief Executive Officer of Eltrax.
EXECUTIVE COMPENSATION
The following table provides information concerning cash and non-cash
compensation paid to or earned by our Chief Executive Officer and each of our
other executive officers whose salary and bonus exceeded $100,000 for the fiscal
year ended November 30, 1998:
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 .............................. 1998 $ 225,000 $ 68,730 $ 9,855 $ 8,511
Chairman of the Board, President and Chief
Executive Officer
Robert S. Messina ............................ 1998 160,000 90,768 5,400 9,502
Executive Vice President
Brian P. Dirk ................................ 1998 115,000 114,106 3,825 5,776
Vice President
Del L. Conrad ................................ 1998 130,000 16,250 4,050 8,715
Chief Financial Officer, Treasurer and
Secretary
</TABLE>
- ------------------------
(1) Cash bonuses earned have been included as 1998 compensation, even though
such bonuses were paid in 1999. Represents performance bonuses of $68,730,
$45,500, $50,000 and $16,250 for Messrs. Patrick Dirk, Messina, Brian Dirk
and Conrad, respectively. Also includes commissions of $45,268 and $64,106
for Messrs. Messina and Brian Dirk.
(2) Represents $5,250, $5,400, $3,825 and $4,050 for automobile usage for
Messrs. Patrick Dirk, Messina, Brian Dirk and Conrad and $4,605 for
reimbursement of social club membership fees for Mr. Patrick Dirk.
(3) Includes $5,000, $4,041, $3,058 and $3,812 for Messrs. Patrick Dirk,
Messina, Brian Dirk and Conrad, respectively, for matching contributions
under Troy's 401(k) Plan and $3,511, $5,461,
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<PAGE>
$2,718 and $4,903 as the value of insurance premiums paid by Troy on behalf
of Messrs. Patrick Dirk, Messina, Brian Dirk and Conrad, respectively, under
a medical insurance arrangement.
No stock options were granted to, and no options were exercised by, Messrs.
Patrick Dirk, Messina, Brian Dirk or Conrad during the fiscal year ended
November 30, 1998. Upon completion of this offering, Mr. Conrad will be granted
an option to purchase 35,000 shares of common stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table summarizes the value of options held by Messrs. Patrick
Dirk, Messina, Brian Dirk and Conrad at November 30, 1998. For purposes of the
table, value is based on the difference between the fair market value of the
shares of common stock as of the date of this prospectus (assuming an initial
public offering price of $8.00 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.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT FISCAL
FISCAL YEAR END YEAR END
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Patrick J. Dirk..................... -- -- -- --
Robert S. Messina................... -- 244,990 -- $ 1,859,474
Brian P. Dirk....................... -- 81,967 -- 618,851
Del. L. Conrad...................... -- -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS
On November 27, 1996, we entered into a non-competition agreement with
Robert Messina regarding his services as President and Chief Operating Officer
of Troy Systems International. Under the terms of this agreement, we granted Mr.
Messina an option to purchase 244,990 shares of common stock at an exercise
price of $0.41 per share expiring on November 25, 2006. This option becomes
fully vested on November 24, 2006. Vesting will accelerate earlier upon the sale
of more than 51% of our issued and outstanding common stock or upon completion
of this offering. Our agreement with Mr. Messina requires him to maintain the
confidentiality of our proprietary information and prohibits him from engaging
in competitive activity for a three-year period after his termination. If Mr.
Messina's service with us is terminated during fiscal 1999 or 2000 without
cause, whether actual or constructive, we must pay Mr. Messina $300,000. Such
payment is payable in 36 equal monthly installments.
We generally enter into confidentiality and non-disclosure agreements with
our technical personnel. Pursuant to the terms of these agreements, employees
agree to confidentiality restrictions and to assign to us any reports,
blueprints, data, writings and technical information prepared by them during
their employment that relate to our business.
STOCK OPTION AND INCENTIVE PLANS
Our 1998 Stock Incentive Plan was adopted by the Board of Directors and
approved by the stockholders in April 1998. A total of 1,200,000 shares of
common stock have been authorized for issuance under the 1998 Plan, plus any
shares that are not issued under our 1996 Stock Option Plan. As of the date of
this prospectus, 37,341 shares remained available for issuance under our 1996
Plan, making such shares available under our 1998 Plan.
The 1998 Plan provides for the grant to eligible recipients of:
- options to purchase common stock that qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code;
- non-qualified options to purchase common stock that do not qualify as
incentive options;
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<PAGE>
- restricted stock awards, which are subject to certain forfeiture and
transferability restrictions that lapse after specified employment
periods;
- performance units, entitling the recipient to receive a payment from us,
in the form of shares of common stock, cash or a combination of both, upon
the achievement of established performance or other goals;
- awards of shares of common stock in the form of stock bonuses; and
- stock appreciation rights, entitling the recipient to receive a payment,
in the form of shares of common stock or cash, 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.
Under the 1998 Plan options may be granted at an exercise price that is not
less than 100% of the fair market value on the date of grant for incentive
options, and 85% of the fair market value on the date of grant for non-qualified
options.
In the event a "change in control" of Troy occurs, then, unless otherwise
approved by the Compensation Committee of our Board of Directors:
- all outstanding options and stock appreciation rights held at least three
months will become immediately exercisable in full and will remain
exercisable for the remainder of their terms, regardless of whether the
participant remains in the employ or service of the Company or any
subsidiary;
- all outstanding restricted stock awards will become immediately fully
vested; and
- all outstanding performance units and stock bonuses will vest and/or
continue to vest in the manner determined by the Compensation Committee
and reflected in the award agreement.
In addition, the Compensation 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 Troy will be deemed
to have occurred, among other things, upon:
- the sale or other disposition of substantially all of our assets;
- the approval by our stockholders of a plan or proposal for the liquidation
or dissolution of Troy;
- a merger or consolidation to which we are a party if our stockholders
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
"continuity directors," which are the directors as of the effective date
of the 1998 Plan or any persons who subsequently become directors and
whose election or nomination was approved by a majority vote of the
continuity 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 continuity directors;
- 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 our outstanding securities, unless the transaction was
approved in advance by the continuity directors, or (B) 50% or more of the
combined voting power of our outstanding securities, regardless of any
approval by the continuity directors; or
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<PAGE>
- the continuity directors cease for any reason to constitute at least a
majority of the Board.
Under the terms of the 1998 Plan, certain transfers among the members of
Patrick J. Dirk's family or family trusts will not, in themselves, be considered
to constitute a change in control for the purposes of the plan.
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, 1999, we 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 this offering, we intend to grant options to
purchase an aggregate of 755,000 shares of common stock to certain executive
officers, key employees and directors. Such options will have an exercise price
equal to the price per share to the public in this offering.
CERTAIN TRANSACTIONS
Prior to April 1998, Troy and Troy Systems were 100% beneficially owned by
Patrick J. and Mary J. Dirk as trustees under The Dirk Family Trust UTD March 6,
1990, 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. For
convenience, we refer to each of these individuals and trusts collectively as
the Dirk stockholders. Effective May 31, 1998, the Dirk stockholders contributed
the stock of Troy Systems beneficially owned by them to Troy in exchange for an
aggregate of 1,124,772 shares of our common stock. The percentage ownership of
the Dirk stockholders in Troy did not change as a result of the contribution of
their Troy Systems stock.
In November 1993, we borrowed, pursuant to a non-negotiable promissory note,
an aggregate of approximately $1.6 million from Patrick J. Dirk and Mary J.
Dirk, as trustees of the Dirk Family Trust. The proceeds of this note were used
for working capital purposes. This note bore interest at a rate of 7.0% per
annum. We made payments to the Dirk Family Trust for the years ended November
30, 1996, 1997 and 1998 in the amounts of $163,000, $349,000 and $375,000,
respectively. During 1998, this note was paid off.
We lease a total of 77,000 square feet at our West Virginia facility from
Dirk Investments, Inc. 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 us for the years ended November 30, 1996, 1997 and 1998 were
approximately $158,000, $168,000 and $250,000 respectively. In 1993, Dirk
Investments secured loans to acquire and improve the West Virginia facility. One
loan, which had an original principal balance of $800,000, 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 rate published in 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. Troy
Systems and Patrick and Mary Dirk guaranteed repayment of $500,000 of the
amounts outstanding under the first of these loans. In June 1998, Troy Systems
was released from this guarantee.
We paid pro rata distributions to the Dirk stockholders. In fiscal years
ended November 30, 1996, 1997 and 1998, these distributions totalled $118,000,
$2.6 million and $3.6 million, respectively.
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<PAGE>
We and the Dirk stockholders are parties to a Tax Agreement Relating to S
Corportion Distributions regarding our respective income tax liabilities. We
have agreed to indemnify the Dirk stockholders for any adjustments causing an
increase in their federal and state income tax liability, including interest and
penalties, related to tax years prior to October 30, 1998. Subject to certain
limitations, this agreement also provides that the Dirk stockholders will
reimburse us for any amounts refunded to them as a result of the loss of the S
corporation status of Troy or Troy Systems. Any payment made by us to the Dirk
stockholders pursuant to this agreement may be considered by the Internal
Revenue Service or state taxing authorities to be nondeductible by Troy or Troy
Systems for income tax purposes.
All future transactions, including any loans from us to our officers,
directors, principal shareholders or affiliates, will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock (a) by each stockholder who is known by us to own beneficially
more than 5% of the outstanding common stock; (b) by each director and director
nominee; (c) by each executive officer named in the Summary Compensation Table
under the heading "Executive Compensation" beginning on page 46; and (d) by all
our directors and executive officers as a group, both before and after the
offering.
For the purpose of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding "Before Offering" includes: (a)
7,730,130 shares of common stock outstanding as of May 31, 1999; and (b) 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. The number of shares of common stock outstanding after this offering
includes an additional 2,500,000 shares offered hereby. Except as otherwise
indicated below, 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OWNERSHIP
BENEFICIALLY ----------------------------------
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
Patrick J. Dirk................................................ 5,692,857 73.6% 55.6%
Mary J. Dirk................................................... 5,692,857 73.6 55.6
Brian P. Dirk.................................................. 503,752 6.4 4.9
Suzanne M. Anderson............................................ 421,786 5.5 4.1
Kristine L. Gigerich........................................... 421,786 5.5 4.1
Lorrie A. Brown................................................ 421,786 5.5 4.1
Robert S. Messina.............................................. 244,990 3.1 2.3
Del L. Conrad.................................................. -- -- --
Norman B. Keider............................................... -- -- --
John B. Zaepfel................................................ -- -- --
William P. O'Reilly............................................ -- -- --
Gene A. Bier................................................... -- -- --
Dr. Harold L. Clark............................................ -- -- --
All directors and executive officers as a group (4 persons).... 6,441,599 80.0 61.0
</TABLE>
The shares beneficially owned by Patrick J. and Mary J. Dirk include
5,692,857 shares that they hold as trustees under The Dirk Family Trust UTD
March 6, 1990 and exclude 120,000 shares of common stock held by the trustee of
The Dirk 1997 Education Trust, 187,143 shares of common stock held by the
trustees of the Dirk 1998 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 currently
exercisable options held by Brian P. Dirk.
Brian P. Dirk's beneficial ownership includes 81,967 shares issuable under
currently exercisable options and 46,785 shares of common stock that Mr. Brian
Dirk holds as a trustee under the Alaska Trust.
The shares beneficially owned by each of Ms. Anderson, Ms. Gigerich and Ms.
Brown include 46,786 shares of common stock that each holds as a trustee under
the Alaska Trust.
Mr. Messina's beneficial ownership consists entirely of shares issuable
under currently exercisable options.
The amount beneficially owned by all current directors and executive
officers as a group includes an aggregate of 326,957 shares issuable under
currently exercisable options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of consists of 50,000,000 shares of
common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock
that are undesignated as to series. The following description of our capital
stock does not purport to be complete and is qualified by reference to our
Certificate of Incorporation and applicable law.
COMMON STOCK
As of May 31, 1999, there were 7,730,130 shares of common stock issued and
outstanding, held of record by 16 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 legally available funds. Upon our liquidation,
dissolution or winding up, 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, subject to the prior rights of any holders
of preferred stock then outstanding. In addition, in the event that we do not
complete a public offering by May 1, 2000, the former shareholders of Troy
Telgate could require us to repurchase the 58,700 shares of common stock that we
issued in that transaction at a price of $10.00 per share. This option will no
longer be exercisable after this offering is completed. Except for this option,
the holders of common stock have no other preemptive, subscription, redemption,
sinking fund or conversion rights. All outstanding shares of common stock are
fully paid and nonassessable. The shares of common stock to be issued upon
completion of this offering will also 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 Troy without further action by the
stockholders. We have no present plans to issue any shares of preferred stock.
OPTIONS
As of May 31, 1999, we 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
24, 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 our corporate structure. Upon
consummation of this offering, we intend to grant options to purchase an
aggregate of 755,000 shares of common stock to certain officers, directors and
employees. Such options will have an exercise price equal to the initial public
offering price.
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<PAGE>
WARRANTS
Under a consulting agreement between Troy and Broadland Capital Partners, we
issued Broadland a warrant, effective as of October 1, 1997 and as amended
through June 8, 1999, to purchase up to 250,000 shares of common stock. The
warrant was issued to Broadland for:
- assisting us in focusing our business plan and strategy in preparation for
a public offering;
- identifying and analyzing comparable companies;
- identifying and conducting due diligence on potential investment bankers;
- assisting us in evaluating and negotiating with potential underwriters;
- assisting us in the public offering process, including participating in
drafting sessions, collecting information and preparing road show
strategies and materials;
- assisting us in preparing to become a public company, including advising
us regarding investment community expectations and introducing us to
potential market makers and research analysts;
- assisting us in identifying and negotiating with potential acquisition
candidates; and
- providing such other services in connection with this offering as may be
requested from time to time.
As amended, the warrant will vest as to 50,000 shares upon completion of
this offering and as to the remaining shares upon certain acquisitions. The
warrants will expire five years after they vest. The 50,000 shares that vest
upon completion of this offering will be issuable at an exercise price equal to
the offering price. The remaining 200,000 shares will be issuable at an exercise
price of $3.50 per share. This warrant vested as to 50,000 shares upon
completion of the acquisition of Troy XCD in October 1998 and an additional
50,000 shares upon completion of our acquisition of Troy Telgate in May 1999.
In connection with legal services provided to us, we issued a warrant in May
1998 to an individual to purchase up to 50,000 shares of common stock at an
exercise price of $3.50 per share. This warrant was amended and vested in June
1999 and expires five years from the date of vesting. The warrant was issued to
the individual for:
- assisting in drafting our offering and other legal documents in connection
with our initial public offering;
- assisting the Chief Executive Officer in the completion of the
underwriters' due diligence investigation;
- providing necessary legal opinions required by an underwriting agreement;
and
- providing such other services in connection with this offering as
requested by the Chief Executive Officer from time to time.
In October 1998, we issued warrants to purchase 50,000 shares of common
stock to a consultant in connection with the acquisiton of Troy XCD. These
warrants have an exercise price of $7.00 per share.
REGISTRATION RIGHTS
Under the terms of our outstanding warrants, each warrant holder or their
transferee are entitled to have the shares of common stock issued upon exercise
registered under the Securities Act if registration is required by any
governmental authority under any federal or state law in connection with their
issuance.
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<PAGE>
In connection with our acquisition of Troy XCD, we also granted registration
rights to the former XCD shareholders covering the 171,430 shares of our common
stock that they received in the transaction. Upon a majority demand of these
holders at any time after October 30, 1999, these registration rights require us
to register these shares of common stock under the Securities Act. If demand
registration does not occur for any reason, the holders are entitled to include
their shares in any registration statement that we file (other than those filed
with respect to acquisitions or employee benefit plans). We have no obligation
to register any of the shares issued in the Troy XCD acquisition if the holder
would have substantially the same opportunity to sell the shares under Rule 144
under the Securities Act or any other exemption from registration.
ANTI-TAKEOVER PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
We are 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.
Our 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
Troy. The foregoing provisions of our 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 Troy.
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
Our Certificate of Incorporation limits our directors' liability to the
fullest extent permitted under the Delaware General Corporation Law.
Specifically, our directors are not liable to us or our stockholders for
monetary damages for any breach of fiduciary duty by such a director, except for
liability for:
- any breach of the director's duty of loyalty to us or our stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- corporate distributions, including dividends, stock distributions and
redemptions, which are in contravention of restrictions in Delaware law,
our Certificate of Incorporation or Bylaws, or any agreement to which we
are a party, and
- any transaction from which a director derives an improper personal
benefit.
This provision will generally not limit liability under state or federal
securities laws.
Delaware law and our Certificate of Incorporation provide that we shall,
under certain circumstances and subject to certain limitations, indemnify any
person made or threatened to be made a party
54
<PAGE>
to a proceeding by reason of that person's former or present official capacity
with Troy 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.
We have also entered into indemnification agreements with all of our
directors and executive officers. Under these agreements we have agreed to
indemnify and hold each harmless 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 Troy to the maximum extent permitted by Delaware law.
We believe that these agreements are necessary to attract and retain qualified
persons as directors and executive officers.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation is our transfer agent and registrar.
SHARES ELIGIBLE FOR FUTURE SALE
Following this offering, we will have 10,230,130 shares of common stock
outstanding, assuming no options or warrants are exercised after May 31, 1999.
All the shares we sell in this offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares held by our affiliates, as that term is defined in Rule 144 under the
Securities Act may generally only be sold in compliance with the limitations of
Rule 144 described below.
The remaining 7,730,130 shares of common stock held by existing stockholders
are considered restricted under Rule 144. Generally, restricted securities that
have been owned for a period of at least two years may be sold immediately after
the completion of this offering and restricted securities that have been owned
for at least one year may be sold 90 days after the completion of this offering.
Holders of all of the restricted securities have entered into lock-up agreements
under which they have agreed not to sell any common stock for a period of 180
days after the date of this prospectus without the prior written consent of the
underwriters' 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 this period. Following expiration of the 180-day
period, 1,265,358 of the restricted securities will be eligible for sale in the
public market without restriction. Volume limitations and other conditions of
Rule 144 will apply to public sale of the balance of the restricted shares
although certain holders have been granted registration rights which, if
exercised, would cause their shares to be registered and eligible for immediate
sale. Following this offering, we also intend to file one or more Registration
Statements on Form S-8 covering shares issuable under our 1998 Plan, 1996 Plan
and 1998 Employee Stock Purchase Plan, thus permitting the resale of such shares
by non-affiliates in the public market without restriction under the Securities
Act.
Because there has been no public market for shares of our common stock, we
are 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.
55
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
Cruttenden Roth Incorporated, Pennsylvania Merchant Group and H.C. Wainwright &
Co., Inc., have severally agreed with us, subject to the terms and conditions of
the underwriting agreement, to purchase the number of shares of common stock
opposite their names below. The underwriters are obligated to purchase and pay
for all such shares, subject to certain legal matters and various other
conditions.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Cruttenden Roth Incorporated...............................................
Pennsylvania Merchant Group................................................
H.C. Wainwright & Co., Inc.................................................
-----------------
Total...................................................................... 2,500,000
-----------------
-----------------
</TABLE>
The representatives have advised us that they propose to offer the shares of
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 completion of the offering, the public offering
price, 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.
In addition to their discounts and commissions, we have agreed to pay the
underwriters a non-accountable expense allowance of 1- 1/2% of the gross
proceeds of this offering.
We have granted the underwriters an option to purchase up to 375,000
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.
We have agreed to sell to the representatives, for nominal consideration, a
warrant representing the right to purchase 250,000 shares of common stock at an
exercise price per share equal to 120% of the price per share to the public. The
warrant is exercisable during the period beginning one year after the date of
this prospectus and ending on the fifth anniversary of the date of this
prospectus. The warrant includes a net exercise provision under which the holder
may exercise the warrant by 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 one year from the date of this prospectus, the
warrant is not transferable, except to officers and stockholders of the
representatives. The holders of the warrant have certain limited rights or
registration of the common stock issuable upon exercise of the warrant. Any
profits realized by the representatives upon the sale of the warrant or the
securities issuable upon its exercise may be deemed additional underwriting
compensation.
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<PAGE>
The underwriting agreement provides that we will indemnify the underwriters
and their controlling persons against certain liabilities under the Securities
Act or will contribute to payments the underwriters and their controlling
persons may be required to make in respect thereof. We are generally obligated
to indemnify the underwriters and their respective controlling persons in
connection with losses or claims arising out of any untrue statement of a
material fact contained in this prospectus or in related documents filed with
the Securities and Exchange Commission or with any state securities
administrator or arising out of any omission to state in any of such documents
any material fact required to be stated in such documents or necessary to make
the statements made in such documents, in light of the circumstances under which
they were made, not misleading. In addition, we are generally obligated to
indemnify the underwriters and their respective controlling persons in
connection with losses or claims arising out of any breach of any of our
representations, warranties, agreements or covenants contained in the
underwriting agreement.
The foregoing is a summary of the principal terms of the underwriting
agreement; it does not purport to be complete and is qualified in its entirety
by reference to the form of underwriting agreement that has been filed as an
exhibit to our Registration Statement of which this prospectus is a part.
We and each of our existing stockholders have agreed not to, 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, 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 owned or
later acquired either of record or beneficially (as defined in Rule 13d-3 under
the Exchange Act) by us, or publicly announce our intention to do any of the
foregoing, for a period of 180 days after the date of this prospectus.
The representatives have advised us 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 by this prospectus.
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 this 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 this 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.
Before this offering, no public market for our securities has existed. The
initial public offering price for the common stock will be determined by
negotiations among us and the representatives. The factors to be considered in
determining the initial public offering price will include our history and the
prospects for our business and the industry in which we operate, our past and
present operating results and the trends of such results, our future prospects,
an assessment of management, the general condition of the securities markets at
the time of the offering and the prices for similar securities of comparable
companies.
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<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
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.
EXPERTS
Our financial statements as of November 30, 1997 and 1998, and for each of
the three years in the period ended November 30, 1998 and the financial
statements of XCD Incorporated as of September 30, 1998 and for the nine months
then ended included in this prospectus and Registration Statement have been
audited by McGladrey & Pullen, LLP, independent auditors, as set forth in their
reports appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given on the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a Registration
Statement under the Securities Act with respect to the shares of common stock
that we are offering. This prospectus does not contain all the information that
is set forth in the Registration Statement and the related exhibits and
schedules. For further information regarding Troy and our common stock,
reference is made to the Registration Statement and to its exhibits and
schedules. 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 SEC's offices at 450 Fifth Street, N.W., Washington D.C. 20549,
and at the SEC'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 SEC's Public Reference Section in Washington D.C., upon the
payment of prescribed fees. The SEC maintains a Web site (http:// www.sec.gov)
that contains reports, proxy statements and other information that has been or
will be filed by us.
We intend to furnish holders of the common stock with future annual reports
containing audited financial statements certified by independent auditors, and
future quarterly reports for each of the first three quarters of each year
containing unaudited financial information.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TROY GROUP, INC.
- -----------------------------------------------------------------------------------------------------------
Independent auditor's report............................................................................. F-2
Consolidated balance sheets.............................................................................. F-3
Consolidated statements of operations.................................................................... F-4
Consolidated statements of stockholders' equity.......................................................... F-5
Consolidated statements of cash flows.................................................................... F-6
Notes to consolidated financial statements............................................................... F-7
Independent auditor's report on the schedule............................................................. F-21
Schedule II--valuation and qualifying account............................................................ F-22
XCD INCORPORATED
- -----------------------------------------------------------------------------------------------------------
Independent auditor's report............................................................................. F-23
Consolidated balance sheet............................................................................... F-24
Consolidated statement of income......................................................................... F-25
Consolidated statement of stockholders' equity........................................................... F-26
Consolidated statement of cash flows..................................................................... F-27
Notes to consolidated financial statements............................................................... F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors
Troy Group, Inc.
Santa Ana, California
We have audited the accompanying consolidated balance sheets of Troy Group,
Inc. and subsidiaries as of November 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended November 30, 1998. These financial
statements are the responsibility of the Company's 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Troy Group,
Inc. and subsidiaries as of November 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1998, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Anaheim, California
January 6, 1999
F-2
<PAGE>
TROY GROUP, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------- MAY 31,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash.............................................................. $ 100,000 $ 308,000 $ 42,000
Accounts receivable, less allowance for doubtful accounts 1997
$164,000; 1998 140,000; 1999 $153,000........................... 5,509,000 6,379,000 7,842,000
Income tax refund receivable...................................... -- 319,000 --
Inventories....................................................... 3,831,000 5,783,000 7,012,000
Prepaid expenses and other........................................ 254,000 50,000 134,000
Deferred tax assets............................................... -- 766,000 766,000
------------- ------------- -------------
Total current assets.......................................... 9,694,000 13,605,000 15,796,000
Equipment and leasehold improvements, net........................... 1,500,000 1,905,000 1,974,000
Other assets........................................................ 555,000 3,408,000 4,650,000
------------- ------------- -------------
Total assets.................................................. $ 11,749,000 $ 18,918,000 $ 22,420,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued not yet presented for payment....................... $ 173,000 $ 42,000 $ 675,000
Note payable...................................................... -- 1,190,000 1,247,000
Current portion of long-term debt................................. 754,000 959,000 959,000
Accounts payable.................................................. 1,670,000 2,868,000 2,777,000
Accrued expenses.................................................. 1,724,000 2,544,000 1,683,000
Income taxes payable.............................................. -- -- 655,000
Deferred service revenue.......................................... 200,000 196,000 205,000
------------- ------------- -------------
Total current liabilities..................................... 4,521,000 7,799,000 8,201,000
------------- ------------- -------------
Long-term debt, net of current portion (including $375,000 in 1997
payable to the majority stockholder).............................. 1,280,000 2,374,000 2,564,000
------------- ------------- -------------
Deferred tax liabilities............................................ -- 480,000 740,000
------------- ------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000
shares, issued 1997 7,500,000 shares; 1998 7,671,430 shares; and
1999 7,730,130 shares........................................... 75,000 77,000 77,000
Preferred stock, no par value, authorized 5,000,000 shares, issued
none............................................................ -- -- --
Additional paid-in capital........................................ 247,000 1,724,000 2,349,000
Retained earnings................................................. 5,626,000 6,464,000 8,489,000
------------- ------------- -------------
Total stockholders' equity.................................... 5,948,000 8,265,000 10,915,000
------------- ------------- -------------
Total liabilities and stockholders' equity.................... $ 11,749,000 $ 18,918,000 $ 22,420,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TROY GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Net sales............................... $ 28,161,000 $ 33,434,000 $ 35,758,000 $ 18,322,000 $ 23,466,000
Cost of goods sold, (including:
$158,000; $168,000; $250,000 $127,000;
and $134,000 in rent paid to majority
stockholders)......................... 17,408,000 19,597,000 21,496,000 10,756,000 14,167,000
------------ ------------ ------------ ------------ ------------
Gross profit...................... 10,753,000 13,837,000 14,262,000 7,566,000 9,299,000
------------ ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative... 5,234,000 6,622,000 6,394,000 3,424,000 4,036,000
Research and development.............. 2,041,000 2,521,000 2,546,000 1,228,000 1,742,000
Purchased in process research and
development......................... -- -- 857,000 -- --
------------ ------------ ------------ ------------ ------------
7,275,000 9,143,000 9,797,000 4,652,000 5,778,000
------------ ------------ ------------ ------------ ------------
Operating income.................. 3,478,000 4,694,000 4,465,000 2,914,000 3,521,000
Interest expense, (including $61,000;
$33,000; $11,000; $11,000; and none
paid to majority stockholders) 361,000 262,000 101,000 69,000 162,000
------------ ------------ ------------ ------------ ------------
Income before income taxes
(credit)........................ 3,117,000 4,432,000 4,364,000 2,845,000 3,359,000
Provision for income taxes (credit)..... 50,000 35,000 (70,000) 43,000 1,334,000
------------ ------------ ------------ ------------ ------------
Net income........................ $ 3,067,000 $ 4,397,000 $ 4,434,000 $ 2,802,000 $ 2,025,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma net income (unaudited):
Historical income before income
taxes............................... $ 3,117,000 $ 4,432,000 $ 4,364,000 $ 2,845,000
Pro forma provision for income
taxes............................... 1,247,000 1,773,000 1,993,000 1,138,000
------------ ------------ ------------ ------------
Pro forma net income.............. $ 1,870,000 $ 2,659,000 $ 2,371,000 $ 1,707,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per share:
Basic (1996, 1997 and 1998 pro
forma).............................. $ 0.25 $ 0.35 $ 0.32 $ 0.23 $ 0.26
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted (1996, 1997 and 1998 pro
forma).............................. $ 0.25 $ 0.34 $ 0.31 $ 0.22 $ 0.25
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted-average shares outstanding:
Basic................................. 7,500,000 7,500,000 7,514,000 7,500,000 7,679,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted............................... 7,500,000 7,759,000 7,745,000 7,807,000 8,020,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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
Issuance of common stock.............. 171,430 2,000 1,198,000 -- 1,200,000
Issuance of common stock warrants..... -- -- 279,000 -- 279,000
Dividends............................. -- -- -- (3,596,000) (3,596,000)
Net income............................ -- -- -- 4,434,000 4,434,000
----------- ------------- ------------- ------------- -------------
Balance, November 30, 1998.............. 7,671,430 77,000 1,724,000 6,464,000 8,265,000
Issuance of common stock (unaudited).... 58,700 -- 411,000 -- 411,000
Issuance of common stock warrants
(unaudited)........................... -- -- 214,000 -- 214,000
Net income (unaudited)................ -- -- -- 2,025,000 2,025,000
----------- ------------- ------------- ------------- -------------
Balance, May 31, 1999 (unaudited)....... 7,730,130 $ 77,000 $ 2,349,000 $ 8,489,000 $ 10,915,000
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED
---------------------------------------- MAY 31,
1996 1997 1998 --------------------------
------------ ------------ ------------ 1998 1999
------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 3,067,000 $ 4,397,000 $ 4,434,000 $ 2,802,000 $ 2,025,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 680,000 617,000 682,000 262,000 467,000
Purchased in process research and
development.......................... -- -- 857,000 -- --
Provision for doubtful accounts........ 209,000 65,000 134,000 151,000 29,000
Deferred taxes......................... -- -- (77,000) -- --
Changes in working capital components,
net of effects from acquisition of
companies.
(Increase) decrease in:
Accounts receivable................ (1,738,000) (369,000) (16,000) (1,131,000) (1,297,000)
Income tax refund receivable....... -- -- (211,000) -- 319,000
Inventories........................ (517,000) 404,000 (1,209,000) (794,000) (1,194,000)
Prepaid expenses and other......... (17,000) (125,000) 244,000 -- (81,000)
Increase (decrease) in:
Accounts payable................... 616,000 227,000 894,000 902,000 (91,000)
Accrued expenses................... (142,000) 346,000 (1,125,000) (477,000) (879,000)
Income taxes payable............... -- -- -- -- 655,000
Deferred service revenue........... (104,000) 10,000 (4,000) (7,000) 9,000
------------ ------------ ------------ ------------- -----------
Net cash provided by (used in)
operating activities............... 2,054,000 5,572,000 4,603,000 1,708,000 (38,000)
------------ ------------ ------------ ------------- -----------
Cash flows from investing activities:
Acquisition of companies................. -- -- (1,638,000) -- (299,000)
Purchase of equipment and leasehold
improvements........................... (301,000) (197,000) (917,000) (19,000) (338,000)
Increase in other assets................. (1,000) (561,000) (802,000) (260,000) (271,000)
------------ ------------ ------------ ------------- -----------
Net cash (used in) investing
activities......................... (302,000) (758,000) (3,357,000) (279,000) (908,000)
------------ ------------ ------------ ------------- -----------
Cash flows from financing activities:
Borrowings on notes payable.............. 12,875,000 17,498,000 10,291,000 4,691,000 12,097,000
Payments on notes payable................ (13,143,000) (19,110,000) (9,101,000) (4,076,000) (12,040,000)
Proceeds from issuance of debt........... -- 1,000,000 2,876,000 -- 670,000
Principal payments on debt............... (848,000) (1,175,000) (1,577,000) (861,000) (480,000)
Payments on life insurance loans......... -- (201,000) -- -- --
Increase (decrease) in checks issued not
presented for payment.................. (476,000) (217,000) (131,000) 255,000 633,000
Dividends paid........................... (118,000) (2,551,000) (3,396,000) (1,498,000) (200,000)
------------ ------------ ------------ ------------- -----------
Net cash provided by (used in)
financing activities............... (1,710,000) (4,756,000) (1,038,000) (1,489,000) 680,000
------------ ------------ ------------ ------------- -----------
Net increase (decrease) in cash...... 42,000 58,000 208,000 (60,000) (266,000)
Cash, beginning of period.................. -- $ 42,000 100,000 100,000 308,000
------------ ------------ ------------ ------------- -----------
Cash, end of period........................ $ 42,000 $ 100,000 $ 308,000 $ 40,000 $ 42,000
------------ ------------ ------------ ------------- -----------
------------ ------------ ------------ ------------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is a leading worldwide provider of enterprise output solutions
that enable organizations to electronically transmit and output information
across distributed computing environments. The Company provides connectivity and
output enhancement solutions to over 9,000 customers, including many of the
Fortune 1,000 Companies. The Company's connectivity products include software,
firmware and hardware that enable output devices such as printers and fax
machines to better communicate over networks and the Internet. The Company's
output enhancement products include software, firmware, hardware and imaging
supplies that enhance the functionality of these output devices.
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 consolidated financial statements. The
reporting entity includes the consolidated 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
consolidated 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. In addition, the reporting
entity includes the results of Troy XCD, Inc. and Telgate Equipment Corporation
since the date of their acquisitions (see Note 2).
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 CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries. All material intercompany balances
and transactions are eliminated in 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 6). Under this program, idle funds are
F-7
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) 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.
INTANGIBLE ASSETS
Intangible assets consists of customer lists, core technology, assembled
workforce and goodwill which are being amortized on a straight line basis over 5
to 7 years.
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 $164,000, $94,000
and $84,000 in fiscal years 1996, 1997 and 1998, respectively, net of marketing
development funds received from a supplier of $30,000 in fiscal year 1996. There
were no marketing development funds received in fiscal years 1997 and 1998.
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
For the eleven months ended October 31, 1998 and for the years ended
November 30, 1997 and 1996, and prior years, the Company, with the consent of
its stockholders, elected to be taxed under sections of federal and state income
tax law, which provide that, in lieu of corporation income taxes, the
stockholders separately account for their pro rata shares of the Company's
income, deductions,
F-8
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
losses and credits. The Company's stockholders terminated this election
effective as of October 30, 1998.
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
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.
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.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The Company terminated the S corporation election for itself and its
subsidiary effective as of October 30, 1998. The pro forma statement of
operations information prior to October 30, 1998 included in these financial
statements is to show what the significant effects might have been on the
historical statements of operations had the Company and its subsidiary not been
treated as S corporations for income tax purposes. The pro forma information
reflects a provision for income taxes at an effective rate of 40% in the fiscal
years ended November 30, 1996, 1997 and 1998, after giving effect in 1998 to the
nondeductibility of purchased in process research and development and the
nontaxability of the increase in the cash surrender value of officer life
insurance. The pro forma net income per share is based on the weighted average
number of shares of common stock outstanding during the period.
EARNINGS PER SHARE
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, 259,000 and 231,000 shares in the fiscal year ended November 30, 1996,
1997 and 1998, respectively; and 307,000 shares and 341,000 shares in the six
months ended May 31, 1998 and 1999, respectively). Diluted EPS does not include
contingently issuable
F-9
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
options because the conditions for issuance have not been met. The dilutive
effect of options which were not included in the total of diluted shares for
1998 because the effect was antidilutive was 63,000 shares.
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.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The SOP is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Management of the Company does not believe the adoption of SOP 97-2 will have a
material effect on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
new standard is effective for fiscal years starting after June 30, 1999 and is
not expected to have a material impact on the Company's consolidated financial
statements.
RECLASSIFICATION
Certain reclassifications have been made to the 1997 consolidated balance
sheet to conform to the 1998 presentation with no effect on stockholder's equity
or net income.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information presented herein as of and for the six
months ended May 31, 1998 and 1999 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. The May 31, 1999
interim financial statements are not necessarily indicative of the results in
the entire fiscal year ending November 30, 1999, or any subsequent period.
F-10
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 2. BUSINESS COMBINATIONS
TROY XCD, INC.
On October 30, 1998, the Company acquired all of the outstanding shares of
Troy XCD, Inc. (formerly XCD Incorporated), a manufacturer of print server
hardware and firmware in exchange for 171,430 shares of $.01 par value common
stock and $1,550,000 in cash. The total acquisition cost was $3,117,000 and was
allocated as follows:
<TABLE>
<S> <C>
Current assets, including $663,000 of deferred tax assets....... $2,568,000
Equipment and leasehold improvements............................ 155,000
Customer list................................................... 100,000
Core technology................................................. 953,000
Assembled workforce............................................. 150,000
Purchased in process research and development................... 857,000
Current liabilities assumed..................................... (2,049,000)
Long-term deferred tax liability................................ (480,000)
Goodwill........................................................ 863,000
----------
$3,117,000
----------
----------
</TABLE>
The acquisition has been accounted for as a purchase and results of
operations of Troy XCD, Inc. since the date of acquisition are included in the
consolidated financial statements.
Unaudited pro forma consolidated results of operations for the years ended
November 30, 1997 and 1998 as though Troy XCD, Inc. had been acquired as of
December 1, 1996 after giving effect of the termination of the Company's
subchapter S election are as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Sales.......................................................... $ 39,159,000 $ 40,828,000
Pro forma net income........................................... 2,526,000 1,945,000
Pro forma net income per share:
Basic........................................................ 0.33 0.25
Diluted...................................................... 0.32 0.25
</TABLE>
The above amounts reflect pro forma adjustments for amortization of
intangibles, the elimination of the charge for purchased in process research and
development, interest expense and number of shares outstanding. This pro forma
financial information does not purport to be indicative of the results of
operations had the Troy XCD, Inc. acquisition actually taken place at the
earlier date.
On October 30, 1998, Troy XCD, Inc. had 16 research and development projects
in process. These projects included the development of hardware, software and
firmware for interface cards, print servers and printing over the internet to
remote locations. Troy assigned value to each of these projects using an income
approach methodology. A number of factors were used to determine value including
the assignment of probability to the projected product revenue streams,
estimated gross margin contributions, and estimated stage of completion. Of
these 16 projects, four accounted for over ninety-five
F-11
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 2. BUSINESS COMBINATIONS (CONTINUED)
percent of the value assigned to the in process research and development. A
summary of these projects is as follows:
<TABLE>
<CAPTION>
IN-PROCESS
ESTIMATED ANTICIPATED RESEARCH AND
NO. COSTS COST TO COMPLETION DEVELOPMENT
-- NATURE INCURRED COMPLETE DATE VALUE
------------------------------------------------------ ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 Ethernet interface card............................... $ 143,000 $ 13,000 Dec. 1998 $ 453,000
2 Print server hardware and firmware.................... 26,000 9,000 March 1999 254,000
3 Data Products firmware................................ 53,000 31,000 Sept. 1999 63,000
4 Internet firmware and software........................ 90,000 130,000 Dec. 1999 66,000
5 Others, twelve projects............................... Various Various Various 21,000
------------
$ 857,000
------------
------------
</TABLE>
PROJECT NUMBER 1--XCD was in the process of developing an ethernet interface
card with features that include a graphical interface, custom e-mail filter for
internet printing, and multilanguage support for management utilities. XCD was
completing the graphical interface and debugging the ethernet interface card.
Once completed, various regulatory approvals will be required.
PROJECT NUMBER 2--XCD was in the process of developing print server hardware
and firmware for a Hewlett-Packard family of EIO printers which will have DEC
LAT and Banyan VINES protocol support. The design and layout of the printed
circuit board and testing needed to be completed.
PROJECT NUMBER 3--XCD was in the process of developing modification features
for project number 1, the ethernet interface card, including specific virtual
printer functions and status commands, pass-through functions for control files,
and programming via the PCI bus. This product was at an untested prototype
stage.
PROJECT NUMBER 4--XCD was in the process of developing firmware and software
that would allow the printing of jobs via the internet from one location to
another with increased levels of print quality and color. The company was in the
process of developing new security and printing protocols.
If the above projects are not completed timely, the Company would miss
future opportunities and could lose existing customers and market share.
TELGATE EQUIPMENT CORPORATION (UNAUDITED)
On May 8, 1999, the Company acquired the remaining 75% of the outstanding
shares of Telgate Equipment Corporation (Telgate), a software development
company, in exchange for 58,700 shares of $0.01 par value common stock and
$242,000 in cash. The total acquisition cost was $924,000, including
F-12
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 2. BUSINESS COMBINATIONS (CONTINUED)
the $214,000 recorded in connection with the warrants issued to a consultant
(Note 9), and was allocated as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 233,000
Equipment and leasehold improvements............................. 93,000
Customer list.................................................... 25,000
Core technology.................................................. 500,000
Assembled workforce.............................................. 125,000
Current liabilities assumed...................................... (218,000)
Long-term deferred tax liability................................. (260,000)
Goodwill......................................................... 426,000
---------
$ 924,000
---------
---------
</TABLE>
The acquisition has been accounted for as a purchase and results of
operations of Telgate Equipment Corporation since the date of acquisition are
included in the Company's consolidated financial statements.
For the nine months ended April 30, 1999, Telgate had sales and net income
of $1,015,000 and $72,000, respectively.
NOTE 3. INVENTORIES
Inventories consisted of the following as of November 30, 1997 and 1998 and
May 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials....................................... $ 2,188,000 $ 3,954,000 $ 4,555,000
Work-in-process..................................... 470,000 495,000 392,000
Finished goods...................................... 1,173,000 1,334,000 2,065,000
------------ ------------ ------------
$ 3,831,000 $ 5,783,000 $ 7,012,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following as of
November 30:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Machinery and equipment........................................... $ 5,063,000 $ 5,957,000
Furniture and fixtures............................................ 304,000 646,000
Leasehold improvements............................................ 1,202,000 1,135,000
------------ ------------
6,569,000 7,738,000
Less accumulated depreciation and amortization.................... 5,069,000 5,833,000
------------ ------------
$ 1,500,000 $ 1,905,000
------------ ------------
------------ ------------
</TABLE>
F-13
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 5. OTHER ASSETS
Other assets consisted of the following as of November 30, 1997 and 1998 and
May 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Intangible assets, net of accumulated amortization of
$15,000 in 1998 and $105,000 in 1999................ $ -- $ 2,051,000 $ 3,077,000
Deferred stock offering costs......................... -- 502,000 568,000
Cash surrender value of officers life insurance....... 446,000 814,000 992,000
Other................................................. 109,000 41,000 13,000
---------- ------------ ------------
$ 555,000 $ 3,408,000 $ 4,650,000
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
NOTE 6. NOTE PAYABLE
The Company has a $5,000,000 line-of-credit agreement with a bank. As of
November 30, 1998, there was $1,190,000 in borrowings outstanding against the
line of credit. Borrowings bear interest at the lesser of the bank's reference
rate (7.75% at November 30, 1998) less 0.25% or the bank's LIBOR rate (5.62% at
November 30, 1998) plus 2% and are limited to 80% of eligible accounts
receivable and 50% of eligible inventories. The agreement may be terminated by
either party. In connection with the line-of-credit agreement, the Company has a
$500,000 standby letter-of-credit sublimit agreement of which approximately
$300,000 was outstanding at November 30, 1998. This line of credit is secured by
substantially all of the Company's assets. In connection with its borrowing
arrangements, the Company is subject to certain financial covenants (see Note
9). As of November 30, 1998, the Company had approximately $3,500,000 in
availability under this line of credit.
NOTE 7. LONG-TERM DEBT
Long-term debt consisted of the following as of November 30, 1998:
<TABLE>
<S> <C>
Notes payable, bank............................................. $2,876,000
4% economic development note payable............................ 359,000
5% industrial and business development note payable............. 98,000
---------
3,333,000
Less current maturities......................................... 959,000
---------
$2,374,000
---------
---------
</TABLE>
Notes payable, bank, bear interest based on the bank's reference rate (7.75%
as of November 30, 1998) and the bank's reference rate plus 0.50%, mature
through 2003; and are secured by substantially all assets. One note contains a
provision for personal guarantees by the majority stockholders if total
liabilities to tangible effective net worth is greater than two to one. Another
note is subject to certain financial covenants (see Note 9). During the six
months ended May 31 1999, the Company borrowed an additional $670,000 under
these same terms.
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
F-14
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 7. LONG-TERM DEBT (CONTINUED)
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, 1998, future maturities of long-term debt are as follows:
1999 $959,000; 2000 $911,000; 2001 $667,000; 2002 $599,000; 2003 $72,000;
thereafter $125,000
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following as of November 30, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Compensation...................................................... $ 1,539,000 $ 1,868,000
Other............................................................. 185,000 676,000
------------ ------------
$ 1,724,000 $ 2,544,000
------------ ------------
------------ ------------
</TABLE>
NOTE 9. STOCKHOLDERS' EQUITY
COMMON STOCK (UNAUDITED)
The 58,700 shares of common stock issued in connection with the acquisition
of Telgate Equipment Corporation contain a put option. The put option entitles
the holders of these shares to require the Company to buy all or part of these
shares at $10 per share. The put option may be exercised on or before May 5,
2000 if the Company does not conduct a public offering of its shares by May 1,
2000. No value was assigned to the put feature because of the Company's
anticipated public offering.
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.
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, 1998. 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 1998 and no
options have been exercised or expired in fiscal years 1997 or 1998. There are
no options exercisable as of November 30, 1997 or 1998. In connection with the
acquisition of Troy XCD, Inc., the Company has committed to
F-15
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
grant options to acquire a total of 150,000 shares to five individuals upon the
conversion of the Company to a public company at the same price per share as the
initial price of the stock to the public. These options will be granted for
future services to be provided by these individuals.
As permitted under generally accepted accounting principles, grants under
these plans to employees 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,
fiscal year 1997 and 1998 net income after the pro forma provision for income
taxes and the related basic and diluted pro forma net income per share would
have been reduced to $2,653,000, $0.35 and $0.34 and $1,722,000, $0.23 and
$0.22, 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 and as amended in December, 1998 and June, 1999, the
Company issued warrants to a consultant to purchase up to 250,000 shares of
common stock of the Company. The warrants vest upon the occurrence of two
separate performance conditions. Warrants to purchase 50,000 shares will vest
upon the Company becoming publicly owned at the fair value on that date and
200,000 will vest upon certain acquisition transactions at $3.50 per share. The
effect 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 vesting. In connection with the acquisitions of Troy XCD, Inc. and
Telgate Equipment Corporation, the Company issued warrants to purchase 50,000
shares of common stock for each of the acquisitions under the acquisition
criteria and recorded $210,000 in connection with the purchase of Troy XCD, Inc.
and $214,000 in connection with the acquisition of Telgate Equipment Corporation
(Note 2). On October 30, 1998, the Company issued warrants to a consultant of
the Company to purchase 50,000 shares of common stock at $7.00 per share and
recorded $69,000 in connection with the purchase of Troy XCD, Inc. (Note 2). The
warrants expire five years from the date granted. In determining the amount of
compensation to be recorded in connection with the issuance of the 100,000
warrants to purchase Troy XCD and the 50,000 warrants to purchase Telgate
Equipment Corporation, the Company's value of the grants were estimated at the
measurement date using the Black-Scholes Option-pricing model prescribed in
Statement No. 123, with the following assumptions: no dividends for all years,
expected lives of 3 years, expected amounts to be exercised of 100%, risk-free
interest rate of 4.32%, and 5.21%, respectively and expected volatility of 43%.
Effective in May 1998 and as amended in June 1999, 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 Company recorded a $215,000 charge
in June 1999 when the terms of the warrant were amended and the warrant was
vested. The Company's value of the grant was estimated at the measurement date
using the Black-Scholes Option-pricing model with the following assumptions: no
dividends for all years, expected lives
F-16
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
of 3 years, expected amounts to be exercised of 100%, risk-free interest rate of
5.58% and expected volatility of 43%. The warrant expires five years after it
vested.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted a stock purchase plan covering substantially all
employees and has reserved 200,000 shares for issuance under this plan. No
shares can be purchased until a registration of the Company's common stock is
declared effective.
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 10. 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 (see Note 11). Rent expense in fiscal years 1996, 1997 and 1998 was
approximately $288,000, $352,000 and $414,000 respectively. Future minimum
rental commitments under these leases in the fiscal years ending November 30 are
as follows: 1999 $528,000; 2000 $464,000; 2001 $195,000; 2002 $117,000; 2003
$39,000 (total $1,343,000 of which $445,000 is to the related party).
NOTE 11. 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 Company's obligations under its term loan with a bank, contains a
provision for guarantees by the majority stockholders if total liabilities to
tangible effective net worth is greater then two to one.
In fiscal years 1996, 1997 and 1998, the Company made principal payments on
the notes payable to stockholders of $175,000, $373,000 and $375,000,
respectively.
NOTE 12. INCOME TAX MATTERS
As a result of the October 30, 1998 S corporation election termination, on
that date the Company recorded a net deferred tax asset of $103,000 by a credit
to income tax expense for temporary differences between the reported amounts of
assets and liabilities and their tax bases.
Deferred taxes charged to income during 1998 consisted of the following:
<TABLE>
<S> <C>
Effect of change in tax status.................................................. $(103,000)
Change in net deferred tax asset................................................ 26,000
---------
$ (77,000)
---------
---------
</TABLE>
F-17
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 12. INCOME TAX MATTERS (CONTINUED)
Net deferred tax assets consist of the following components as of November
30, 1998:
<TABLE>
<S> <C>
Deferred tax liabilities:
Receivable allowance and valuation............................................ $(275,000)
Customer list, core technology and assembled workforce........................ (480,000)
---------
(755,000)
---------
Deferred tax assets:
Inventories valuation......................................................... 305,000
Accrued compensation.......................................................... 465,000
Accrued warranty and other.................................................... 49,000
Equipment and leasehold improvements.......................................... 29,000
Net operating loss carryforward............................................... 222,000
---------
1,070,000
---------
Net deferred tax assets..................................................... $ 315,000
---------
---------
</TABLE>
The net deferred tax assets have been classified on the accompanying
consolidated balance sheet as of November 30, 1998 as follows:
<TABLE>
<S> <C>
Current assets.................................................................. $ 766,000
Noncurrent assets............................................................... 29,000
Long-term liabilities........................................................... (480,000)
---------
$ 315,000
---------
---------
</TABLE>
The Company has net operating loss carryforwards of $500,000 for federal
income tax purposes and $100,000 for state income tax purposes expiring in 2018
and 2003, respectively.
The provision for income tax (credits) charged to operations for 1998
consists of the following:
<TABLE>
<S> <C>
Current tax..................................................................... $ 7,000
Deferred tax benefit............................................................ (77,000)
---------
$ (70,000)
---------
---------
</TABLE>
The historical income tax provisions differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax income for
1998 due to the following:
<TABLE>
<S> <C>
Computed "expected" tax rate.......................................................... 35%
Increase (decrease)
State income taxes, net of federal benefit.......................................... 6
Non deductible purchased in process research and development........................ 8
Non taxable increase in cash surrender value of officers life insurance............. (2)
Deferred tax assets recorded as a result of the S corporation election
termination....................................................................... (2)
S corporation income and income taxes through October 30, 1998 included on
individual shareholders' returns.................................................. (47)
---
(2)%
---
---
</TABLE>
F-18
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 12. INCOME TAX MATTERS (CONTINUED)
State income taxes in fiscal years 1996 and 1997 differ from the computed
"expected" taxes due to enterprise zone and other tax credits generated.
NOTE 13. MAJOR VENDORS
The Company purchases key components from one vendor. Net purchases from
this vendor in fiscal years 1996, 1997 and 1998 were approximately $3,600,000,
$4,100,000 and $8,500,000, respectively. Accounts payable to this vendor as of
November 30, 1997 and 1998 were approximately $540,000 and $1,201,000,
respectively.
In addition, 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.
NOTE 14. MAJOR CUSTOMERS AND FOREIGN SALES
In fiscal year 1997 and 1998, the Company had sales to a customer that
individually accounted for 16.6% and 17.1% of the Company total net sales and as
of November 30, 1997 and 1998, respectively, and the trade receivables from this
customer were $326,000 and $710,000, respectively. Sales to this customer in
fiscal year 1996 were less than 10% of the Company's net sales.
In fiscal years 1996, 1997 and 1998, the Company had shipments to foreign
customers that accounted for 14.3%, 13.7%, and 16.2% 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 foreign currency gains or losses.
F-19
<PAGE>
TROY GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED MAY 31, 1998 AND 1999 IS
UNAUDITED
NOTE 15. CASH FLOW INFORMATION
Supplemental Disclosure of cash flow information
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, MAY 31,
------------------------------------ ---------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Interest...................... $ 345,000 $ 272,000 $ 118,000 $ 68,000 $ 165,000
---------- ---------- ------------ --------- ----------
---------- ---------- ------------ --------- ----------
Income taxes.................. $ 65,000 $ 185,000 $ 10,000 $ 10,000 $ 467,000
---------- ---------- ------------ --------- ----------
---------- ---------- ------------ --------- ----------
Supplemental schedule of noncash
investing and financing
activities
Purchase of Troy XCD, Inc. in
1998 and Telgate Equipment
Corporation in 1999
Total purchase price........ $ -- $ -- $ 3,117,000 $ -- $ 924,000
Less fair value of common
stock and stock warrants
issued in connection with
the acquisitions.......... -- -- 1,479,000 -- 625,000
---------- ---------- ------------ --------- ----------
Cash purchase price......... $ -- $ -- $ 1,638,000 $ -- $ 299,000
---------- ---------- ------------ --------- ----------
---------- ---------- ------------ --------- ----------
Dividends payable............. $ -- $ -- $ 200,000 $ -- $ --
---------- ---------- ------------ --------- ----------
---------- ---------- ------------ --------- ----------
</TABLE>
F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULE
To the Board of Directors
Troy Group, Inc
Santa Ana, California
Our audits were made for the purpose of forming an opinion on the basic
consolidated 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 consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
McGLADREY & PULLEN, LLP
Anaheim, California
January 6, 1999
F-21
<PAGE>
TROY GROUP, INC
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNT
FISCAL YEARS ENDED NOVEMBER 30, 1996, 1997 AND 1998
<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:
1996....................................................... $ 107,000 $ 209,000 $(143,000) $ 173,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
1997....................................................... $ 173,000 $ 65,000 $ (74,000) $ 164,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
1998....................................................... $ 164,000 $ 134,000 $(158,000) $ 140,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
</TABLE>
F-22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
XCD Incorporated
Irvine, California
We have audited the accompanying consolidated balance sheet of XCD
Incorporated and subsidiary as of September 30, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
nine months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XCD
Incorporated and subsidiary as of September 30, 1998, and the results of their
operations and their cash flows for the nine months then ended in conformity
with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Anaheim, California
October 20, 1998
F-23
<PAGE>
XCD INCORPORATED
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash.......................................................................... $ 11,000
Accounts receivable, less allowance for doubtful accounts of $128,000......... 792,000
Income taxes receivable....................................................... 122,000
Inventories................................................................... 878,000
Prepaid expenses.............................................................. 31,000
Deferred income taxes......................................................... 150,000
---------
Total current assets........................................................ 1,984,000
Equipment, net.................................................................. 159,000
Other Assets.................................................................... 12,000
---------
Total assets................................................................ $2,155,000
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, including $27,000 payable to stockholders................... $ 329,000
Accrued liabilities........................................................... 211,000
Notes payable, stockholders................................................... 233,000
---------
Total current liabilities................................................... 773,000
---------
Commitments and Contingencies
Stockholders' Equity
Common stock, no par value; authorized 1,000,000,000 shares; issued 37,900,000
shares...................................................................... 106,000
Retained earnings............................................................. 1,320,000
Note receivable for common stock purchases.................................... (44,000)
---------
Total stockholders' equity.................................................. 1,382,000
---------
Total liabilities and stockholders' equity.................................. $2,155,000
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-24
<PAGE>
XCD INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Net sales...................................................................... $4,488,000
Cost of goods sold............................................................. 2,679,00
-----------
Gross profit............................................................. 1,809,000
-----------
Operating expenses:
Selling, general and administrative.......................................... 1,212,000
Research and development, including $240,000 to stockholders................. 532,000
-----------
1,744,000
-----------
Operating income......................................................... 65,000
Financial income (expense):
Interest expense, including $22,000 to stockholders.......................... (22,000)
Interest income.............................................................. 5,000
-----------
Income before income tax credit.......................................... 48,000
Income tax credit.............................................................. 49,000
-----------
Net income............................................................... $ 97,000
-----------
-----------
Earnings per share, basic and diluted.......................................... $ --
-----------
-----------
Weighted average number of shares outstanding:
Basic........................................................................ 37,900,000
-----------
-----------
Diluted...................................................................... 37,931,166
-----------
-----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-25
<PAGE>
XCD INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- RETAINED NOTE
SHARES AMOUNT EARNINGS RECEIVABLE TOTAL
------------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998..................... 37,900,000 $ 106,000 $ 1,223,000 $ (53,000) $ 1,276,000
Forgiveness of note receivable............. -- -- -- 9,000 9,000
Net income................................. -- -- 97,000 -- 97,000
------------- ---------- ------------ ----------- -------------
Balance, September 30, 1998.................. 37,900,000 $ 106,000 $ 1,320,000 $ (44,000) $ 1,382,000
------------- ---------- ------------ ----------- -------------
------------- ---------- ------------ ----------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-26
<PAGE>
XCD INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Cash flows from Operating Activities
Net income................................................................... $ 97,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................... 42,000
Provision for doubtful accounts............................................ 70,000
Deferred income taxes...................................................... (56,000)
Compensation expense for forgiveness of note receivable.................... 9,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable...................................................... (96,000)
Income taxes receivable.................................................. 7,000
Inventories.............................................................. 17,000
Prepaid expenses......................................................... (13,000)
Increase (decrease) in:
Accounts payable......................................................... 26,000
Accrued liabilities...................................................... (11,000)
-----------
Net cash provided by operating activities................................ 92,000
-----------
Cash Flows from Investing Activities
Purchases of equipment....................................................... (60,000)
Increase in other assets..................................................... (5,000)
-----------
Net cash (used in) investing activities.................................. (65,000)
-----------
Cash Flows from Financing Activities, decrease in excess checks outstanding
over bank balance............................................................ (21,000)
-----------
Net increase in cash..................................................... 6,000
Cash, beginning of period...................................................... 5,000
-----------
Cash, end of period............................................................ $ 11,000
-----------
-----------
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest..................................... $ 31,000
-----------
-----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-27
<PAGE>
XCD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of XCD
Incorporated (incorporated as XCd, Inc.) and its wholly owned subsidiary, XCD
International Incorporated, a foreign sales corporation (collectively, the
Company). The Company's customers are located throughout the United States, Asia
and Europe. The Company is engaged primarily in the design, development,
manufacture and sale of products that allow printers to be shared on local area
networks (LANs).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
All significant intercompany transactions and accounts have been eliminated
in the accompanying consolidated financial statements.
INVENTORIES
Inventories are stated at the lower of average cost or market.
EQUIPMENT
Equipment is recorded at cost. Depreciation is provided over the estimated
useful lives of the assets using the straight-line method, which generally
ranges from three to seven years.
REVENUE RECOGNITION
Revenue is recognized when the related products are shipped to customers. No
right of return (other than for defective merchandise) is allowed on sales. All
sales are transacted in U.S. dollars.
CREDIT RISK
The Company sells its products on credit terms that it establishes for
individual customers. The Company also performs ongoing credit evaluations of
its customers, generally does not require collateral and maintains reserves for
potential credit losses.
ESTIMATED WARRANTY CLAIMS
The Company sells its product with a warranty that provides for replacements
of any defective products for a one-year period after the sale. The Company
accrues an estimate of the cost of providing the warranty at the time revenue is
recognized.
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs of new products as
incurred.
F-28
<PAGE>
XCD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Costs associated with advertising and promoting products are expensed as
incurred. Advertising and promotion expense was approximately $119,000 during
1998.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and notes payable. The
carrying value of these instruments are considered to be representative of their
fair value due to the short nature of maturities of these instruments.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net income attributable
to the common stockholders by the weighted average number of common shares
outstanding during the period. There is no adjustment in the net income
attributable to common stockholders. Diluted earnings per share reflects the
potential dilution that could occur from common shares issuable through stock
options (31,166 shares in the period ended September 30, 1998)
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic-value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
NOTE 2. INVENTORIES
Inventories consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Raw materials..................................................... $ 133,000
Work in process................................................... 320,000
Finished goods.................................................... 425,000
---------
$ 878,000
---------
---------
</TABLE>
F-29
<PAGE>
XCD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. EQUIPMENT
Equipment consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Computer equipment............................................... $ 363,000
Furniture and fixtures........................................... 41,000
---------
404,000
Less accumulated depreciation.................................... (245,000)
---------
$ 159,000
---------
---------
</TABLE>
NOTE 4. NOTE RECEIVABLE
During 1996 an employee exercised 400,000 options at an exercise price of
$0.178 in exchange for a nonrecourse note receivable. The principal and interest
on the note will be forgiven in equal installments over a four-year period in
lieu of payment for services performed. As of September 30, 1998, the balance on
this note receivable is $44,000.
NOTE 5. INCOME TAXES
Income tax credits are summarized below for the nine months ended September
30, 1998:
<TABLE>
<S> <C>
Current tax benefit.............................................. $(105,000)
Deferred tax expense............................................. 56,000
---------
$ (49,000)
---------
---------
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the nine months
ended September 30, 1998 due to the following:
<TABLE>
<S> <C>
Computed "expected" tax expense................................................... $ 17,000
State income taxes, net of federal benefit........................................ 2,000
Increase (decrease) in income taxes resulting from:
Research and development credits................................................ (77,000)
Tax interest and penalties...................................................... 7,000
Other........................................................................... 2,000
---------
$ (49,000)
---------
---------
</TABLE>
F-30
<PAGE>
XCD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAXES (CONTINUED)
The major components of the Company's net deferred tax assets at September 30,
1998 are comprised of:
<TABLE>
<S> <C>
Deferred tax assets...............................................
Receivable allowance............................................ $ 51,000
Inventory allowance............................................. 50,000
Inventory capitalization........................................ 52,000
Accrued vacation expense........................................ 2,000
Accrued warranty claims......................................... 16,000
---------
171,000
Deferred tax liabilities, equipment............................... 21,000
---------
Net deferred tax assets....................................... $ 150,000
---------
---------
</TABLE>
These amounts have been classified on the accompanying balance sheet as a
current asset as of September 30, 1998.
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Payroll and related taxes......................................... $ 53,000
Accrued warranties................................................ 40,000
Accrued marketing................................................. 40,000
Accrued interest, stockholders.................................... 19,000
Accrued vacation.................................................. 5,000
Other............................................................. 54,000
---------
$ 211,000
---------
---------
</TABLE>
NOTE 7. SHORT-TERM BORROWINGS
The Company has $233,000 in unsecured subordinated notes payable to
stockholders that are due on demand, with interest-only payments, recalculated
annually at a rate 2% above a bank's prime rate (8.5% at September 30, 1998) due
monthly.
In addition, the Company has a revolving line of credit agreement with a
bank that allows maximum borrowings of $600,000. The credit agreement matures
September 30, 1998, and is collateralized by substantially all of the Company's
assets. The line of credit bears interest at the bank's prime rate (8.5% at
September 30, 1998) plus 0.5%. At September 30, 1998, the Company had no amounts
borrowed under this agreement. Under the agreement, the Company is required,
among other things, to maintain certain minimum net worth and working capital
ratios. At September 30, 1998, the Company had $600,000 in availability under
this agreement.
F-31
<PAGE>
XCD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK OPTION PLANS
The Company has a 1994 Incentive Stock Option Plan and a Non-Qualified Stock
Option Plan under which it may grant options to purchase common stock. The
Company may grant options for up to 4,000,000 shares under the Incentive Stock
Option Plan to full time employees at prices that the Compensation Committee
determines to be appropriate. Options are granted at market value on the date of
the grant and are generally exercisable ratably over four years with certain
non-qualified options which vest upon a change in control. Options expire five
years after grant date. In addition, the Company may grant options for up to
4,000,000 shares to employees and nonemployee directors under the Non-Qualified
Stock Option Plan at prices that the Board of Directors determines to be fair
market value.
A summary of the status of the Plans and changes during the period ended
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding at beginning of period......................................................... 3,684,500 $ 0.168
Granted.................................................................................... 48,000 0.037
Exercised.................................................................................. -- --
Forfeited.................................................................................. (379,000) 0.163
---------- -----------
Outstanding at end of period............................................................... 3,353,500 $ 0.166
---------- -----------
---------- -----------
Exercisable at end of period............................................................... 2,410,375 $ 0.172
---------- -----------
---------- -----------
Weighted-average minimum value of options granted during the period........................ $ 0.009
-----------
-----------
Remaining options available under the Plans, at end of period.............................. 1,762,500
----------
----------
</TABLE>
A further summary of options outstanding at September 30, 1998 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- ----------------------------------------------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.130-$0.178........................................ 3,305,500 2.4 years $ 0.168 2,405,375 $ 0.172
$0.037............................................... 48,000 4.8 years 0.037 5,000 0.037
---------- ----------- ----------- ---------- -----------
3,353,500 2.5 years $ 0.166 2,410,375 $ 0.172
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
</TABLE>
As permitted under generally accepted accounting principles, grants under
the above Plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the Incentive Stock Option Plan and the Non-Qualified Stock Option
Plan. Had compensation costs for all of the stock-based compensation plans been
determined using the minimum value method prescribed Statement No. 123, reported
net income would have been reduced to $95,000 from $97,000 with no effect on
basic and diluted earnings per share. The fair value of each option granted
during the nine months ended September 30, 1998 was estimated on
F-32
<PAGE>
XCD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK OPTION PLANS (CONTINUED)
date of grant utilizing the then current fair value of the underlying shares
less the exercise price discounted over the average expected life of the options
(five years) with risk free interest rate of 5.48% and 6.06% and no dividends.
The pro forma effects of applying Statement No. 123 are not indicative of future
amounts since, among other reasons, the requirements of the Statement have been
applied only to options granted after December 15, 1995 (see Note 14).
NOTE 9. FOREIGN SALES AND ACCOUNTS RECEIVABLE
During the period ended September 30, 1998, the Company had sales to foreign
customers. Foreign sales for the period ended September 30, 1998 and the related
accounts receivable as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
ASIA EUROPE CANADA TOTAL
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Sales........................................................ $ 1,308,000 $ 800,000 $ 106,000 $ 2,214,000
Accounts receivable.......................................... $ 106,000 $ 250,000 $ 26,000 $ 382,000
</TABLE>
NOTE 10. MAJOR CUSTOMERS
Net sales for the period ended September 30, 1998 includes sales to the
following major customers (each of which accounted for 10% or more of the total
sales of the Company) together with the receivables due from those customers as
of September 30, 1998:
<TABLE>
<CAPTION>
TRADE
ACCOUNTS
NET SALES RECEIVABLE
------------ ----------
<S> <C> <C>
Customer A.............................................................................. $ 1,178,000 $ 74,000
Customer B.............................................................................. 551,000 244,000
------------ ----------
$ 1,729,000 $ 318,000
------------ ----------
------------ ----------
</TABLE>
NOTE 11. LEASE COMMITMENTS AND RENT EXPENSES
The Company rents its facility under an operating lease that expires in
2003. Future minimum lease payments at September 30, 1998 under all
noncancelable operating leases are as follows: 1999 $119,000; 2000 $124,000;
2001 $129,000; 2002 $134,000; and 2003 $68,000 (total $574,000).
Rent expense was approximately $84,000 for the period ended September 30,
1998.
NOTE 12. PENSION PLAN
The Company sponsors a simplified employee pension contribution plan for
employees who are at least 21 years of age and have performed services for the
Company in at least three of the immediately preceding five years. Total
expenses related to the Plan were approximately $51,000 for the period ended
September 30, 1998.
NOTE 13. RELATED PARTY TRANSACTIONS
For the period ended September 30, 1998, the Company paid $240,000 to two
corporations whose presidents are stockholders of the Company for costs related
to product development and engineering
F-33
<PAGE>
XCD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. RELATED PARTY TRANSACTIONS (CONTINUED)
services. As of September 30, 1998, the Company had accrued $27,000 relating to
such expenses, which is included in accounts payable.
NOTE 14. BUSINESS COMBINATION
On September 30, 1998, the Company signed a letter of intent to sell all its
outstanding common stock, including any shares issuable relating to stock
options, to Troy Group, Inc. for 171,430 shares of Troy Group, Inc.'s common
stock and $1,550,000 in cash. All outstanding stock options will be extinguished
upon the consummation of this merger.
NOTE 15. SUBSEQUENT EVENT
In October 1998, the Company entered into an agreement to pay certain
officer/stockholders and employees $1,250,000 of compensation for prior
services. No provision for deferred compensation arising from the agreement has
been reflected in the accompanying financial statements as of September 30,
1998.
F-34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[TROY GROUP, INC. LOGO]
2,500,000 SHARES OF COMMON STOCK
-------------
PROSPECTUS
-------------
[LOGO]
[PENNSYLVANIA MERCHANT GROUP LOGO]
[H.C. WAINWRIGHT & CO. LOGO]
- --------------------------------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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....................................................... $ 7,194
NASD fee................................................................... 3,663
Nasdaq listing fee......................................................... 78,875
Blue Sky fees and expenses................................................. 2,000
Legal fees and expenses.................................................... 250,000
Accounting fees and expenses............................................... 300,000
Printing expenses.......................................................... 200,000
Transfer agent fees........................................................ 3,500
Warrants................................................................... 215,000
Miscellaneous.............................................................. 39,768
-----------------
Total...................................................................... $ 1,100,000
-----------------
-----------------
</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 May 31, 1999, 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
a consultant 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 issued an aggregate of
1,124,772 shares of common stock to six existing stockholders in exchange
for the contribution of all of the outstanding capital stock of Troy Systems
to the Company.
5. On October 30, 1998 the Company issued an aggregate of 171,430
shares of common stock in connection with the acquisition of XCD
Incorporated. The Company also granted a warrant to purchase 50,000 shares
of common stock to a consultant for services in connection with the
acquisition.
6. On May 8, 1999, the Company issued an aggregate of 58,700 shares of
common stock in connection with the acquisition of Telgate Equipment
Corporation.
7. Concurrently with the consummation of the offering, the Company
intends to grant options to purchase an aggregate of 755,000 shares of
common stock of the Company to certain officers, directors and employees of
the Company.
All of the above sales were made in reliance on Rule 701, Regulation D or
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
2.1 Merger Purchase Agreement dated October 28, 1998 between the Company, Troy
Merger Subsidiary, Inc. and XCD Incorporated and its shareholders*
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
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 December 30, 1998 issued to Broadland Capital Partners, as
amended through June 8, 1999*
4.2 Warrant dated October 30, 1998 issued to Steve Holmes*
4.3 Warrant dated June 1, 1998 issued to Raymond F. Schuler, as amended
through June 8, 1999*
5.1 Opinion of Oppenheimer Wolff & Donnelly LLP*
10.1 Lease dated March 16, 1995 between the Company and RAGCO, as amended on
May 18, 1998*
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 Lease dated March 1, 1998 between Sanwa Bank California and XCD, Inc. and
a Consent to Assignment of Lease, Assignment and Acceptance dated
October 23, 1998 between Sanwa Bank California, XCD, Inc. and Troy XCD,
Inc.*
10.7 1996 Stock Option Plan*
10.8 1998 Stock Incentive Plan*
10.9 1998 Employee Stock Purchase Plan*
10.10 Incentive Stock Option Agreement dated November 27, 1996 in favor of
Robert Messina, as amended on February 6, 1998*
10.11 Incentive Stock Option Agreement dated November 27, 1996 in favor of Brian
Dirk, as amended on February 6, 1998*
10.12 Non-Competition Agreement dated November 27, 1996 between Robert Messina
and the Company*
10.13 Consulting Agreement dated October 1, 1997 between the Company and
Broadland Capital Partners, as amended through June 8, 1999*
10.14 Form of Indemnification Agreement for directors and executive officers of
the Company*
10.15 MICR Supplies Agreement dated February 6, 1998 between the Company and IBM
Printing Systems Company(1)*
10.16 Form of Tax Agreement Relating to S Corporation Distributions by and
between the Company and the Dirk Shareholders*
10.17 Loan Agreement and Security Agreement dated October 20, 1998 between the
Company and Comerica Bank-California*
10.18 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica
Bank-California*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.19 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica
Bank-California*
10.20 Guaranty dated October 20, 1998 by the majority shareholders*
10.21 Letter dated October 3, 1997 to RAGCO from the Company*
10.22 Bill of Sale and Assignment and Assumption Agreement dated May 31, 1998
between Troy Group, Inc. and Troy Systems International, Inc.*
10.23 Form of Subscription Agreement*
10.24 Reseller Agreement dated April 1, 1996 between the Company and
Hewlett-Packard Company (1)*
21.1 Subsidiaries of the Registrant*
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors*
23.2 Consent of McGladrey & Pullen, LLP, Independent Auditors*
23.3 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*
99.6 Consent of Harold L. Clark*
</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. 7 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 21st day of July, 1999.
<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. 7 to the Registration Statement has been signed by the following persons in
the capacities indicated, on July 21, 1999.
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
- ------------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Underwriting Agreement
1.2 Form of Representatives' Warrant
2.1 Merger Purchase Agreement dated October 28, 1998 between the Company, Troy Merger Subsidiary,
Inc. and XCD Incorporated and its shareholders*
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 December 30, 1998 issued to Broadland Capital Partners, as amended through June
8, 1999*
4.2 Warrant dated October 30, 1998 issued to Steve Holmes*
4.3 Warrant dated June 1, 1998 issued to Raymond F. Schuler, as amended through June 8, 1999*
5.1 Opinion of Oppenheimer Wolff & Donnelly LLP*
10.1 Lease dated March 16, 1995 between the Company and RAGCO, as amended on May 18, 1998*
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 Lease dated March 1, 1998 between Sanwa Bank California and XCD, Inc. and a Consent to
Assignment of Lease, Assignment and Acceptance dated October 23, 1998 between Sanwa Bank
California, XCD, Inc. and Troy XCD, Inc.*
10.7 1996 Stock Option Plan*
10.8 1998 Stock Incentive Plan*
10.9 1998 Employee Stock Purchase Plan*
10.10 Incentive Stock Option Agreement dated November 27, 1996 in favor of Robert Messina, as
amended on February 6, 1998*
10.11 Incentive Stock Option Agreement dated November 27, 1996 in favor of Brian Dirk, as amended
on February 6, 1998*
10.12 Non-Competition Agreement dated November 27, 1996 between Robert Messina and the Company*
10.13 Consulting Agreement dated October 1, 1997 between the Company and Broadland Capital
Partners, as amended through June 8, 1999*
10.14 Form of Indemnification Agreement for directors and executive officers of the Company*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
10.15 MICR Supplies Agreement dated February 6, 1998 between the Company and IBM Printing Systems
Company(1)*
10.16 Form of Tax Agreement Relating to S Corporation Distributions by and between the Company and
the Dirk Shareholders*
10.17 Loan Agreement and Security Agreement dated October 20, 1998 between the Company and Comerica
Bank-California*
10.18 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica Bank-California*
10.19 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica Bank-California*
10.20 Guaranty dated October 20, 1998 by the majority shareholders*
10.21 Letter dated October 3, 1997 to RAGCO from the Company*
10.22 Bill of Sale and Assignment and Assumption Agreement dated May 31, 1998 between Troy Group,
Inc. and Troy Systems International, Inc.*
10.23 Form of Subscription Agreement*
10.24 Reseller Agreement dated April 1, 1996 between the Company and Hewlett-Packard Company (1)*
21.1 Subsidiaries of the Registrant*
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors*
23.2 Consent of McGladrey & Pullen, LLP, Independent Auditors*
23.3 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*
99.6 Consent of Harold L. Clark*
</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>
2,500,000 SHARES
TROY GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__________, 1999
CRUTTENDEN ROTH INCORPORATED
18301 Von Karman Avenue
Suite 100
Irvine, CA 92612
Attention: Corporate Finance Department
PENNSYLVANIA MERCHANT GROUP
Four Falls Corporate Center
West Conshohocken, PA 19428
Attn: Corporate Finance Department
H. C. WAINWRIGHT & CO., INC.
One Boston Place
40th Floor
Boston, MA 02108
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 2,500,000 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 2,500,000 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 375,000
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 250,000 shares of Common
Stock (the "Warrant Shares") on the terms and for the
<PAGE>
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. 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 375,000 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
2
<PAGE>
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").
(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.
3
<PAGE>
(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 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,
4
<PAGE>
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
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
5
<PAGE>
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 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
6
<PAGE>
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 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
7
<PAGE>
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
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.
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(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 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.
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(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 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.
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<PAGE>
(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.
(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
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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 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.
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<PAGE>
(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.
(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
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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 one
and one-half percent (1.5%) 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 one and one-half percent (1.5%) 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, 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 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
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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 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.
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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.
(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.
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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 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.
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(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.
(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,
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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 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.
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<PAGE>
(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 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,
20
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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 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
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<PAGE>
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 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
22
<PAGE>
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 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
23
<PAGE>
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 Underwritershave 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 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
24
<PAGE>
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 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
25
<PAGE>
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 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
26
<PAGE>
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.
(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
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<PAGE>
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.
(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
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<PAGE>
PENNSYLVANIA MERCHANT GROUP
Four Falls Corporate Center
West Conshohocken, PA 19428
Attn: Corporate Finance Department
H. C. WAINWRIGHT & CO., INC.
One Boston Place
40th Floor
Boston, MA 02108
with a copy to:
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.
(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.
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<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
PENNSYLVANIA MERCHANT GROUP
H. C. WAINWRIGHT & CO., INC.
(for themselves and as Representatives of the Underwriters named in Schedule I
hereto)
By: Cruttenden Roth Incorporated
By:_______________________________
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SCHEDULE I
<TABLE>
<CAPTION>
No. of Shares
Underwriters to be Purchased
------------ ---------------
<S> <C>
Cruttenden Roth Incorporated
Pennsylvania Merchant Group
H. C. Wainwright & Co., Inc.
TOTAL 2,500,000
</TABLE>
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EXHIBIT A
FORM OF WARRANT
32
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EXHIBIT B
FORM OF LOCK-UP AGREEMENT
33
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Exhibit 1.2
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE.
THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED, EXCEPT UPON SUCH REGISTRATION OR
UPON DELIVERY TO MAKER OF AN OPINION OF COUNSEL SATISFACTORY TO MAKER THAT
REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.
TROY GROUP, INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
NO. [ ] [_______] SHARES
FOR VALUE RECEIVED, TROY GROUP, INC., a Delaware
corporation (the "Company"), hereby certifies that ______________________
_______________ or its permitted assigns, is entitled to purchase from the
Company, at any time or from time to time commencing on [ , 1999]
and prior to 5:00 P.M., New York City time, on [ , 2004], Two
Hundred Fifty Thousand (250,000) fully paid and non-assessable shares of the
common stock, $.01 par value per share, of the Company for an aggregate
purchase price of $[ ] (computed on the basis of $ PER SHARE).
Hereinafter, (i) said common stock, together with any other equity securities
which may be issued by the Company with respect thereto or in substitution
therefor, is referred to as the "Common Stock," (ii) the shares of the Common
Stock purchasable hereunder or under any other Warrant (as hereinafter
defined) are referred to individually as a "Warrant Share" and collectively
as the "Warrant Shares," (iii) the aggregate purchase price payable for the
Warrant Shares hereunder is referred to as the "Aggregate Warrant Price,"
(iv) the price payable for each of the Warrant Shares hereunder is referred
to as the "Per Share Warrant Price," (v) this Warrant, all similar Warrants
issued on the date hereof and all Warrants hereafter issued in exchange or
substitution for this Warrant or such similar Warrants are referred to as the
"Warrants", and (vi) the holder of this Warrant is referred to as the
"Holder" and the holder of this Warrant and all other Warrants or Warrant
Shares issued upon the exercise of any Warrant are referred to as the
"Holders." The Aggregate Warrant Price is not subject to adjustment. The Per
Share Warrant Price is subject to adjustment as hereinafter provided, and in
the event of any such adjustment, the number of Warrant Shares shall be
adjusted to equal the number determined by dividing the Aggregate Warrant
Price by the Per Share Warrant Price in effect immediately after such
adjustment.
1. Exercise of Warrant.
(a) This Warrant may be exercised in whole at any time or
in part from time to time, during the period commencing on
[ , 1999] and ending prior to 5:00 P.M., New York City time, on
[ , 2004] (such period, the "Exercise Period"), by the Holder by
the surrender of this Warrant (with the subscription form at the end of this
Warrant duly executed) at the address set forth in Section 10(a) hereof,
together with proper payment of the Aggregate Warrant Price, or the
proportionate part thereof if this Warrant is exercised in part. Payment for
Warrant Shares shall be made by certified or official bank check payable to
the order of the Company. If this Warrant is exercised in part, this Warrant
must be exercised for a number of whole shares of the Common Stock, and the
Holder is entitled to receive a new Warrant covering the Warrant Shares in
respect of which this Warrant has not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such exercise and surrender of this Warrant, the Company will
(i) issue a
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certificate or certificates in the name of the Holder for the largest number
of whole shares of the Common Stock to which the Holder shall be entitled
and, if this Warrant is exercised in whole, in lieu of any fractional share
of the Common Stock to which the Holder shall be entitled, pay to the Holder
cash in an amount equal to the fair value of such fractional share
(determined in such reasonable manner as the Board of Directors of the
Company shall determine) and (ii) deliver the other securities and properties
receivable upon the exercise of this Warrant, or the proportionate part
thereof if this Warrant is exercised in part, pursuant to the provisions of
this Warrant.
(b) In lieu of exercising this Warrant in the manner set forth
in Section 1(a) above, this Warrant may be exercised in whole at any time or in
part from time to time during the Exercise Period, by the Holder by surrendering
the Warrant at the address set forth in Section 10(a) hereof, without payment of
any other consideration, commission or remuneration, together with the
subscription form at the end of this Warrant, duly executed. The number of
shares of the Common Stock to be issued by the Company shall be calculated using
the following formula:
X=Y(A-B)
A
Where X= the number of shares of the Common
Stock to be issued to the Holder
Y= the number of shares of the Common
Stock purchasable under this
Warrant or, if this Warrant is
being exercised in part, under the
portion of the Warrant being
exercised (at the date of the
surrender of this Warrant and the
subscription form)
A= the Market Price (at the date of
the surrender of this Warrant and
the subscription form)
B= the Per Share Warrant Price (as
adjusted to the date of the
surrender of this Warrant and the
subscription form)
If this Warrant is exercised in part pursuant to this Section
1(b), this Warrant must be exercised for a number of whole shares of the Common
Stock, and the Holder is entitled to receive a new Warrant covering the Warrant
Shares in respect of which this Warrant has not been exercised and setting forth
the proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such exercise and surrender of this Warrant, the Company will (i)
issue a certificate or certificates in the name of the Holder for the largest
number of whole shares of the Common Stock to which the Holder shall be entitled
and, if this Warrant is exercised in whole, in lieu of any fractional share of
the Common Stock to which the Holder shall be entitled, pay cash equal to the
fair value of such fractional share (determined in such reasonable manner as the
Board of Directors of the Company shall determine) and (ii) deliver the other
securities and properties receivable upon the exercise of this Warrant, or the
proportionate part thereof if this Warrant is exercised in part, pursuant to the
provisions of this Warrant.
(c) The market price of a share of the Common Stock (the
"Market Price") on any date of determination shall be (i) the last reported sale
price per share of the Common Stock on the business
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day immediately preceding the date of determination as reported on the Nasdaq
National Market (the "Nasdaq National Market"), or (ii) if there is no such
reported sale on the date in question, the average of the closing bid and
asked quotations as so reported on the Nasdaq National Market, or (iii) if
the Common Stock is not then listed on the Nasdaq National Market, the last
reported sale price per share of the Common Stock on such national securities
exchange upon which the Common Stock is then listed, or (iv) if the Common
Stock is not then listed on any national securities exchange, the average of
the closing bid and asked quotations in the over-the-counter market as
reported by Nasdaq, or if not so reported, as reported by the National
Quotations Bureau or a similar organization. In the absence of such
quotations, the Board of Directors of the Company shall determine in good
faith the fair market value per share of the Common Stock, which shall for
these purposes be deemed to be the Market Price, which determination shall be
set forth in a certificate executed by an officer of the Company showing the
facts upon which the Market Price is based.
2. Reservation of Warrant Shares; Listing. The Company agrees
that, prior to the expiration of this Warrant, the Company will at all times (a)
have authorized and in reserve, and will keep available, solely for issuance or
delivery upon the exercise of this Warrant, the shares of the Common Stock and
other securities and properties as from time to time shall be receivable upon
the exercise of this Warrant, free and clear of all restrictions on sale or
transfer and free and clear of all preemptive rights and rights of first refusal
and (b) if the Company hereafter lists the Common Stock on any national
securities exchange, use its best efforts to keep the shares of the Common Stock
receivable upon the exercise of this Warrant authorized for listing on such
exchange upon notice of issuance.
3. Protection Against Dilution.
(a) If, at any time or from time to time after the date of this
Warrant, the Company shall issue or distribute to the holders of shares of the
Common Stock (i) securities, other than shares of the Common Stock, or (ii)
property, other than cash, without payment therefor, with respect to the Common
Stock, then, and in each such case, the Holder, upon the exercise of this
Warrant, shall be entitled to receive the securities and property which the
Holder would hold on the date of such exercise if, on the date of this Warrant,
the Holder had been the holder of record of the number of shares of the Common
Stock subscribed for upon such exercise and, during the period from the date of
this Warrant to and including the date of such exercise, had retained such
shares and the securities and properties receivable by the Holder during such
period. Notice of each such distribution shall be forthwith mailed to the
Holder.
(b) If, at any time or from time to time after the date of this
Warrant, the Company shall (i) pay a dividend or make a distribution on its
capital stock in shares of the Common Stock, (ii) subdivide its outstanding
shares of the Common Stock into a greater number of shares, (iii) combine its
outstanding shares of the Common Stock into a smaller number of shares or (iv)
issue by reclassification of the Common Stock any shares of capital stock of the
Company, the Per Share Warrant Price shall be adjusted so that the Holder upon
the exercise hereof shall be entitled to receive the number of shares of the
Common Stock or other capital stock of the Company which the Holder would have
owned immediately following such action had such Warrant been exercised
immediately prior thereto. An adjustment made pursuant to this Section 3(b)
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c) In case of any consolidation or merger to which the Company is
a party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or
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conveyance to another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange of
securities with another entity (including any exchange effected in connection
with a merger of another corporation with the Company), the Holder of this
Warrant shall have the right thereafter to receive on the exercise of this
Warrant the kind and amount of securities, cash or other property which the
Holder would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale or conveyance had this Warrant
been exercised immediately prior to the effective date of such consolidation,
merger, statutory exchange, sale or conveyance and, in any such case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this Section 3 with respect to the rights and interests
thereafter of the Holder of this Warrant to the end that the provisions set
forth in this Section 3 shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock or other
securities or property thereafter deliverable on the exercise of this Warrant.
The above provisions of this Section 3(c) shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances. The issuer
of any shares of stock or other securities or property thereafter deliverable on
the exercise of this Warrant shall be responsible for all of the agreements and
obligations of the Company hereunder. Notice of any such consolidation, merger,
statutory exchange, sale or conveyance and of said provisions so proposed to be
made, shall be mailed to the Holders of the Warrants not less than 30 days prior
to such event. A sale of all or substantially all of the assets of the Company
for a consideration consisting primarily of securities shall be deemed a
consolidation or merger for the foregoing purposes.
(d) No adjustment in the Per Share Warrant Price shall be required
unless such adjustment would require an increase or decrease of at least $0.05
per share of the Common Stock; provided, however, that any adjustments which by
reason of this Section 3(d) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment; provided further, however,
that adjustments shall be required and made in accordance with the provisions of
this Section 3 (other than this Section 3(d)) not later than such time as may be
required in order to preserve the tax-free nature of a distribution to the
Holder of this Warrant or the Common Stock issuable upon exercise hereof. All
calculations under this Section 3 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this Section 3 to
the contrary notwithstanding, the Company shall be entitled to make such
reductions in the Per Share Warrant Price, in addition to those required by this
Section 3, as it in its discretion shall deem to be advisable in order that any
stock dividend, subdivision of shares or distribution of rights to purchase
stock or securities convertible or exchangeable for stock hereafter made by the
Company to its stockholders shall not be taxable.
(e) Whenever the Per Share Warrant Price is adjusted as provided
in this Section 3 and upon any modification of the rights of a Holder of
Warrants in accordance with this Section 3, the Company shall promptly prepare a
notice (the "Adjustment Notice"), which shall be certified by the Company's
Chief Executive Officer to be true and correct. The Adjustment Notice shall set
forth the Per Share Warrant Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same,
and copies of such notice shall be mailed to the Holders of the Warrants not
later than thirty (30) days following the occurrence of the event giving rise to
the adjustment.
(f) If the Board of Directors of the Company shall (i) declare
any dividend or other distribution with respect to the Common Stock, other than
a cash dividend payable otherwise than out of earnings or earned surplus, (ii)
offer to the holders of shares of the Common Stock any additional shares of the
Common Stock, any securities convertible into or exercisable for shares of the
Common Stock or any rights to subscribe thereto or (iii) propose a dissolution,
liquidation or winding up of the Company, the Company shall mail notice thereof
to the Holders of the Warrants not less than 15 days prior to the
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record date fixed for determining stockholders entitled to participate in such
dividend, distribution, offer or subscription right or to vote on such
dissolution, liquidation or winding up.
(g) If, as a result of an adjustment made pursuant to this Section
3, the Holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock or shares of
the Common Stock and other capital stock of the Company, the Board of Directors
of the Company (whose determination shall be conclusive and shall be described
in a written notice to the Holder of any Warrant promptly after such adjustment)
shall determine the allocation of the adjusted Per Share Warrant Price between
or among shares or such classes of capital stock or shares of the Common Stock
and other capital stock and any subsequent adjustments made pursuant to this
Section 3 shall apply equally to each such resulting class of capital stock.
4. Fully Paid Stock; Taxes. The Company agrees that the
shares of the Common Stock represented by each and every certificate for Warrant
Shares delivered on the exercise of this Warrant shall, at the time of such
delivery, be validly issued and outstanding, fully paid and nonassessable, and
not subject to preemptive rights, rights of first refusal or other contractual
rights to purchase securities of the Company, and the Company will take all such
actions as may be necessary to assure that the par value or stated value, if
any, per share of the Common Stock is at all times equal to or less than the
then Per Share Warrant Price. The Company further covenants and agrees that it
will pay, when due and payable, any and all federal and state stamp, original
issue or similar taxes which may be payable in respect of the issue of any
Warrant Share or certificate therefor.
5. Registration Under Securities Act of 1933.
(a) The Company agrees that if, at any time during the period
commencing on [_________,1999] and ending on [_________,2004], (i) the Holder
and/or the Holders of any other Warrants and/or Warrant Shares who or which
shall hold, collectively, not less than 50% of the Warrants and/or Warrant
Shares outstanding at such time and not previously sold pursuant to this Section
5 shall request that the Company file a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), covering not less
than 50% of the Warrant Shares issued or issuable upon the exercise of the
Warrants, and not so previously sold, the Company will (i) promptly notify each
Holder of the Warrants and each holder of Warrant Shares not so previously sold
that such registration statement will be filed and that the Warrant Shares which
are then held, and/or may be acquired upon exercise of the Warrants by the
Holder and such Holders, will be included in such registration statement at the
Holder's and such Holders' request, (ii) cause such registration statement to
cover all Warrant Shares which it has been so requested to include, (iii) use
its best efforts to cause such registration statement to become effective as
soon as practicable and (iv) take all other action necessary under any federal
or state law or regulation of any governmental authority to permit all Warrant
Shares which it has been so requested to include in such registration statement
to be sold or otherwise disposed of, and will maintain such compliance with each
such federal and state law and regulation of any governmental authority for the
period necessary for such Holders to effect the proposed sale or other
disposition. The Company shall be required to effect a registration or
qualification pursuant to this Section 5(a) on one occasion only and shall be
required to effect such registration only at such time as the Company is
eligible to use Form S-3 (or any successor form) for the resale of shares by
persons other than the Company. The Company agrees to exercise its best efforts
to obtain eligibility to use Form S-3 at the earliest possible time, and to
maintain such eligibility through the term of this Warrant.
(b) The Company agrees that if, at any time and from time to time
during the period commencing [__________,1999] and ending on
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[___________,2004], the Board of Directors of the Company shall authorize the
filing of a registration statement (any such registration statement being
hereinafter called a "Subsequent Registration Statement") under the Securities
Act (otherwise than pursuant to Section 5(a) hereof, and other than a
registration statement on Form S-8, Form S-4 or other form which does not permit
secondary sales or include substantially the same information as would be
required in a form for the general registration of securities) in connection
with the proposed offer of any of its securities by it or any of its
stockholders, the Company will (i) promptly notify the Holder and each of the
Holders, if any, of other Warrants and/or Warrant Shares not previously sold
pursuant to this Section 5 that such Subsequent Registration Statement will be
filed and that the Warrant Shares which are then held, and/or which may be
acquired upon the exercise of the Warrants, by the Holder and such Holders,
will, at the Holder's and such Holders' request, be included in such Subsequent
Registration Statement, (ii) upon the written request of a Holder made within 20
days after the giving of such notice by the Company, include in the securities
covered by such Subsequent Registration Statement all Warrant Shares which it
has been so requested to include, (iii) use its best efforts to cause such
Subsequent Registration Statement to become effective as soon as practicable and
(iv) take all other action necessary under any federal or state law or
regulation of any governmental authority to permit all Warrant Shares which it
has been so requested to include in such Subsequent Registration Statement to be
sold or otherwise disposed of, and will maintain such compliance with each such
federal and state law and regulation of any governmental authority for the
period necessary for the Holder and such Holders to effect the proposed sale or
other disposition.
(c) Whenever the Company is required pursuant to the provisions of
this Section 5 to include Warrant Shares in a registration statement or a
post-effective amendment to a registration statement, the Company shall (i)
furnish each Holder of any such Warrant Shares and each underwriter of such
Warrant Shares with such copies of the prospectus, including the preliminary
prospectus, conforming to the Securities Act (and such other documents as each
such Holder or each such underwriter may reasonably request) in order to
facilitate the sale or distribution of the Warrant Shares, (ii) use its best
effort to register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or laws (to the extent applicable)
of such jurisdiction or jurisdictions as the Holders of any such Warrant Shares
and each underwriter of Warrant Shares being sold by such Holders shall
reasonably request and (iii) take such other actions as may be reasonably
necessary or advisable to enable such Holders and such underwriters to
consummate the sale or distribution in such jurisdiction or jurisdictions in
which such Holders shall have reasonably requested that the Warrant Shares be
sold, provided that the Company shall not be required to execute a general
consent to service of process or qualify to do business as a foreign corporation
in any jurisdiction where it is not so qualified.
(d) The Company shall have the right to defer the filing of any
registration statement pursuant to Section 5(a) hereof and to suspend the
ability of Holders to sell Warrant Shares pursuant to any registration statement
declared effective under Section 5(a) or 5(b) hereof, in either case for up to
60 days, if (i) in the opinion of counsel for the Company, the Company would
thereby be required to disclose nonpublic information relating to pending
corporate developments or business transactions involving the Company or its
subsidiaries not otherwise then required by law to be publicly disclosed and
(ii) in the good faith judgment of the Company's Board of Directors, such
disclosure at such time would adversely affect the Company or such corporate
development or business transaction contemplated by the Company or its
subsidiaries. Such period shall be referred to herein as the "Black-Out Period,"
and the Company shall not be entitled to implement more than two such Black-Out
Periods during any 12-month period. In the event that notice of a Black-Out
Period is given, each Holder shall keep the fact and subject matter of such
notice confidential and refrain from any further sales or other transfers of
Warrant Shares pursuant to the registration statement until the Holder receives
either copies of a supplemented pr amended prospectus or a notice from the
Company advising the Holder that the use of the existing
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prospectus may be resumed.
(e) Notwithstanding any provision in this Section 5 to the
contrary, the Company shall not be required to include in any registration
requested pursuant to this Section 5 any Warrant Shares issued or issuable upon
exercise of a Warrant and then held by any Holder who is able at such time to
sell all such Warrant Shares in one three-month period pursuant to Rule 144
under the Securities Act.
(f) The Company shall pay all expenses incurred in connection
with any registration or other action pursuant to the provisions of this
Section, other than underwriting discounts and applicable transfer taxes
relating to the Warrant Shares and fees and disbursements of counsel and
accountants for the Holders.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each selling
holder (including, for purposes of this Section 6, any Holder) of Warrant Shares
and each person who controls any such selling holder within the meaning of
Section 15 of the Securities Act, and each and all of them, from and against any
and all losses, claims, damages, liabilities or actions, joint or several, to
which any selling holder of Warrant Shares or they or any of them may become
subject under the Securities Act or otherwise and to reimburse the persons
indemnified above for any legal or other expenses (including the cost of any
investigation and preparation) reasonably incurred by them in connection with
any litigation or threatened litigation, whether or not resulting in any
liability, but only insofar as such losses, claims, damages, liabilities or
actions arise out of, or are based upon, any untrue statement or alleged untrue
statement of a material fact contained in any registration statement pursuant to
which Warrant Shares were registered under the Securities Act (hereinafter
called a "Registration Statement"), any preliminary prospectus, the final
prospectus or any amendment or supplement thereto (or in any application or
document filed in connection therewith) or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; PROVIDED, HOWEVER, that (i) the indemnity agreement
contained in this Section 6(a) shall not extend to any selling holder of Warrant
Shares in respect of any such losses, claims, damages, liabilities or actions
arising out of, or based upon, any such untrue statement or alleged untrue
statement, or any such omission or alleged omission, if such statement or
omission was based upon and made in conformity with information furnished in
writing to the Company by a selling holder of Warrant Shares specifically for
use in connection with the preparation of such Registration Statement, any final
prospectus, any preliminary prospectus or any such amendment or supplement
thereto. The Company agrees to pay any legal and other expenses for which it is
liable under this Section 6(a) from time to time (but not more frequently than
monthly) within 30 days after its receipt of a bill therefor.
(b) Each selling holder of Warrant Shares, severally and not
jointly, will indemnify and hold harmless the Company, its directors, its
officers who shall have signed the Registration Statement and each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act to the same extent as the foregoing indemnity from the Company, but in each
case to the extent, and only to the extent, that any statement in or omission
from or alleged omission from such Registration Statement, any final prospects,
any preliminary prospectus or any amendment or supplement thereto was made in
reliance upon information furnished in writing to the Company by such selling
holder specifically for use in connection with the preparation of the
Registration Statement, any final prospectus or the preliminary prospectus or
any such amendment or supplement thereto; PROVIDED, HOWEVER, that the obligation
of any holder of Warrant Shares to indemnify the Company under the provisions of
this
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Section 6(b) shall be limited to the Market Price of the Warrant Shares
being sold by the selling holder minus the Aggregate Warrant Price for such
Warrant Shares. Each selling holder of Warrant Shares agrees to pay any legal
and other expenses for which its liable under this Section 6(b) from time to
time (but not more frequently than monthly) within 30 days after receipt of a
bill therefor.
(c) If any action is brought against a person entitled to
indemnification pursuant to the foregoing Section 6(a) or Section 6(b) (an
"indemnified party") in respect of which indemnity may by sought against a
person granting indemnification (an "indemnifying party") pursuant to such
section, such indemnified party shall promptly notify such indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party of any such action shall not release the indemnifying party
from any liability it may have to such indemnified party otherwise than on
account of the indemnity agreement contained in Section 6(a) or Section 6(b)
hereof to the extent it is not prejudiced as a proximate result of such failure.
In case any such action is brought against an indemnified party and it notifies
an indemnifying party of the commencement thereof, the indemnifying party
against which a claim is to be made will be entitled to participate therein at
its own expense and, to the extent that it may wish, to assume at its own
expense the defense thereof, with counsel reasonably satisfactory to such
indemnified party; PROVIDED, HOWEVER, that if the indemnified party shall have
reasonably concluded based upon advice of counsel 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 shall have the right to select separate counsel to assume such legal
defenses and otherwise to 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 its 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
such counsel in connection with the assumption of legal defenses 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), (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. An
indemnifying party shall not be liable for any settlement of any action or
proceeding effected without its written consent (which consent shall not be
unreasonably withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 6(a) or
(b) hereof is unavailable in accordance with its terms, the Company and the
selling holder of Warrant Shares shall contribute to the aggregate losses,
claims, damages and liabilities, of the nature contemplated by said indemnity
agreement, incurred by the Company and the selling holder of Warrant Shares, in
such proportions as is appropriate to reflect the relative benefits received by
the Company, on the one hand, and the selling holder of Warrant Shares, on the
other hand, from any offering of the Warrant Shares; PROVIDED, HOWEVER, that if
such allocation is not permitted by applicable law or if the indemnified party
failed to give the notice required under Section 6(c), then the relative fault
of the Company and the selling holder of Warrant Shares in connection with the
statements or omissions which result in such losses, claims, damages and
liabilities and other relevant equitable considerations will be considered
together with such relative benefits.
(e) The respective indemnity and contribution agreements by the
Company and the selling holder of Warrant Shares in Sections 6(a), (b), (c) and
(d) hereof shall remain operative and in full force and effect regardless of (i)
any investigation made by any selling holder of Warrant Shares or by or
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on behalf of any person who controls such selling holder or by the Company or
any controlling person of the Company or any director or any officer of the
Company, (ii) the exercise of this Warrant or (iii) payment for any of the
Warrant Shares, and shall survive the delivery of the Warrant Shares, and any
successor of the Company, or of any selling holder of Warrant Shares, or of any
person who controls the Company, or of any selling holder of Warrant Shares, as
the case may be, shall be entitled to the benefit of such respective indemnity
and contribution agreements. The respective indemnity and contribution
agreements by the Company and the selling holders of Warrant Shares contained in
Sections 6(a), (b), (c) and (d) hereof shall be in addition to any liability
which the Company and the selling holders of Warrant Shares may otherwise have.
7. Limited Transferability. This Warrant may not be sold,
transferred, assigned or hypothecated by the Holder (a) except in compliance
with the provisions of the Securities Act and any applicable state securities
laws and (b) until the first anniversary of the date hereof except (i) to
Cruttenden Roth Incorporated or any successor firm or corporation of Cruttenden
Roth Incorporated, (ii) to any of the officers of Cruttenden Roth Incorporated,
or of any such successor firm or corporation, or (iii) in the case of an
individual, pursuant to such individual's last will and testament or the laws of
descent and distribution, and is so transferable only upon the books of the
Company which it shall cause to be maintained for the purpose. The Company may
treat the registered Holder of this Warrant as he or it appears on the Company's
books at any time as the Holder for all purposes. The Company shall permit any
Holder of a Warrant or his or its duly authorized attorney, upon written request
during ordinary business hours, to inspect and copy or make extracts from its
books showing the registered holders of Warrants. All Warrants issued upon the
transfer or assignment of this Warrant will be dated the same date as this
Warrant, and all rights of the Holder thereof shall be identical to those of the
Holder of this Warrant.
8. Loss, etc., of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, the Company shall execute and deliver to the Holder a new Warrant of
like date, tenor and denomination.
9. Warrant Holder Not Stockholder. Except as otherwise
provided herein, this Warrant does not confer upon the Holder any right to vote
or to consent to or receive notice as a stockholder of the Company, as such, in
respect of any matters whatsoever, or any other rights or liabilities as a
stockholder, prior to the exercise hereof.
10. Communication. No notice or other communication under
this Warrant shall be effective unless, but any notice or other communication
shall be effective and shall be deemed to have been given if, the same is in
writing and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at 2331 South Pullman Street, Santa
Ana, California, 92705, or such other address as the Company
has designated in writing to the Holder, or
(b) the Holder at Cruttenden Roth Incorporated, 18301
Von Karman Avenue, Suite 100, Irvine, CA 92612, Attention:
Corporate Finance Department, or such other address as the
Holder has designated in writing to the Company.
11. Headings. The headings of this Warrant have been
inserted as a matter of convenience and shall not affect the construction
hereof.
-9-
<PAGE>
12. Applicable Law. This Warrant shall be governed by and
construed in accordance with the law of the State of Delaware without giving
effect to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, Troy Group, Inc. has caused this Warrant to
be signed by its [ ] and its corporate seal to be hereunto affixed
and attested by its Secretary this __ day of ____________, 1999.
TROY GROUP, INC.
By:
---------------------------------
Patrick J. Dirk
Chairman and Chief Executive Officer
ATTEST:
- -----------------------------
Name:
Title:
[Corporate Seal]
-10-
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby sells,
assigns and transfers unto _______________________________ the foregoing Warrant
and all rights evidenced thereby, and does irrevocably constitute and appoint
_____________________________, attorney, to transfer said Warrant on the
books of Troy Group, Inc.
Dated: ________________ Signature: ____________________________
Address: _______________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby sells,
assigns and transfers unto __________________________ the right to purchase
_____________ shares of the Common Stock of Troy Group, Inc. covered by the
foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Troy Group, Inc.
Dated: ________________ Signature: ____________________________
Address: _______________________________
<PAGE>
SUBSCRIPTION FORM
The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the attached Warrant for, and to purchase
thereunder, _____________ shares of the Common Stock of Troy Group, Inc., as
provided for in Section 1 thereof.
The undersigned herewith makes payment for such shares in full
at the price per share provided by such Warrant in the following manner (please
check the type or types of payment and indicate the portion of the aggregate
payment to be paid by each type of payment):
____ exercise for cash as provided in Section 1(a) of such
Warrant.
____ exercise by surrender of such Warrant (or a portion
thereof) in accordance with Section 1(b) of such Warrant.
Please issue a certificate or certificates for such shares in
the name of, and pay any cash for any fractional share to:
Name _____________________________________
(Please Print Name, Address and Social
Security No. or Taxpayer Identification No.)
Address __________________________________
__________________________________
Social Security No. or
Taxpayer Identification No._____________
Signature ________________________________
NOTE: The above signature should correspond
exactly with the name on the first page of
such Warrant or with the name of the
assignee appearing in the assignment form
attached to the Warrant.
And if such number of shares shall not be all the shares
purchasable under the attached Warrant, a new Warrant is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder and delivered to the address set forth above.
