<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1999
REGISTRATION NO. 333-51523
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 5
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. MICHAEL S. WACHHOLZ, 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 JUNE 25, 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 555,000
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
- 200,000 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
<PAGE>
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 555,000 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
25, 2006. All outstanding options provide for antidilution adjustments in the
event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in our corporate structure. Upon
consummation of this offering, we intend to grant options to purchase an
aggregate of 555,000 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 200,000 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
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)
$0.01 par value common stock and $242,000 in cash. The total acquisition cost
was $924,000 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.
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 grant options to
acquire a total of 150,000 shares to five individuals upon the conversion of the
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)
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 minimum fair value method prescribed in Statement No.
123, with the following assumptions: no dividends for all years, expected lives
of 5 years, expected amounts to be exercised of 100% and risk-free interest rate
of 4.38%, and 5.71%, respectively. 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
effect of the warrant was recorded in June 1999 at the then current fair value
when the terms of the warrant were amended and the warrant was vested. The
warrant expires five years after it vested.
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)
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 555,000 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*
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*
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. 5 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 24th day of June, 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. 4 to the Registration Statement has been signed by the following persons in
the capacities indicated, on June 24, 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*
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)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
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*
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 200,000 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.
8
<PAGE>
(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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(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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<PAGE>
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.
19
<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
<PAGE>
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
21
<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
27
<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
28
<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.
29
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the Underwriters.
Very truly yours,
TROY GROUP, INC.
By:________________________________
Patrick J. Dirk, Chairman and
Chief Executive Officer
Confirmed as of the date first above mentioned:
CRUTTENDEN ROTH INCORPORATED
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:_______________________________
30
<PAGE>
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>
31
<PAGE>
EXHIBIT A
FORM OF WARRANT
32
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EXHIBIT B
FORM OF LOCK-UP AGREEMENT
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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 Thousand (200,000) 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.
<PAGE>
MERGER PURCHASE AGREEMENT
AMONG
TROY GROUP, INC.,
AS PURCHASER,
AND
TROY MERGER SUBSIDIARY, INC.
AS MERGER SUBSIDIARY AND
SURVIVING CORPORATION
AND
XCD INCORPORATED,
AS TARGET CORPORATION
AND ITS
SHAREHOLDERS
DATED AS OF OCTOBER 28, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Defined Terms.....................................................................1
2. The Merger Transaction............................................................6
2.1. The Merger...................................................................6
2.2. The Closing..................................................................6
2.3. Actions at the Closing.......................................................6
2.4. Effect of Merger.............................................................7
2.5. Procedure for Payment of XCD Shareholders....................................7
2.6. Dissenting XCD Shares........................................................8
2.7. Adjustments Upon Changes in Capitalization...................................8
2.8. Restricted Securities........................................................8
2.9. Holdback.....................................................................9
3. Other Agreements..................................................................9
3.1. Repayment of Certain XCD Obligations.........................................9
3.2. Employment Agreements........................................................9
3.3. Non-Solicitation Agreement...................................................9
3.4. Confidentiality.............................................................10
4. Representations and Warranties of the Target Corporation and each of the XCD
Shareholders.....................................................................10
4.1. Organization and Good Standing..............................................10
4.2. Authority...................................................................10
4.3. No Subsidiaries.............................................................11
4.4. Financial Statements........................................................11
4.5. Leaseholds and Improvements.................................................11
4.6. Real Property...............................................................11
4.7. Personal Property...........................................................11
4.8. Intellectual Property Rights................................................12
4.9. Litigation..................................................................12
4.10. Compliance with Laws.......................................................13
4.11. Entire Business............................................................13
4.12. Contracts..................................................................13
4.13. Receivables: Payables......................................................14
4.14. Certain Transactions.......................................................15
4.15. Employees..................................................................16
4.16. Employee Benefit Plans.....................................................16
4.17. Licenses and Permits.......................................................19
4.18. Transactions with Affiliates...............................................20
4.19. Truthfulness...............................................................20
4.20. Unlawful Payments..........................................................20
4.21. Insurance..................................................................20
4.22. Environmental Matters......................................................21
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<PAGE>
4.23. Status of XCD Shareholders.................................................21
4.24. Tax Matters................................................................21
4.25. No Sale....................................................................22
4.26. Brokers and Finders........................................................22
4.27. Purchase Commitments.......................................................22
4.28. Certain Reports............................................................22
4.29. Certain Payments to Shareholders...........................................22
4.30. Bank and Securities Accounts...............................................22
4.31. Charter Documents..........................................................23
4.32. Capitalization.............................................................23
4.33. Officers and Directors.....................................................23
4.34. Dividends..................................................................23
5. Representations and Warranties of Purchaser and Merger Subsidiary................23
5.1. Organization................................................................24
5.2. Authority...................................................................24
5.3. Litigation..................................................................24
5.4. Truthfulness................................................................24
5.5. Capitalization..............................................................24
5.6. Material Changes............................................................25
5.7. No Default..................................................................25
5.8. Board and Shareholder Action................................................25
5.9. Compliance with Laws Generally..............................................25
5.10. Financial Statements.......................................................26
5.11. Employee Benefit Plans.....................................................26
5.12. ...........................................................................28
5.13. Tax Matters................................................................28
6. Further Covenants and Agreements.................................................29
6.1. Conduct of Business.........................................................29
6.2. Third Party Consents........................................................32
6.3. Access: Information.........................................................32
6.4. Audited Financial Statements................................................32
6.5. Interim Financial Statements and Other Financial Reports....................32
6.6. Insurance Proceeds..........................................................33
6.7. California Franchise Board Tax Clearance....................................33
6.8. Financing...................................................................33
7. Conditions Precedent to Obligations of Purchaser and Merger Subsidiary...........33
7.1. Opinion of Counsel..........................................................33
7.2. Performance by Target Corporation and XCD Shareholders......................33
7.3. Representations and Warranties..............................................33
7.4. No Actions or Proceedings...................................................33
7.5. No Material Adverse Change..................................................34
7.6. Officer's Certificate.......................................................34
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<PAGE>
7.7. Satisfaction of Counsel.....................................................34
7.8. Consents and Estoppels......................................................34
7.9. Title Reports...............................................................34
7.10. Employment Agreements......................................................34
7.11. Merger Documents...........................................................35
7.12. California Franchise Tax Board Clearance...................................35
7.13. Investment Letters.........................................................35
7.14. Financing..................................................................35
7.15. No Dissenters..............................................................35
8. Conditions Precedent to Obligations of XCD.......................................35
8.1. Opinion of Counsel..........................................................35
8.2. Performance by Purchaser....................................................35
8.3. Representations and Warranties..............................................35
8.4. No Actions or Proceedings...................................................35
8.5. Officer's Certificate.......................................................35
8.6. Employment Agreements.......................................................36
8.7. Satisfaction of Counsel.....................................................36
8.8. Merger Documents............................................................36
8.9. Merger Consideration........................................................36
8.10.............................................................................36
8.11.............................................................................36
9. Indemnification..................................................................36
9.1. Indemnities.................................................................36
9.2. Claims Procedures...........................................................37
9.3. Limitations.................................................................38
10. Miscellaneous...................................................................38
10.1. Attorneys'Fees.............................................................38
10.2. Expenses...................................................................38
10.3. Amendments and Waivers.....................................................38
10.4. Transferability Assignment.................................................38
10.5. Termination................................................................38
10.6. Notices....................................................................39
10.7. Governing Law; Choice of Forum.............................................40
10.8. Partial Invalidity.........................................................40
10.9. Section Headings...........................................................40
10.10. Counterparts..............................................................40
10.11. Entire Agreement..........................................................40
10.12. Public Announcements......................................................40
10.13. Gender....................................................................40
10.14. No Waiver: Cumulative Remedies............................................40
10.15. Survival..................................................................41
</TABLE>
iii
<PAGE>
MERGER PURCHASE AGREEMENT
EXHIBITS AND SCHEDULES
EXHIBITS
EXHIBITS "A-1" - Employment Agreements
EXHIBIT "B" Form Of Agreement Of Merger To Be Filed With Secretary Of
State Of California and Delaware
EXHIBIT "C" FORM OF REGISTRATION RIGHTS AGREEMENT
SCHEDULES
Schedule 3.1.1 XCD Shareholder Loans
Schedule 3.1.2 XCD Deferred Compensation Obligations
Schedule 2.4.4 Officers and Directors of Surviving Corporation
Schedule 2.4.5 Merger Consideration Schedule (for each XCD Shareholder)
Schedule 4.1 Organization and Good Standing
Schedule 4.2 Required Consents; Conflicts
Schedule 4.3 Related Companies
Schedule 4.4 HIstorical Financial Statements
Schedule 4.5 Leaseholds
Schedule 4.6 Real Property
Schedule 4.7 Liens
Schedule 4.8 Intellectual Property Rights
Schedule 4.9 Litigation
Schedule 4.12 Contracts
Schedule 4.13 Receivables
Schedule 4.14 Certain Transactions
Schedule 4.15 Employees
Schedule 4.16 Employee Plans
Schedule 4.18 Transactions with Affiliates
Schedule 4.21 Insurance
Schedule 4.25 Taxes
Schedule 4.29 Certain Payments to Shareholders
Schedule 4.30 Bank and Securities Accounts
Schedule 4.32 Capitalization
Schedule 4.33 Officers and Directors
iv
<PAGE>
MERGER PURCHASE AGREEMENT
This MERGER PURCHASE AGREEMENT is dated as of October 28, 1998,
("Agreement"), among TROY GROUP, INC., a Delaware corporation ('Purchaser"),
TROY MERGER SUBSIDIARY, INC., a Delaware corporation ("Merger Subsidiary" or,
after giving effect to the merger described in this Agreement, the "Surviving
Corporation"), and XCD, INCORPORATED, a California corporation "XCD"" or the
"Target Corporation") and the shareholders of Target Corporation identified
on the signature page hereto the "XCD Shareholders."
This Agreement contemplates a transaction in which Purchaser will
acquire all of the outstanding capital stock of XCD for cash and common stock
of Purchaser through a forward subsidiary merger of Target Corporation with
and into Merger Subsidiary, with Merger Subsidiary to be the Surviving
Corporation. Such acquisition is intended to qualify as a partially tax-free
reorganization within the meaning of Section 368(a)(i)(A) of the Internal
Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the premises and the respective
promises herein made, and in consideration of the representations,
warranties, covenants and agreements herein contained, the parties agree as
follows:
1. DEFINED TERMS. The following terms shall have the respective meanings
ascribed to them below:
"Affiliate" shall mean, with respect to any party, any person who
directly or indirectly through stock ownership or through any other
arrangement either controls, or is controlled by, or is under common control
with, such party. The term "control" shall mean the power to direct the
affairs of such party by reason of ownership of voting stock or other equity
interests, by contract or otherwise.
"Agent" shall mean Mr. Keith Sugawara, as agent for all of the XCD
Shareholders with respect to claims under Section 9 hereof In the event of
the death or incapacity of Mr. Keith Sugawara, "Agent" shall mean such other
person designated by a majority in interest of the XCD Shareholders.
"Assets" shall mean all of the assets, properties, interests, cash on
hand and in bank accounts, cash equivalents, investments, marketable
securities, business, goodwill, claims and other rights of the Target
Corporation of every kind and nature whatever, tangible or intangible, vested
or unvested, fixed, contingent or otherwise, real, personal or mixed, and
wherever located, whether or not reflected on the books and records of the
Target Corporation and whether or not described herein or in any of the
exhibits or schedules delivered or to be delivered to Purchaser hereunder,
including, without limitation, all respective right, title and interest of
the Target Corporation in, to and under the names "XCD INCORPORATED" and
"XCD," the Tangible Personal Property (including the Inventories); the
Leaseholds; the Improvements; all rights, benefits, privileges and interests
under the Contracts (including all security and other deposits thereunder);
Receivables; Licenses; Intellectual Property Rights; Warranties; Records;
prepaid expenses; backlog; advances; rights, benefits, claims, credits,
prorations and refunds due or belonging to the Target Corporation under any
Contracts or insurance policies or otherwise; and all rights to any deposits
made by the Target Corporation to obtain goods, services, rights or
privileges of any kind; and including all of the foregoing acquired by or on
behalf of the Target Corporation between the date of this Agreement and the
Closing Date.
"Audit Accountants" shall have the meaning set forth in Section 6.4.
1
<PAGE>
"Audited Financial Statements" shall mean the audited balance sheet
and results of operations (including audited statements of income or loss,
cash flows and shareholders' equity) of the Target Corporation as of and for
the fiscal years ended December 31, 1996 (reviewed, not audited) and December
31, 1997.
"Business" shall mean, collectively, the business of the Target
Corporation, which, in the aggregate, includes all current operations, but is
not necessarily limited to the sale of existing products and the research,
development and sale of other proprietary and non-proprietary software and
hardware.
"California Franchise Tax Board Clearance" shall mean the franchise
tax clearance required to be issued by the State of California in connection
with the XCD Merger.
"Capital Stock Change" shall have the meaning specified in Section 2.7.
"Closing" shall have the meaning specified in Section 2.2.
"Closing Date" shall have the meaning specified in Section 2.2.
"COBRA" shall have the meaning specified in Section 4.16.6.
"Confidential Information" means any information concerning the
business and affairs of the Purchaser or XCD which is not generally known or
available to the public.
"Contracts" shall mean, collectively, and "Contract" shall mean,
individually, all leases relating to Leaseholds, distribution agreements,
franchise agreements and arrangements, maintenance agreements, service
agreements, equipment or other personal property leases, arrangements
regarding the loaning of equipment or value added services, use agreements,
loan, credit, or financing agreements of any kind, security agreements,
chattel or leasehold mortgages, license agreements, agency agreements,
purchase orders, sales orders, blanket or master agreements with customers,
supply contracts, output or requirements contracts, commitments to purchase
or sell goods, products or services of any kind, stockholders agreements,
stock redemption agreements, stock option, warrant, purchase or rights
agreements, any other agreements relating to or affecting the capital stock
of the Target Corporation, buy-sell agreements, indentures, notes,
restrictive covenants of any kind, and other contracts and agreements of any
kind or nature, whether written or oral, to which the Target Corporation is a
party or by which the Target Corporation or the Assets or the Business (in
whole or in part) are subject, and all rights, interests, benefits and
privileges arising thereunder.
"Dissenting XCD Shares" shall have the meaning specified in Section
2.6.
"Effective Time" shall have the meaning specified in Section 2.4.
"Employee" shall mean, as the context requires, any former or current,
active or inactive, employee, officer, agent, consultant, independent
contractor or subcontractor of the Target Corporation.
"Employee Agreement" shall have the meaning specified in Section
4.16.1.
"Employee Plan" shall have the meaning specified in Section 4.16.1.
2
<PAGE>
"Employment Agreement" shall mean the Employment Agreement to be
executed and delivered by the Surviving Corporation, as employer, and the
Employee(s), as employee, on the Closing Date, in the forms attached as
Exhibits "A-1" through "A-5."
"Environmental Laws" shall have the meaning specified in Section 4.22.
"ERISA" shall have the meaning specified in Section 4.16.1.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
"Hazardous Substances" shall have the meaning specified in Section
4.22.
"Historical Financial Statements" shall mean the unaudited balance
sheet and results of operations (including unaudited statements of income or
loss, cash flows and shareholders' equity) of the Target Corporation as of
and for the nine (9) month period ending September 30, 1998, and the Audited
Financial Statements.
"Improvements" shall have the meaning specified in Section 4.5.
"Indebtedness" shall mean any (i) debt for the payment of money or
borrowed money or for the deferred purchase price of property or services,
(ii) obligations evidenced by notes, bonds, debentures or other instruments,
(iii) lease obligations which would normally be capitalized under GAAP, and
(iv) obligations under direct or indirect guarantees of (including
obligations, contingent or otherwise, to assure a creditor against loss in
respect of) indebtedness or obligations of others of any of the types
referred to in clauses (i), (ii) or (iii) above.
"Interim Financial Statements" shall mean the Target Corporation's
internal unaudited balance sheet and statement of income or loss as of and
for the month ending September 30, 1998 and as and for each month thereafter
the last day of which is more than fifteen (15) days prior to the Closing
Date.
"Intellectual Property Rights" shall mean (i) Patents, (ii) Know-how,
(iii) Trademarks, (iv) Trade Names, and (v) shop rights, copyrights,
inventions, technology, service marks and all other intellectual property
rights, whether registered or not.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986,
as amended.
"Inventories" shall mean all inventories of XCD.
"Inventory List" shall have the meaning specified in Section 4.7.3.
"Key Employees" shall mean Keith Sugawara, Bill (William) Hegardt, Jon
Asahina, Jim (James) Okubo, Lee Aydelotte, Ronald Kanemura and Bill (William)
Gibson.
"Know-how" shall mean all trade secrets, know-how (including, without
limitation, product know-how and use and application know-how), processes,
product designs, specifications, work flow analyses, charts and designs,
selling, quoting, bidding and other business techniques, methods and systems,
customer requirements, quality control procedures, computer databases and
software, telephone numbers, facsimile numbers, technology and all other
information and similar intangibles, including, without limitation, technical
information, safety information, research records, market information and
surveys and all
3
<PAGE>
promotional literature, customer and supplier lists (and all other
information relating to suppliers and customers) and similar data.
"Leaseholds" shall mean the real property and interests in real
property leased or used by the Target Corporation in connection with the
Business, or any part thereof; or otherwise.
"Liabilities" shall mean, collectively, with respect to any Person,
all types of Indebtedness, liabilities, obligations, debts, duties and
responsibilities of, and all claims, demands, judgments, orders, fines and
penalties against, such Person of any kind or nature whatever, fixed or
contingent, liquidated or unliquidated, known (but not unknown), disclosed or
undisclosed.
"Licenses" shall mean all local, municipal, state, federal and foreign
licenses, franchises, permits, consents, approvals, waivers, rights and
authorizations used or required for use in connection with the conduct of the
Business (or any part thereof), and all industry certifications of the
Business or the Assets (or any part thereof).
"Lien" shall mean any mortgage, pledge, deed of trust, assignment,
lien, charge, encumbrance, judgment, restriction or security interest of any
kind or nature whatever, or the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Material Contract" shall mean any, and "Material Contracts" shall
mean all, of the following Contracts: (a) any Contract providing for the
purchase of Inventories (other than routine purchase orders made in the
ordinary course of business consistent with past practice) by, or the sale of
Inventories to, the Target Corporation (e.g., distributor, franchise,
purchasing and supplier agreements); (b)any Contract (other than routine
purchaser orders received in the ordinary course of business consistent with
past practice) with any customer of the Target Corporation; (c) any Contract
relating to borrowings made by the Target Corporation, or pursuant to which
Assets of the Target Corporation are pledged or assigned as collateral, or
the Business (in whole or in part) is restricted; (d) any Contract which in
any manner relates to the capitalization, capital structure or authorized
shares of the Target Corporation, or to any XCD Shares, or to rights
(contingent or otherwise) to acquire any security of; or interest in, the
Target Corporation or the Business, including any agreement between or among
any XCD Shareholders relating to the Target Corporation or the Business
(whether or not the Target Corporation is a party thereto); (e) any Contract
which is not terminable upon ninety (90) days (or shorter) notice without
liability or cost to the Target Corporation, (f) any Contract relating to any
of the Leaseholds; (g) any Contract relating to insurance for the Business or
the Assets, any Employee Plan, any Intellectual Property Rights or any
Licenses; (h) any Contract relating to any of the real property; (i) any
Contract which a reasonably prudent business person knowledgeable of the
Business and exercising reasonable business judgment would deem material to
the Business; and (j) any Contract entered into Outside of the ordinary
course of business consistent with past practice.
"Merger" shall have the meaning specified in Section 2.1.
"Merger Consideration" shall have the meaning specified in Section
2.4.5.
"Merger Subsidiary" shall mean Troy Merger Subsidiary, Inc., a
Delaware corporation, and a wholly-owned subsidiary of Purchaser.
4
<PAGE>
"Patents" shall mean patents (including all reissues, divisions,
continuations, continuations in part and extensions thereof), patent
applications and patent disclosures docketed and all other patent rights
(including, without limitation, all claims against third parties for past
infringement not heretofore asserted).
"Person" shall mean any natural person, corporation, association,
partnership, governmental agency or subdivision thereof; joint venture or
other entity.
"Purchaser" shall mean Troy Group, Inc., a Delaware corporation.
"Purchaser's S-1 Registration Statement" shall mean Registration No.
333-5 1523 as filed with the SEC, and all amendments or supplements thereto.
"Receivables" shall mean, collectively, all accounts receivable,
claims, notes and other amounts receivable by, or owed to, the Target
Corporation or which may be claimed by the Target Corporation as a result of
the operation or ownership of the Business (or any part thereof), including,
without limitation, all amounts due from franchisees, customers, vendors and
Employees, together with any unpaid financing charges accrued thereon,
whether or not arising in the ordinary course of business.
"Records" shall mean, collectively, originals, or, to the extent
originals are not available, true and complete copies, of all business,
accounting and financial records, including corporate minute books and
records, and stock ledgers and records, property records, contract records,
personnel records, correspondence, files, books and documents of the Target
Corporation, including, without limitation, production, testing, quality
control, sales, marketing and advertising data and materials, customer and
supplier records and mailing lists of any and all types, vendor and customer
invoices, billing records, software and related documentation, art work,
photographs and advertising material, manuals and teaching aids, and all
other records relating to the Business as presently and heretofore conducted.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Surviving Corporation" shall mean Merger Subsidiary after giving
effect to the Merger.
"Tangible Personal Property" shall mean, collectively, all fixed
assets, machinery, equipment, tools, vessels, containers, computers,
vehicles, furniture, fixtures, leasehold improvements, office equipment,
plant, supplies, inventory (including, without limitation, Inventories) and
other tangible personal property owned by the Target Corporation of any kind
or nature.
"Target Corporation" shall mean XCD INCORPORATED.
"Taxes" shall mean all taxes of any kind, including, without
limitation, those on, or measured by or referred to as, income, gross
receipts, capital gains, built-in gains, retained earnings, sales (including,
without limitation, sales taxes due or payable on leases), use, ad valorem,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, documentary stamp, intangible (recurring and
non-recurring), occupation, premium, property or windfall profits taxes,
customs duties or similar fees, import or export duties, and assessments or
charges of any kind whatever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority,
domestic or foreign.
5
<PAGE>
"Trademarks" shall mean trademarks, registrations thereof, pending
applications therefor and such unregistered rights as may exist through use.
"Trade Names" shall mean, collectively, trade names, brand marks,
trade dress, brand names and all other names and slogans used in connection
with the Business embodying the Target Corporation's good will for which no
trademark registration has been obtained and for which no application is
pending.
"Troy Share" shall mean a share of common stock, $.01 par value, of
Purchaser.
"Warranties" shall mean, collectively, all warranties in favor of the
Target Corporation with respect to any and all Tangible Personal Property
(including Inventories) or pursuant to any Contract, including, without
limitation, warranties of any supplier of Tangible Personal Property
(including Inventories) sold to the Target Corporation, whether resold or to
be resold by the Target Corporation to its customers.
"XCD" shall mean XCD INCORPORATED., a California corporation, which is
sometimes herein referred to as "Target Corporation."
"XCD's Shares" shall mean, collectively, the 37,900,000 shares of
common stock of XCD which are issued and outstanding on the date hereof and
which, at the Effective Time, shall constitute all of the issued capital
stock of XCD.
"XCD Shareholders" shall mean all of the holders of XCD Shares.
"XCD Shareholder Loans" shall mean all of the obligations described on
Schedule 3.1.1.
2. THE MERGER TRANSACTION.
2.1. THE MERGER. On and subject to the terms and conditions of this
Agreement, Target Corporation will merge with and into Merger Subsidiary
(the "Merger") at the Effective Time. Merger Subsidiary shall be the
corporation surviving the Merger.
2.2. THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of
Schuler & Associates, 500 Newport Center Drive, Suite 700, Newport
Beach, California, commencing at 10:00 a.m. local time on October 30,
1998 or such other place or date as the parties may mutually determine
(the "Closing Date"); provided, however, in no event shall the Closing
Date be later than November 14, 1998, unless by written agreement such
Closing Date is extended by all of the parties hereto.
2.3. ACTIONS AT THE CLOSING. At the Closing: (i) XCD and/or the XCD
Shareholders will deliver or cause to be delivered to Purchaser and
Merger Subsidiary the various certificates, instruments, agreements and
documents referred to in Section 7 of this Agreement; (ii) Purchaser and
Merger Subsidiary will deliver or cause to be delivered to XCD and the
XCD Shareholders the various certificates, instruments, agreements and
documents referred to in Section 8 of this Agreement; (iii) XCD and
Merger Subsidiary will file with the Secretary of State of the State of
Delaware Agreement of Merger substantially in the form attached hereto
as Exhibit "B;" (iv) Merger Subsidiary shall file the documents required
by California Corporations Code Section 1108(d); (v) Purchaser will
deliver or will cause to be delivered, or provide for the delivery of;
the Merger Consideration in the manner provided below in this Section 2;
and (vi) Merger Subsidiary shall change its name to TROY XCD, Inc.
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2.4. EFFECT OF MERGER.
2.4.1. GENERAL. The Merger shall become effective at the time (the
"Effective Time") XCD and Merger Subsidiary file the XCD Agreement of
Merger with the Secretary of State of the State of Delaware. The
Merger shall have the effect set forth in the Delaware General
Corporation Law. The Surviving Corporation may, at any time after the
consummation of the Merger, take any action (including executing and
delivering any document) in the name and on behalf of the Target
Corporation with which it was merged in order to carry out and
effectuate the transactions contemplated by this Agreement.
2.4.2. CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of the Surviving Corporation shall be the Articles of
Incorporation of Merger Subsidiary immediately prior to the Effective
Time, except that the name of Merger Subsidiary shall be changed to
"TROY XCD, Inc."
2.4.3. BYLAWS. The Bylaws of the Surviving Corporation shall be the
Bylaws of Merger Subsidiary immediately prior to the Effective Time.
2.4.4. DIRECTORS AND OFFICERS. The director(s) and officers of the
Surviving Corporation at and as of the consummation of the Merger
shall be as set forth on Schedule 2.4.4 hereto.
2.4.5. CONVERSION OF XCD SHARES. At and as of the Effective Time,
all of the outstanding XCD Shares shall be exchanged for the following
(the "Merger Consideration"): (i) an aggregate cash amount of One
Million Five Hundred Fifty Thousand Dollars ($1,550,000); and (ii)
171,430 Troy Shares. The Merger Consideration payable to each XCD
Shareholder is set forth on Schedule 2.4.5.
2.4.6. XCD OPTIONS. At and as of the Effective Date, all
outstanding options for the purchase of XCD capital stock shall be
canceled and shall become null and void.
2.4.6.1 EMPLOYMENT AGREEMENT OPTIONS. Certain of the Key Employees
shall receive options to purchase Troy Shares, all as provided in
their Employment Agreements or the exhibits thereto.
2.4.7. SHARES OF MERGER SUBSIDIARY. None of the issued shares of
capital stock of Merger Subsidiary shall be converted as a result of
the Merger, but all of such shares shall remain issued shares of
capital stock of the Surviving Corporation.
2.5. PROCEDURE FOR PAYMENT OF XCD SHAREHOLDERS.
2.5.1. Upon the effectiveness of the Merger, all XCD Shares,
without any further action being required, shall automatically be
cancelled and be of no further force, effect or significance. At the
Closing, all stock certificates evidencing any issued XCD Shares
(together with spousal consents, for all married XCD Shareholders, in
form and content reasonably satisfactory to Purchaser) shall be
delivered to Purchaser. Purchaser may, upon or following the
effectiveness of the Merger, mark all of such certificates "void" or
"cancelled" and/or take such other action as appropriate or desirable
to evidence the cancellation and cessation of existence of all of XCD
Shares.
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2.5.2. As soon as reasonably practicable following the Closing Date
(but in no event later than the Closing Date), Purchaser shall pay
and/or cause to be paid the Merger Consideration in accordance with
Schedule 2.4.5.
2.5.3. For the convenience of Purchaser, fractional Troy Shares
shall not be issued. Any person who would otherwise be entitled to
receive a fractional interest in a Troy Share shall receive, at the
time the Merger Consideration is paid one (1) whole Troy Share in lieu
of such fractional share.
2.6. DISSENTING XCD SHARES. Should there hereafter arise, for any
reason, a situation wherein any shareholder of the Target Corporation could
have rights under applicable law to dissent from the approval of the Merger,
Purchaser shall NOT be obligated to close the transactions contemplated
hereby (even assuming all other conditions precedent to its obligation to
close under this Agreement have been satisfied or waived). Holders of
dissenting XCD Shares, if any, shall be entitled to such dissenters' rights
in respect of the Merger as are set forth in the California Corporations
Code, as applicable, and all applicable procedures therein contained shall be
observed (such shares are hereinafter referred to as "dissenting XCD
Shares"). Holders of Dissenting XCD Shares shall not be considered XCD
Shareholders or entitled to the Merger Consideration for any purpose of this
Agreement or any Exhibit to this Agreement. It is again emphasized that no
Dissenting XCD Shares are anticipated, and that this Section 2.6 has been
included only to address any unforeseen circumstance which would create
dissenters' rights. In the event that Dissenting XCD Shares do exist,
Purchaser and Merger Subsidiary elect to close the transaction, and the
payment in solely cash (as opposed to cash and stock) to the dissenters would
be required, Schedule 2.4.5 shall be adjusted accordingly. In such event, the
number of Troy Shares to be issued as part of the Merger Consideration shall
be reduced by the number of Troy Shares applicable to a the Dissenting XCD
Shares, as well as the cash portion such Dissenting XCD Shares would have
received. Any payments required to be made to Dissenting XCD Shares shall be
made by Purchaser (and not the Target Corporation or Merger Subsidiary) and
shall reduce the aggregate Merger Consideration on a dollar for dollar basis,
as if the holder of such Dissenting XCD Shares had not been a shareholder on
the Closing Date.
2.7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The Target Corporation
and the XCD Shareholders shall not cause or permit to occur any. stock split,
reverse stock split, stock dividend, reclassification or recapitalization
which changes the character or amount (a "Capital Stock Change") of the XCD
Shares. Nonetheless, without in any manner limiting Purchaser's or Merger
Subsidiary's rights or remedies in respect of any breach of the obligations
set forth in the preceding sentence or elsewhere in this Agreement, should a
Capital Stock Change with respect to any XCD Shares occur prior to Closing,
and Purchaser nevertheless elects to close, Purchaser shall make such
adjustments to the Merger Consideration as shall be equitable and appropriate
in order to make such Merger Consideration (as a whole and per affected
stockholder of the Target Corporation), as nearly as practicable, equivalent
in value to such Merger Consideration (as a whole and per affected
stockholder of the Target Corporation) prior to the Capital Stock Change.
2.8. RESTRICTED SECURITIES. The Troy Shares to be issued in exchange for
shares of the Target Corporation have not been registered under the
Securities Act by reason of an exemption therefrom, and may not be
transferred or resold except pursuant to an effective registration statement
or
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exemption from registration and each certificate representing Troy Shares
will be endorsed with the following legend and any legend required to be
placed thereon by applicable state securities laws:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE
SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF A CURRENT AND EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT WITH RESPECT TO SUCH SHARES, OR AN
OPINION OF THE ISSUER'S COUNSEL TO THE EFFECT THAT REGISTRATION IS NOT
REQUIRED UNDER THE ACT."
2.9. HOLDBACK. Notwithstanding and in addition to the restrictions
imposed under Section 2.8 hereof; the XCD Shareholders agree that none
of the Troy Shares received as part of the Merger Consideration will be
sold, transferred or otherwise disposed of without the prior written
consent of Purchaser for a period of one year from and after the Closing
Date. Each XCD Shareholder agrees and consents to the entry of a stop
transfer instruction with Purchaser's transfer agent against a transfer
in violation hereof. Each XCD Shareholder agrees to execute a separate
letter for the benefit of Purchaser's underwriters confirming the
provisions hereof and agreeing to permit Purchaser's underwriters to act
on their behalf in distributing or selling their Troy Shares after the
restrictions herein lapse.. The XCD Shareholders shall have the benefit
of a Registration Rights Agreement in the form of Exhibit "C" hereof.
3. OTHER AGREEMENTS.
3.1. REPAYMENT OF CERTAIN XCD OBLIGATIONS.
3.1.1. REPAYMENT OF SHAREHOLDER LOANS. On or before the
Closing Date, Target Corporation must repay $226,752.77
representing all principal and interest on the XCD Shareholder
Loans. If, on or prior to the Closing Date, neither XCD nor
Merger Subsidiary shall have paid the XCD Shareholder Loans,
Merger Subsidiary shall assume the obligation to pay all
amounts due with respect to the XCD Shareholder Loans. The XCD
Shareholder Loans are described on Schedule 3.1.1 hereto.
3.1.2. DEFERRED COMPENSATION OBLIGATIONS. Merger Subsidiary
shall assume the obligation to pay all amounts due with
respect to the obligations of XCD listed on Schedule 3.1.2.
3.2. EMPLOYMENT AGREEMENTS. On the Closing Date, certain of the Key
Employees and the Surviving Corporation shall execute and deliver the
Employment Agreements attached hereto as Exhibits A-1 through A-5.
3.3. NON-SOLICITATION AGREEMENT. In addition to any covenants
contained in any of the Employment Agreements, each XCD Shareholder
hereby covenants and agrees that such XCD Shareholder shall not solicit,
hire or induce in any. manner any employee, consultant or customer of
XCD to cease his or her relationship as such with XCD or Merger
Subsidiary at any time while such XCD Shareholder is employed by Merger
Subsidiary and for three years after termination of such employment. In
such cases where such XCD Shareholder is not employed by XCD or Merger
Subsidiary after the Closing Date, such covenant shall run for a period
of one year after the Closing Date.
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3.4. CONFIDENTIALITY. Each XCD Shareholder will treat and hold as
confidential all of the Confidential Information obtained from Purchaser
or Merger Subsidiary in connection with this Agreement and each XCD
Shareholder agrees not to disclose any of such Confidential Information
to any party without the prior written consent of Purchaser. The
restrictions herein contained shall not apply to any Confidential
Information which is generally available to the public immediately prior
to the time of disclosure.
4. REPRESENTATIONS AND WARRANTIES OF THE TARGET CORPORATION AND EACH OF THE
XCD SHAREHOLDERS. As a material inducement to Purchaser to enter into this
Agreement, the Target Corporation and the XCD Shareholders, jointly and
severally, hereby represent and warrant to Purchaser, Merger Subsidiary and
Surviving Corporation, which representations and warranties shall survive the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby (including the Merger), as follows:
4.1. ORGANIZATION AND GOOD STANDING. The Target Corporation is a
corporation duly organized, validly existing and in good standing under
the laws of the State of California, with full power and authority to
own or lease its properties and assets as presently owned or leased and
to conduct its businesses as presently conducted and to consummate all
transactions contemplated to be consummated by it under this Agreement.
Except as set forth on Schedule 4.1, the Target Corporation is in good
standing and duly qualified to do business in each other jurisdiction in
which the ownership, leasing or operation of the Assets or the conduct
of the Business by it requires such qualification and where the failure
to so qualify would have a material adverse effect on the Business or
the Target Corporation.
4.2. AUTHORITY. Target Corporation has full power and authority to
execute and deliver this Agreement and the other agreements and
instruments to be executed and delivered by it pursuant hereto and to
consummate the transactions contemplated hereby and thereby. This
Agreement has been and, as of the Closing Date, each of such other
agreements and instruments will be, duly executed and delivered by the
Target Corporation and each XCD Shareholder and (assuming due
authorization, execution and delivery by Purchaser and Merger
Subsidiary) this Agreement constitutes, and each of such other
agreements and instruments when duly executed and delivered by the
Target Corporation and each XCD Shareholder will constitute, legal,
valid and binding obligations of the Target Corporation and each XCD
Shareholder enforceable against the Target Corporation and each XCD
Shareholder in accordance with their respective terms. Except as set
forth in Schedule 4.2, the execution and delivery by the Target
Corporation and each XCD Shareholder of this Agreement and such other
agreements and instruments and the consummation by the Target
Corporation and each XCD Shareholder of the transactions contemplated
hereby and thereby will not (a) violate, or conflict with, result in any
breach of; constitute a default (or an event which with notice or lapse
of time or both would become a default) under, permit the cancellation
of; or result in the creation of a Lien on any of the XCD Shares, the
Business or any of the Assets pursuant to, the Articles of Incorporation
or Bylaws of the Target Corporation, or any indenture, mortgage, deed of
trust, lease, Contract or other agreement or instrument, judgment,
order, decree, law, ordinance, rule or regulation to which the Target
Corporation or any XCD Shareholder is a party or by which the Target
Corporation or any XCD Shareholder or any of the Business or any of the
Assets is bound or affected, or the terms of any License held by the
Target Corporation, or (b) permit or result in the acceleration of the
maturity of ay Indebtedness of the Target Corporation, or of any
Indebtedness secured by any Assets. No approval, authorization, consent
or other order or action of or filing with
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any court, administrative agency or other governmental authority or
any other person is required or desirable to obtain for or in
connection with the execution and delivery by the Target Corporation
and each XCD Shareholder of this Agreement or such other agreements
and instruments or the consummation by the Target Corporation and each
XCD Shareholder of the transactions contemplated hereby or thereby.
4.3. NO SUBSIDIARIES. The Target Corporation does not own stock or
any other equity interest in, or controls, directly or indirectly, any
corporation, association, partnership, business, enterprise, joint
venture or other entity or person. Except as set forth in Schedule 4.3,
the Target Corporation is not a party to any participation, stockholder,
joint venture or partnership agreement.
4.4. FINANCIAL STATEMENTS. The Historical Financial Statements,
true, correct and complete copies of which are attached as Schedule 4.4
hereto, (a) were prepared in accordance with the books of account and
records of the Target Corporation, (b) present fairly in all material
respects the financial position and results of operations of the Target
Corporation as of the dates and for the periods indicated therein, (c)
were prepared in accordance with GAAP throughout the periods covered
thereby (except that the unaudited financial statements do not include
notes which would otherwise be required by GAAP), and (d) make full and
adequate disclosure of; and provision for, all material Liabilities of
the Target Corporation and have adequate reserves for all taxes as of
the dates thereof which are required to be disclosed by application of
GAAP.
4.5. LEASEHOLDS AND IMPROVEMENTS. Schedule 4.5 contains a complete
list of all real property and interests in real property leased or used
by the Target Corporation in connection with the Business (or any part
thereof) or otherwise. The improvements located on the real property
subject to the Leaseholds (the "Improvements") which are material to the
conduct or operation of the Business are, and as of the Closing will be,
in operating and working condition, and fit for operation in the usual
course of business, ordinary wear and tear excepted. The Target
Corporation is the lessee of each of the leasehold estates listed in
Schedule 4.5 as being leased by it. Schedule 4.5 correctly identifies
(A) each lease by the Target Corporation of any real property and each
space allocation arrangement with any other person covering any real or
other material property used in the Business (or any part thereof) and
(B) each guaranty by the Target Corporation of or relating to, any such
lease or space allocation arrangement. Except as set forth in Schedule
4.5, each lease pursuant to which each Leasehold is purported to be
granted is valid without any default thereunder by the Target
Corporation, or, to the best of the Target Corporation's knowledge, any
other party thereto. Such leases are the only leases of real property to
which the Target Corporation is a party or where offices of the Business
are maintained or on which tangible Assets (except for Inventories in
transit) are located. Except as set forth in Schedule 4.5, the Merger
will not be subject to any lease restriction or required consent or
other approval provision in any such lease.
4.6. REAL PROPERTY. Except as set forth in Schedule 4.6, the Target
Corporation owns no real property which it uses in connection with the
Business or any part thereof.
4.7. Personal Property. Inventories and Title to Property.
4.7.1. All Tangible Personal Property owned, leased or used
by the Target Corporation is reflected in the Historical
Financial Statements, and is in operating and working
condition and fit for operation in the usual course of
business, ordinary wear and tear excepted, and all
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such Tangible Personal Property (except for Inventories in
transit) is located on premises covered by Leaseholds or owned
by the Target Corporation.
4.7.2. (i) Except as set forth in Schedule 4.7, the Target
Corporation has good and marketable title to all of its
Assets, and a good and valid leasehold interest in all
property leased by the Target Corporation, free and clear of
all Liens.
(ii) All of the Improvements and Tangible Personal
Property owned or leased by the Target Corporation are being
used and operated in material conformity with all applicable
laws, statutes, codes, regulations and ordinances. The Assets
are, in the aggregate, sufficient in all material respects to
continue operating the Business as it is presently conducted
and as it is contemplated to be conducted by the Target
Corporation in the foreseeable future if the merger were not
to take place.
4.7.3. A true and complete list of all Inventories of the
Target Corporation as of September 30, 1998 has been delivered
to Purchaser (the "Inventory List"). Substantially all of such
Inventories are in good condition and usable in the ordinary
course of the Business and in such quantities as will be
utilized in the ordinary course consistent with past practice.
As of the Closing Date, the Inventories of the Target
Corporation will be of a quantity, mix, age, type and nature
which are substantially similar to the Inventories set forth
on the Inventory List.
4.8. INTELLECTUAL PROPERTY RIGHTS. Except as set forth in Schedule
4.8, the Target Corporation does not own, or has ever owned, or
licenses, or has ever licensed or obtained, the right to use, any
Patents. The Target Corporation has not used any Trademarks or Trade
Names in connection with the Business other than those listed on
Schedule 4.8 and the Target Corporation validly owns, beneficially and
of record, and holds the entire right, title and interest in and to, all
of the Intellectual Property Rights (including, without limitation, the
Know-how) used in the Business conducted by it, free and clear of any
Lien. To the best of the Target Corporation's knowledge, the operation
of the Business by the Target Corporation does not and will not infringe
any patent, trade secret, trademark, intellectual property rights, or
any other rights of any nature whatsoever of others. No action, suit or
arbitration, or legal, administrative or other proceeding, or
governmental investigation, is pending, nor has any claim been asserted
or threatened, which involves any Intellectual Property Rights of or
used by the Target Corporation, and no state of facts exists under which
any such action, suit, arbitration, proceeding or investigation might be
based. The Target Corporation is not subject to any judgment, order,
writ, injunction or decree of any court or any federal, state, local or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or any arbitrator, nor has the
Target Corporation entered into or is it a party to any Contract, which
restricts or impairs the use of any such Intellectual Property Rights.
4.9. LITIGATION. Except as set forth in Schedule 4.9, there is no
claim, legal action, counterclaim, suit, arbitration, governmental
investigation or other legal, administrative or tax proceeding, or any
order, decree, judgment, settlement agreement or settlement order, in
effect, in progress or pending, or to the best of the Target Corporation
and the XCD Shareholders' knowledge, threatened against or relating to
the Target Corporation, the Business or the Assets, nor does the Target
Corporation nor the XCD Shareholders know or have reason to be aware of
any basis for the same. Except as set forth in Schedule 4.9, the Target
Corporation is not a party to any legal, administrative or Tax
proceeding,
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or arbitration or mediation, of any kind or nature. Except as set forth
in Schedule 4.9, there is no outstanding order, writ, injunction,
judgment or decree of any court, governmental agency or arbitration
tribunal or any settlement agreement or arrangement of any kind against,
with, binding upon or involving any XCD Shareholder, the Target
Corporation, the Business (or any part thereof) or any of the Assets.
4.10. COMPLIANCE WITH LAWS. To the best knowledge of the management
of the Target Corporation, the Target Corporation has complied and is
currently in compliance in all material respects with all laws,
ordinances, regulations, licensing requirements, rules, decrees, awards
and orders applicable to it, the Business and the Assets including,
without limitation, any thereof relating to wages, hours, hiring,
promotions, retirement, working conditions, use and occupancy of the
Improvements, air or water pollution, disposal of wastes or hazardous or
toxic substances, other environmental matters, nondiscrimination,
health, safety, pensions, employee benefits, except where the failure to
comply would not, as to individual failures or as to all failures in the
aggregate, have a material adverse effect on the Target Corporation, the
Business or the Assets.
4.11. ENTIRE BUSINESS. The Merger will effectively convey to the
Surviving Corporation, directly or indirectly, unrestricted,
unencumbered (except for any Liens identified in Schedule 4.7), l00%
beneficial ownership of the entire Business. The Assets, properties and
rights which will be owned, possessed or leased by the Target
Corporation as of the Closing will constitute all of the tangible and
intangible property used by the Target Corporation in connection with
the conduct of the Business as now conducted, and will be transferred to
the Surviving Corporation after giving effect to the Merger. Except for
the sale of Inventories, disbursements of cash to pay Liabilities when
due in the ordinary course of business or repay XCD Shareholder loans or
pay Deferred Compensation obligations and collection of accounts
receivable in the ordinary course of business, all of the Target
Corporation's Assets on the date hereof shall be transferred to the
Surviving Corporation as a result of the Merger.
4.12. CONTRACTS.
4.12.1. Schedule 4.12 contains a true and complete list of
all Material Contracts to which the Target Corporation is a
party or which are or will be binding upon the Target
Corporation, the Business (or any part thereof) or the Assets.
Except for the Material Contracts listed on Schedule 4.12
(true and complete copies of which have been previously
delivered to Purchaser or, in the case of oral agreements, if
any, descriptions of which are set forth on Schedule 4.12),
and routine purchase orders sent or received in the ordinary
course of business consistent with past practice, the Target
Corporation is not a party to nor is any of the Assets or the
Business bound or affected by any Material Contract.
4.12.2. The Target Corporation has in all material respects
performed all material obligations required to be performed by
it under all Material Contracts to which it is a party or by
which it is bound, and will in all material respects perform
all material obligations required to be performed by it under
Material Contracts entered into after the date hereof Neither
the Target Corporation nor, to the best of the Target
Corporation' and the XCD Shareholders' best knowledge, any
other party to a Material Contract with the Target
Corporation, is in material default under any such Material
Contract, and no event exists which with the giving of notice
or the passage of time, or both, would create such a default.
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4.12.3. Each of the Material Contracts has been, and each
Material Contract entered into after the date hereof will be,
lawfully entered into and is or will be valid and in full
force and effect and is or will be enforceable in accordance
with its terms for the period stated in such Material
Contract. The Target Corporation has not received any notice
of cancellation of(or notice of threat of cancellation of),
nor are there any outstanding disputes under any Material
Contracts.
4.12.4. Except as set forth on Schedule 4.12 the
consummation of the transactions contemplated by this
Agreement (including, without limitation, the Merger) does not
require any consent under any Material Contract (pursuant to
or due to the existence of an anti-assignment provision, in
order to avoid or prevent a default or acceleration of
obligations, or otherwise), and the consummation of the
transactions contemplated by this Agreement (including,
without limitation, the Merger) will not require any consent
under any Material Contract entered into after the date
hereof; in each case, which will not have been obtained by the
Closing (and copies of such consents will be given to
Purchaser on or prior to the Closing Date), and such
consummation will not result in the termination of any right
or privilege under any Material Contract now existing or
entered into after the date hereof The Target Corporation has
not received notice that any party to any Material Contract
intends to cancel such Material Contract, nor has any party
given the Target Corporation notice of any alleged breach of
any Material Contract or of its intent to take any legal
action in order to enforce its rights thereunder.
4.12.5. Except as set forth in Schedule 4.12 neither the
Target Corporation nor any of the XCD Shareholders is a party
to, nor is the Target Corporation or any of the XCD
Shareholders or the Business (or any part or aspect thereof)
bound by, any shareholders agreement, buy-sell agreement,
non-competition agreement or arrangement or any other
agreement or arrangement restricting or prohibiting, in any
fashion, the way in which the Business (or any part or aspect
thereof) is operated.
4.12.6. Schedule 4.12 includes all non-competition or other
agreements or arrangements (if any) which restrict, in any
fashion, any Person or Persons from competing with the Target
Corporation or which otherwise are for the benefit of the
Target Corporation or the Business (or any part or aspect
thereof).
4.13. RECEIVABLES: PAYABLES.
4.13.1. The accounts receivable set forth in the Historical
Financial Statements constitute all of the Receivables of the
Business as of the respective dates thereof Except as set
forth in Schedule 4.13, all of the Target Corporation's
Receivables arose from valid sales and bona fide transactions
in the ordinary course of business of the Target Corporation.
4.13.2. The Receivables, as reflected in the Historical
Financial Statements and subsequent thereto through the date
hereof are, to the best of the Target Corporation's knowledge,
the genuine, valid and legally enforceable obligations of the
account debtor thereunder and are not actually or contingently
subject to any set-off or other defense on the part of such
account debtor, or to any claim on the part of such account
debtor denying liability thereunder; and represent bona fide
transactions arising in the ordinary course of
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business, completed substantially in accordance with the terms
and provisions contained in any agreements or documents related
thereto. Target Corporation has not received any notice of and
does not know of any counterclaim or set off with respect to
any of the receivables.
4.13.3. A true, complete and correct schedule of the
accounts receivable of the Target Corporation as of September
30, 1998 (or a more current date) showing aging on a 30, 60,
90 and over 90-day basis has been delivered to Purchaser.
4.13.4. All accounts payable and other Liabilities reflected
in the Historical Financial Statements arose or will have
arisen in the ordinary course of the Target Corporation's
business. A true, complete and correct schedule of all
accounts payable relating to or arising out of the operation
of the Business of the Target Corporation as of September 30,
1998 (or a more current date) showing thereon any accounts
payable which are 30, 60, 90 or more than 90-days past due
and, with respect to any overdue amount, accompanied by an
explanation as to why such amount is overdue, has been
delivered to Purchaser.
4.14. CERTAIN TRANSACTIONS. Except as set forth in Schedule 4.14,
since September 30, 1998, the Target Corporation has conducted its
business only in the ordinary course consistent with past practice and
has not: (i) paid, or made any accrual or arrangement for the payment
of; bonuses or special compensation of any kind or any severance or
termination pay to any Employee; (ii) made any general wage or salary
increases concerning its Employees or increased or altered in any
material respect any other benefits or insurance provided to or
maintained on behalf of any Employee or, except as set forth in Schedule
4.15, declared or paid any bonus to any Employee; (iii) mortgaged,
pledged or subjected to Lien or any other restriction any of the Assets;
(iv) sold, assigned or transferred or agreed to sell, assign or transfer
any of the Assets which in' the aggregate exceed $10,000 in value, other
than sales of Inventories in the ordinary course of business consistent
with past practice; (v) granted any rights or licenses relating to any
Intellectual Property Rights or entered into any licensing, franchise,
agency, distributorship, requirements, output or similar arrangements;
(vi) canceled or agreed to cancel any debts or claims; (vii) waived or
agreed to waive any material rights (contractual or otherwise); (viii)
made or permitted any amendment or termination of any Contracts other
than in the ordinary course of business; (ix) effected any change in the
accounting methods or principles used in connection with its books,
records and financial statements; (x) suffered any damage, destruction,
deterioration, impairment or loss to any Assets or the Business, whether
or not covered by insurance, or suffered any event or condition of any
character, which, individually or in the aggregate with others, might
reasonably be expected to have a material adverse effect on the Target
Corporation, the Business or the financial condition or prospects of the
Target Corporation or the Business; (xi) suffered any material adverse
change in its financial condition or operations; (xii) incurred, assumed
or guaranteed or paid, discharged or satisfied, any obligations or
Liabilities except in the ordinary course of business consistent with
past practice or the repayment of XCD Shareholder loans or the payment
of XCD's Deferred Compensation Obligations, as permitted by, Sections
3.1.1 and 3.1.2. respectively, (xiii) suffered any default under, or
suffered any event which with notice or lapse of time or both would
constitute a default under any Contract, debt instrument or other
agreement to which the Target Corporation is a party or by which it, the
Business or any of the Assets is bound; (xiv) terminated or amended, or
suffered a termination or amendment of; any License; (xv) made or paid
any distributions, dividends or extraordinary payments to any of its
shareholders other than salary and bonuses described in Schedule 4.15,
except as otherwise
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described in this Agreement; or (xvi) entered into any transaction not
in the ordinary course of business.
4.15. EMPLOYEES.
4.15.1. Schedule 4.15 contains a list setting forth the name
and current annual salary and other compensation (of any kind)
payable by the Target Corporation to each current Employee
with compensation in excess of $35,000 per year, and the
profit sharing, bonus or other form of additional compensation
paid or payable by the Target Corporation to or for the
benefit of each such person for the current fiscal year.
Except as set forth herein or in Schedule 4.12 or under the
employment, consulting or other agreements listed thereon or
in Schedule 4.16, there are no oral or written contracts,
agreements or arrangements obligating the Target Corporation
to increase the compensation or benefits presently being paid
or hereafter payable to any of its Employees or other persons
or to pay any bonus. Except as set forth in Schedule 4.9, to
the best knowledge of the management of the Target Corporation
or the XCD Shareholders. there is not now, and there will not
be as of the Closing Date, any liability or basis for
liability of the Target Corporation arising out of claims made
or suits brought (including, without limitation, workers'
compensation claims and claims or suits for contribution to,
or indemnification of; third parties, occupational health and
safety, environmental, consumer protection or equal employment
matters) for injury, sickness, disease, discrimination, death
or termination of employment of any Employee or other
employment matter attributable to an event occurring or a
state of facts existing on or prior to the Closing Date and
there is no threatened charge, complaint, allegation or other
process or claim with regard to any of the foregoing.
4.15.2. Neither the Target Corporation nor any Affiliate of
the Target Corporation is party to any collective bargaining
agreement, written or oral, which covers any Employees or
which is binding upon the Target Corporation. There have been,
and there are, no strikes, grievances, disputes or
controversies pending or, to the best of the Target
Corporation's knowledge, threatened between the Target
Corporation and any of its Employees or any union or other
organization claiming to represent such Employees' interests.
There is no request for union representation pending or, to
the best of the Target Corporation's knowledge, no present
union organizing or election activities in progress or
threatened with respect to any Employees. There is no unfair
labor practice complaint pending before the National Labor
Relations Board or, to the best of the Target Corporation's
knowledge, threatened against or relating to the Target
Corporation or any of its Employees.
4.15.3. The Target Corporation has not engaged in any unfair
labor practice or discrimination on the basis of race, age,
gender, disability or otherwise in its employment conditions
or practices with respect to Employees the effect of which,
individually or in the aggregate, could have a material
adverse effect on the Target Corporation, the Business or the
Assets.
4.16. EMPLOYEE BENEFIT PLANS.
4.16.1. Schedule 4.16 annexed hereto contains a true and
complete list of each plan, program, policy, practice,
contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance award,
stock or stock-related award,
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fringe benefit or other employee benefit of any kind,
whether formal or informal, proposed or final, funded or
unfunded, and whether or not legally binding, including,
without limitation, each "employee benefit plan" within the
meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), ("Employee
Plan") which is now, or ever has been, maintained,
contributed to, or required to be contributed to, for the
benefit of any Employee, and each management, employment,
severance or consulting agreement or contract between the
Target Corporation and any Employee, each, an "Employee
Agreement". There are no oral employment or consulting or
similar arrangements (other than purely "at will"
employments or arrangements) between the Target Corporation
and any Person (each, an "Employee Agreement"). The Target
Corporation will provide to Purchaser prior to the Closing:
true and complete copies of all documents, if any, embodying
each Employee Plan and Employee Agreement, including all
amendments thereto and written interpretations thereof; the
two most recent annual reports filed with respect to each
Employee Plan required under ERISA the most recent summary
plan description, if any, with respect to each Employee Plan
required under ERISA the most recent favorable determination
letter from the Internal Revenue Service, if applicable,
with respect to each Employee Plan; and all material
communications, if any, to any Employee relating to each
Employee Plan.
4.16.2. Each Employee Plan that is intended to be qualified
under the Internal Revenue Code has received a determination
letter from the Internal Revenue Service to the effect that
such Employee Plan and related trust are qualified and exempt
from federal income taxes under Sections 40 1(a) and 50 1(a)
(as amended by the Tax Reform Act of 1986 and subsequent
legislation), respectively, and no such determination letter
has been revoked or, to the best of the Target Corporation's
knowledge, has revocation been threatened. Nothing has
occurred or is expected to occur which would adversely affect
the qualified status of any such Employee Plan or any related
trust subsequent to the issuance of such determination letter.
4.16.3. The Target Corporation has performed in all material
respects all obligations required to be performed under each
Employee Plan, and each Employee Plan has been established and
maintained in all material respects in accordance with its
terms and in compliance with all applicable laws, statutes,
orders, rules and regulations, including but not limited to
ERISA and the Internal Revenue Code. No Employee Plan is a
defined benefit plan within the meaning of Section 3(3 5) of
ERISA. No Employee Plan is a multi-employer plan within the
meaning of Section 3(37) of ERISA. The Target Corporation does
not have any liability with respect to any defined benefit
plan or multi-employer plan as a result of having been
considered a "single employer" within the meaning of Section
414(b), (c), (m), (n) and (o) of the Internal Revenue Code, or
otherwise, and there is no basis for such liability being
imposed. There are no investigations, claims, suits or
proceedings pending, or to the best of the Target
Corporation's knowledge, threatened or anticipated (other than
routine claims for benefits) against any Employee Plan or the
assets of any Employee Plan, and, to the best of the Target
Corporation's knowledge, there are no facts that could give
rise to any liability in the event of any such investigation,
claim, suit or proceeding. Each Employee Plan can be amended,
terminated or otherwise discontinued prior to the Closing
without liability to Purchaser, the Target Corporation or the
Surviving Corporation. All premiums required by any Employee
Plan have been paid thereunder. All contributions due to, and
payments from, the Employee Plans that may have been required
to be made have been made. No "prohibited
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transaction" within the meaning of Section 4975 of the
Internal Revenue Code or Section 406 of ERISA has occurred
with respect to any Employee Plan, and, to the best of the
Target Corporation's knowledge, no action or failure to act
with respect to any Employee Plan could subject Purchaser,
the Target Corporation, the Surviving Corporation or any
Employee Plan to any tax, penalty or other liability, for
breach of fiduciary duty or otherwise, under ERISA or any
other applicable law, whether by way of indemnity or
otherwise.
4.16.4. With respect to any plan that, notwithstanding
Section 4.16.3 above. may be construed as a defined benefit
plan of the Target Corporation, there has been no failure to
make any contribution or pay any amount due as required by
Section 412 of the Internal Revenue Code Section 302 of ERISA
or the terms of such defined benefit plan, and there has been
no request for or receipt of any funding waiver from the
Internal Revenue Service. No trust has been established in
connection with such defined benefit plan pursuant to Section
4049 of ERISA (as in effect on December 17, 1987), and no
liabilities that would have a material adverse effect on the
condition of the Business have been asserted against the
Target Corporation or any entity with which it would be
considered a "single employer" in connection with the Pension
Plan by the Pension Benefit Guaranty Corporation ('PBGC") or
by a trustee appointed pursuant to Section 4042(b) or (c) of
ERISA, and no Lien has been attached and neither the PBGC nor
the Internal Revenue Service has threatened to attach a Lien
on any Assets of the Target Corporation or any entity within
which it would be considered a "single employer" as a result
of any failure to comply with the Internal Revenue Code or the
Treasury regulations thereunder or ERISA. Neither the Target
Corporation nor any entity with which it is or would be
considered a "single employer" has provided or is required to
provide security to any such defined benefit plan pursuant to
Section 40 1(a) of the Internal Revenue Code. Neither the
Target Corporation nor any entity with which it is or would be
considered a "single employer" has incurred or reasonably
expects to incur any Liabilities under Title IV of ERISA with
respect to any such defined benefit plan. Neither the Target
Corporation nor any entity with which it is or would be
considered a "single employer" has transferred any assets or
liabilities of such defined benefit plan which had, at the
date of such transfer, "unfunded benefit liabilities" within
the meaning of Section 400 1(a)(18) of ERISA. No "reportable
event", within the meaning of Section 4043(b) of ERISA, has
occurred with respect to any such defined benefit plan. As of
September 30, 1998, no such defined benefit plan had any
amount of "unfunded benefit liability", within the meaning of
Section 400 1(a)(18) of ERISA, and termination of any such
defined benefit plan has not resulted and will not result in
any liability to the Target Corporation or any entity with
which it is or would be considered a "single employer",
Purchaser or the Surviving Corporation.
4.16.5. The Target Corporation does not maintain or
contribute to any Employee Plan which provides, or has any
liability to provide, life insurance, medical or other
employee welfare benefits to any Employee upon his retirement
or termination of employment, and the Target Corporation has
never promised, represented to, or contracted with (orally or
in writing) any Employee (individually or as a group) that
life insurance, medical or other employee welfare benefits
would be provided upon their retirement or termination of
employment.
4.16.6. Each "group health plan" within the meaning of
Section 4980B(g)(2) of the Internal Revenue Code maintained by
the Target Corporation or any entity with which the
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Target Corporation is or would be considered a "single
employer" has been administered in good faith in compliance
with the continuation coverage requirements contained in the
Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), as set forth at Section 4980B of the
Internal Revenue Code and any regulations promulgated or
proposed thereunder (if such proposed regulations constitute
substantial authority within the meaning of Section 6662 of
the Internal Revenue Code and any regulations promulgated
thereunder).
4.16.7. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby
(including, without limitation, the Merger) will not (either
alone or when taken together with any additional or subsequent
events) constitute an event under any Employee Plan or
Employee Agreement that will or may result in any payment,
upon a change in control or otherwise, whether of severance,
accrued vacation, or otherwise, acceleration, vesting,
distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
4.16.8. The Target Corporation (except to the extent that
any of the following non-compliances, failures or liabilities
would not, either individually or in the aggregate, have a
material adverse effect on the Target Corporation), the
Business or the Assets: (i) is in material compliance with all
applicable federal and state laws, rules and regulations
respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case,
with respect to all Employees; (ii) has withheld all amounts
required by law or by agreement to be withheld from the wages,
salaries and other payments to Employees; (iii) is not liable
for any arrearages of wages or any Taxes or any penalty for
failure to comply with any of the foregoing; and (iv) other
than routine payments to be made in the normal course of
business and consistent with past practice and reserved for on
the September 30, 1998 balance sheet included within the
Historical Financial Statements, is not liable for any payment
to any trust or other fund or to any governmental or
administrative authority with respect to unemployment
compensation benefits, Social Security or other benefits for
Employees.
4.16.9. No material promises or commitments have been made
with respect to any Employee Plan of the Target Corporation
other than in accordance with a reasonable interpretation of
the terms of such Employee Plan. There is no plan or
commitment, whether legally binding or not, to establish any
new Employee Plan of the Target Corporation, to modify any
Employee Plan or to enter into any new Employee Plan; nor has
any intention or commitment to do any of the foregoing been
communicated.
4.17. LICENSES AND PERMITS. The Target Corporation has all Licenses
necessary or appropriate for the operation of the Business and the use
of its Assets and properties as presently operated or used by it except
where the failure to obtain such Licenses would not, individually or in
the aggregate, have a material adverse effect upon the Target
Corporation, the Business or the Assets. All Licenses held by the Target
Corporation are valid and in full force and effect and no proceedings
which could result in the termination or impairment of any such License
are pending, or, to the best of the Target Corporation's knowledge,
threatened. The Target Corporation is not in violation of, has not
received any notice of any violation of, nor, to the best of the Target
Corporation's knowledge, does any state of facts exist which could lead
to a penalty in respect of or termination of any License. The
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consummation of this Agreement (including without limitation the Merger)
will not result in or create the loss or impairment of; or a reduction
of the benefits or privileges conferred by, or an obligation to make
payments of any kind to maintain, any License.
4.18. TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule
4.18, the Target Corporation has not purchased, acquired or leased any
property or services from, or sold, transferred or leased any property
or services to, or loaned or advanced any money to, or borrowed any
money from, or guaranteed or otherwise become liable for any
indebtedness or other obligations of; or acquired any capital stock,
obligations or securities of, or made any management, consulting or
similar fee arrangement with any Affiliate or any officer, director or
stockholder of the Target Corporation, nor is the Target Corporation
party to any agreement oral or written with respect to any of the
foregoing.
4.19. TRUTHFULNESS. No statement, representation or warranty of the
Target Corporation in this Agreement (including the Exhibits and
Schedules hereto) or in any written document or certificate delivered by
or on behalf of the Target Corporation or the XCD Shareholders pursuant
to this Agreement, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary
in order to make the statements contained herein or therein not
misleading.
4.20. UNLAWFUL PAYMENTS. Neither the Corporation nor any director,
officer or Employee thereof, nor, to the best of the Corporation's
knowledge, any other Person (including, without limitation, any
representative of; or broker for, the Corporation acting on behalf of
the Corporation) has ever, directly or indirectly, on behalf of or with
respect to the Corporation, had any transactions or payments which are
not recorded in the Corporation's accounting books and records or
disclosed in its financial statements, or had any off-book bank or cash
accounts or "slush funds".
4.21. INSURANCE. Schedule 4.21 contains a complete list of all
insurance policies or binders insuring the property, assets or business
liabilities of the Target Corporation and with respect to the Business,
true and complete copies of which have been made available to Purchaser.
All properties and assets of the Target Corporation are insured by
reputable insurance companies against loss or damage by fire and other
risks. Except as set forth in Schedule 4.21, the Target Corporation is
in compliance with the terms of all policies and instruments of
insurance it owns and coverage thereunder will not be affected by the
transactions contemplated hereby (including, without limitation, the
Merger). With respect to the Business, there are no pending or asserted
material claims against such insurance by the Target Corporation as to
which the insurers have denied liability. Schedule 4.21 sets forth each
claim in excess of $10,000 (if any) made against said insurance for the
preceding two (2) years (both insured and self-insured).
4.22. ENVIRONMENTAL MATTERS. There has been no manufacture,
refining, storage, disposal or treatment of Hazardous Substances (as
hereinafter defined) by the Target Corporation at any real property
currently or in the past owned, operated, used, leased or contracted for
by the Target Corporation, or otherwise in violation of any
Environmental Laws (as hereinafter defined) or which would require
remedial action under any Environmental Law. During the past five years
the Target Corporation has not received (a) notice of any such violation
with respect to any Hazardous Substance at or by any of such real
property, (b) notice from any governmental agency that the Target
Corporation, or any present or former owner, lessee or operator of such
real property, is a potentially responsible party for cleanup liability
with respect to the emission, discharge or release of any Hazardous
Substance or for any other matter arising under the Environmental Laws
or in any
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litigation, administrative proceeding, finding, order, citation,
notice, investigation or complaint under any Environmental Law, or (c)
notice of violation, citation, complaint, request for information,
order, directive, compliance schedule, notice of claim, proceeding or
litigation from any party concerning the Target Corporation's
compliance with any Environmental Law. All sewage is discharged into a
public sanitary sewer system and no Hazardous Substances are emitted,
discharged or released, directly or indirectly, by the Target
Corporation into the atmosphere or any body of water. No permits,
licenses or other authorizations issued pursuant to the Environmental
Laws are required for the Target Corporation's use or occupancy of; or
the Target Corporation's present use or occupancy of; any such real
property. As used herein "Environmental Laws" means the Resource
Conservation Recovery Act, the Comprehensive Environmental
Responsibility Compensation and Liability Act, the Superfund
Amendments and Reauthorization Act, the Toxic Substances Control Act,
the Hazardous Materials Transportation Act, the Clean Air Act, the
Clean Water Act, and other similar federal, state and local laws, as
amended, together with all regulations issued or promulgated
thereunder, relating to pollution, the protection of the environment
or the health and safety of workers or the general public. As used
herein "Hazardous Substance" means any hazardous substance, hazardous
or toxic waste, hazardous material, pollutant or contaminant, as those
or similar terms are used in the Environmental Laws, including,
without limitation, asbestos and asbestos-related products,
chlorofluorocarbons, oils or petroleum derived compounds,
polychlorinated biphenyls, pesticides and radon.
4.23. STATUS OF XCD SHAREHOLDERS. None of the XCD Shareholders is a
"foreign person" within the meaning of Section 1445 of the Internal
Revenue Code.
4.24. TAX MATTERS. The Target Corporation has filed all federal,
state and local Tax returns and all information returns and reports
required to be filed by or with respect to it under the laws of the
United States or any state or other jurisdiction for all periods ending
on or prior to the date hereof and will timely file all such returns and
reports required to be filed from the date hereof through the Closing
Date. True and complete copies of such reports and returns filed within
three (3) years prior to the date hereof will be made available to
Purchaser for inspection and copying and true and complete copies of all
such returns and reports filed after the date hereof and on or before
the Closing Date will be furnished to Purchaser upon request. All such
reports and returns were or will be in all material respects accurately
prepared in accordance with all applicable statutes, rules and
regulations and are or will be correct as filed. The Target Corporation
has paid all Taxes (including, without limitation, Taxes for which the
Target Corporation is a collection agent - e.g., withholding, excise,
sales, use, Social Security and similar Taxes) which have become due or
payable (and will pay on or prior to the Closing Date all Taxes which
have become due or payable on or prior to the Closing Date). The Target
Corporation has never been included in a consolidated federal income tax
return or combined. The Target Corporation is not a party to or has not
been notified that it is the subject of any in pending, proposed or
threatened action, investigation, proceeding, audit, claim or assessment
by or before the Internal Revenue Service or any other governmental
authority, and no claim for assessment, deficiency or collection of
Taxes, or proposed assessment, deficiency or collection, for which the
Target Corporation may be liable, has been asserted or threatened
against it. The Target Corporation has not received any notice of
deficiency, assessment or collection or proposed deficiency, assessment
or collection from the Internal Revenue Service or any other
governmental authority which has not been satisfied, nor does the Target
Corporation have any reason to believe that any such notice will be
received in the future. Except as set forth in Schedule 4.24, neither
the Internal Revenue Service nor any state taxing authority has ever
audited any Tax return of the Target
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Corporation. The charges, accruals and reserves shown in the
Historical Financial Statements of the Target Corporation in respect
of Taxes for all fiscal periods to date are adequate. There are no
material unpaid assessments or proposals for additional Taxes for
which the Target Corporation does not have adequate reserves, nor does
the Target Corporation know of any basis therefor for any such period.
To the best knowledge of the management of the Target Corporation and
the XCD Shareholders, there are no Tax rulings, requests for rulings
or closing agreements relating to the Target Corporation which could
affect its liability for Taxes for any period. No power of attorney
has been granted by the Target Corporation or any f its Affiliates
with respect to any matter relating to Taxes of the Target Corporation
which is currently in force. The Target Corporation has not executed
or filed with the Internal Revenue Service or any other governmental
authority any agreement which is still in effect waiving limitations
on, or extending, the period for assessment or collection of any Taxes.
4.25. NO SALE. The Target Corporation has not entered into any
contract to sell, mortgage, pledge or encumber, directly or indirectly,
any of its Assets (other than sales of Inventories in the ordinary
course of business, consistent with past practice, and with respect to
Liens disclosed in Schedule 4.7).
4.26. BROKERS AND FINDERS. Except as set forth on Schedule 4.26, all
negotiations on behalf of Target Corporation and the transaction
contemplated hereby have been carried out directly by the parties hereto
without the intervention of any broker, finder, investment banker or
other third party representing Target Corporation or the XCD
Shareholders. Neither Target Corporation nor any of the XCD Shareholders
have engaged or authorized any broker, finder, investment banker or
other party to act on their behalf, directly or indirectly, as a finder,
investment banker, or in any other capacity in connection with this
Agreement or the transactions contemplated hereby.
4.27. PURCHASE COMMITMENTS. No purchase commitment of or by which
the Target Corporation is bound which is not terminable on thirty (30)
days notice or less is in excess of the normal, ordinary and usual
requirements of the Business conducted by the Target Corporation or at
an excessive price. The Target Corporation has delivered to Purchaser a
true and complete list of the Target Corporation's purchase commitments
through the date of this Agreement.
4.28. CERTAIN REPORTS. The Target Corporation has filed all reports,
applications, documents, instruments and information required to be
filed by it pursuant to applicable rules and regulations or requests of
every regulatory body or other governmental authority having
jurisdiction over the Target Corporation, the Business conducted by it
or the use of the Assets owned or used by it.
4.29. CERTAIN PAYMENTS TO SHAREHOLDERS. Schedule 4.29 sets forth all
amounts and benefits which have been paid or provided to any XCD
Shareholder (or Affiliate or spouse or relative thereof) by the Target
Corporation (whether as dividend, distribution, loan, loan repayment,
salary, bonus or other payment or benefit) since January 1, 1998. No
stockholder of the Target Corporation has received during, or in respect
of; any period subsequent to September 30, 1998, any dividends or
distributions or extraordinary payments whatever except for salary and
bonuses at the respective compensation rates set forth in Schedule 4.15,
and except as permitted under Section 3.1.2.
4.30. BANK AND SECURITIES ACCOUNTS. Schedule 4.30 contains a true
and complete list of the names and addresses of (a) all bank, investment
and securities accounts of the Target Corporation, together with the
names of all Persons authorized to draw thereon or withdraw therefrom,
and (b) all Persons to whom powers of attorney have been granted by the
Target Corporation. The cash and securities
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held in such accounts are not subject to restrictions or limitations
as to withdrawals, margin balances or compensating balances. Schedule
4.30 also includes all accounts, deposits or safe deposit boxes and
the names of all Persons authorized to draw on such accounts or
deposits or to have access to such safe deposit boxes. The books of
account of the Target Corporation show all checks and drafts
outstanding, and there are sufficient funds in the bank accounts
listed on Schedule 4.30 to pay any and all checks or drafts presented,
or outstanding, but not yet presented on said accounts.
4.31. CHARTER DOCUMENTS. The Target Corporation has heretofore
delivered to Purchaser true and complete copies of the Articles of
Incorporation (certified by the Secretary of State of the State of
California) and Bylaws of the Target Corporation as in effect on the
date hereof The corporate minute, stock and transfer books of the Target
Corporation (or copies thereof) have been made available to Purchaser
for its inspection and are true and complete.
4.32. CAPITALIZATION. The authorized capital stock of the Target
Corporation and the number of issued and outstanding shares of capital
stock of the Target Corporation, and the name of each stockholder
thereof (as it appears on its, his or her stock certificate for such
shares) as of the date hereof; together with the number of such shares
owned by such stockholder on the date hereof; and the number of shares
that will be owned by such stockholder on the Closing Date, are and will
be (as applicable) as set forth in Schedule 4.32, which is true, correct
and complete in all material respects, subject to amendment on or before
the Closing Date. All outstanding shares of capital stock of the Target
Corporation are (and will be at the Effective Time) duly authorized and
validly issued, are and will be fully paid and nonassessable and were
not and will not be issued in violation of any preemptive right, right
of first refusal or any other contractual or legal restriction of any
kind to which the Target Corporation is a party. Except as set forth in
Schedule 4.32, there are no outstanding or authorized (a) securities of
the Target Corporation convertible into or exchangeable for shares of
capital stock or voting securities of the Target Corporation or (b)
options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, calls, preemptive rights, rights of first
refusal or other contractual rights or commitments that would require or
obligate the Target Corporation to issue any capital stock, voting
securities or securities convertible into or exchangeable for capital
stock or voting. securities of the Target Corporation. Except as set
forth in Schedule 4.32, there are no outstanding obligations of the
Target Corporation to repurchase, redeem or otherwise acquire any
securities of the Target Corporation, and there are no outstanding or
authorized stock appreciation, phantom stock, profit participation or
similar rights with respect to the Target Corporation.
4.33. OFFICERS AND DIRECTORS. The officers and directors of the
Target Corporation on the date hereof are as set forth in Schedule 4.33.
4.34. DIVIDENDS. All dividends and distributions paid by the Target
Corporation have been legally and properly declared and paid in all
respects, and no dividends or distributions have been made since
December 31, 1997.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUBSIDIARY. As a
material inducement to Target Corporation and the XCD Shareholders to enter into
this Agreement, each of Purchaser and Merger Subsidiary represents and warrants
to the Target Corporation and the XCD Shareholders, which representations and
warranties shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, as follows:
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5.1. ORGANIZATION. Purchaser and Merger Subsidiary are each
corporations duly organized, validly existing and in good standing under
the laws of the State of Delaware.
5.2. AUTHORITY. Each has full corporate power and authority to
execute and deliver this Agreement and the other agreements and
instruments to be executed and delivered by it pursuant hereto and to
consummate the transactions contemplated hereby and thereby. All
proceedings required to be taken by or on the part of each to authorize
such execution, delivery and consummation have been or will be duly and
properly taken prior to the Closing Date. This Agreement has been duly
executed and delivered by each and (assuming due authorization,
execution and delivery by the Target Corporation and the XCD
Shareholders) this Agreement constitutes, and such other agreements and
instruments when duly executed and delivered will constitute, legal,
valid and binding obligations of each enforceable against Purchaser and
Merger Subsidiary in accordance with their respective terms. The
execution and delivery by each of this Agreement and such other
agreements and instruments and the consummation by each of the
transactions contemplated hereby and thereby will not violate any law,
or conflict with, result in any breach of; constitute a default (or an
event which with notice or lapse of time or both would become a default)
under, or result in the creation of a lien or encumbrance on any of the
properties or assets of Purchaser or Merger Subsidiary pursuant to, the
Certificate of Incorporation or Bylaws of either of them or any
indenture, mortgage, lease, agreement or other instrument to which
either of them is a party or by which either of them or any of their
respective properties or assets is or are bound. Other than the filing
of the Agreement of Merger with the Secretary of State and the
California Franchise Tax Clearance, no approval, authorization, consent
or other order or action of or filing with any court, administrative
agency or other governmental authority in the United States of America
is required for the execution and delivery by Purchaser or the Merger
Subsidiary of this Agreement and such other agreements and instruments
or the cosummation by any of them of the transactions contemplated
hereby or thereby.
5.3. LITIGATION. Except as set forth on Schedule 5.3, there is no
claim, legal action, counterclaim, suit, arbitration, governmental
investigation or other legal, administrative or tax proceeding, or any
order, decree, judgment, settlement agreement or order, in effect, in
progress or pending, or to the best of Purchaser's or Merger
Subsidiary's knowledge, threatened, against or relating to either of
them, nor does either of them know or have reason to be aware of any
basis for the same, which would individually or in the aggregate have a
material adverse effect on the transactions contemplated by this
Agreement, or the business, assets and properties of Purchaser or Merger
Subsidiary. There is outstanding no order, writ, injunction, judgment or
decree of any court, governmental agency or arbitration tribunal or any
settlement agreement or arrangement which would individually or in the
aggregate have a material adverse effect on the transactions
contemplated by this Agreement, or the business, assets and properties
of Purchaser or Merger Subsidiary.
5.4. TRUTHFULNESS. No statement, representation or warranty of
Purchaser or Merger Subsidiary in this Agreement or in any agreement,
written document or certificate delivered by or on behalf of any of them
pursuant to this Agreement contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact
necessary in order to make the statements contained herein or therein
not misleading.
5.5. CAPITALIZATION. The authorized capital stock of Purchaser
consists of fifty million (50,000,000) shares of common stock, $.01 par
value, and five million (5,000,000) shares of
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preferred stock of which approximately seven million five hundred
(7,500,000) shares of common stock and zero (0) shares of preferred
stock are issued and outstanding as of the date of this Agreement. All
of the outstanding shares of Purchaser's common stock are duly
authorized, validly issued, fully paid and nonassessable. The Troy
Shares to be issued to the XCD Shareholders pursuant to this
Agreement, when issued and delivered in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable.
The authorized capital stock of Merger Subsidiary consists of 3,000
shares of common stock, having $.001 par value, of which one hundred
(100) shares are issued and outstanding as of the date of this
Agreement. All of the issued and outstanding shares of Merger
Subsidiary are owned by Purchaser and are duly authorized, validly
issued, fully paid and nonassessable shares of capital stock of such
Merger Subsidiary. Merger Subsidiary was organized by Purchaser on
October 16, 1998, and has not as of the date hereof engaged or
participated in any business activities other than as contemplated by
this Agreement.
5.6. MATERIAL CHANGES. Since January 1, 1998, there has not
occurred or arisen, other than as disclosed in this Agreement, (i) any
material adverse change in the assets or liabilities or in the
condition, financial or otherwise, or business, properties, earnings,
net worth or prospects of Purchaser and its subsidiaries viewed as a
whole, or (ii) any damage or destruction in the nature of a casualty or
loss, whether covered by insurance or not, materially and adversely
affecting any property or business of Purchaser and its subsidiaries
viewed as a whole.
5.7. NO DEFAULT. Purchaser is not in default in any material
respect under any material agreement, lease or other document to which
it is a party, or received written notice of or is, to the knowledge of
any executive officer of Purchaser, a material violation of any law or
order, writ, injunction or decree of any court or Federal, state,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality (including, without limitation, applicable
environmental protection laws and regulations, equal employment and
civil rights laws and occupational health and safety laws) the effects
of which, individually or in the aggregate, would have a material
adverse effect on the financial condition, results of operations or
business of Purchaser and its subsidiaries viewed as a whole.
5.8. BOARD AND SHAREHOLDER ACTION. The respective Boards of
Directors and Shareholders of Purchaser and Merger Subsidiary, at duly
held meetings, or by written consent in lieu thereof; by requisite vote,
determined that the Merger is in the best interests of Purchaser and
Merger Subsidiary and their respective stockholders approved this
Agreement.
5.9. COMPLIANCE WITH LAWS GENERALLY. To the knowledge of its
executive officers, Purchaser is in compliance in all material respects
with all statutes, rules and regulations applicable to it, its
properties or its business operations, except where the failure so to
comply would not, as to individual failures or all failures in the
aggregate, have a material adverse effect on the financial condition,
results of operations or business of Purchaser. Without limiting the
generality of the foregoing, to the knowledge of its executive officers,
except where the failure so to comply would not, as to individual
failures or all failures in the aggregate, have a material adverse
effect on the financial condition, results of operations or business of
Purchaser. To the knowledge of its executive officers, Purchaser
maintains all licenses, permits and governmental authorizations
necessary or appropriate for the ownership of its properties and the
conduct of its business the failure of which to maintain same would have
a material adverse effect upon the assets or business of Purchaser and
its subsidiaries viewed as a whole.
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5.10. FINANCIAL STATEMENTS. The financial statements, of Purchaser,
as reflected in Purchaser's Registration Statement, draft dated August
4, 1998, (a) were prepared in accordance with the books of account and
records of the Purchaser, (b) present fairly in all material respects
the financial position and results of operations of the Purchaser as of
the dates and for the periods indicated therein, (c) were prepared in
accordance with GAAP throughout the periods covered thereby (except that
the unaudited financial statements do not include notes which would
otherwise be required by GAAP), and (d) make full and adequate
disclosure of; and provision for, all material Liabilities of Purchaser
and have adequate reserves for all taxes as of the dates thereof which
are required to be disclosed by application of GAAP.
5.11. EMPLOYEE BENEFIT PLANS.
5.11.1. There has been made available to management of
Target Corporation each plan, program, policy, practice,
contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance award,
stock or stock-related award, fringe benefit or other employee
benefit of any kind, whether formal or informal, proposed or
final, funded or unfunded, and whether or not legally binding,
including, without limitation, each "employee benefit plan"
within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), ("Employee
Plan") which is now, or ever has been, maintained, contributed
to, or required to be contributed to, for the benefit of any
employee on the same echelon of any subsidiary of Purchaser as
management of Target Corporation will be as an employee of
Merger Subsidiary. Upon request by management of Target
Corporation, Purchaser will provide to management of Target
Corporation prior to the Closing: true and complete copies of
all documents, if any, embodying each Employee Plan and
Employee Agreement, including all amendments thereto and
written interpretations thereof; the two most recent annual
reports, if any, filed with respect to each Employee Plan
required under ERISA and the most recent summary plan
description, if any, with respect to each Employee Plan
required under ERISA the most recent favorable determination
letter from the Internal Revenue Service, if applicable, with
respect to each Employee Plan.
5.11.2. The Purchaser has performed in all material respects
all obligations required to be performed under each Employee
Plan, and each Employee Plan has been established and
maintained in all material respects in accordance with its
terms and in compliance with all applicable laws, statutes,
orders, rules and regulations, including but not limited to
ERISA and the Internal Revenue Code. No Employee Plan is a
defined benefit plan within the meaning of Section 3(3 5) of
ERISA. No Employee Plan is a multi-employer plan within the
meaning of Section 3(37) of ERISA. The Purchaser does not have
any liability with respect to any defined benefit plan or
multi-employer plan as a result of having been considered a
"single employer" within the meaning of Section 414(b), (c),
(m), (n) and (o) of the Internal Revenue Code, or otherwise,
and there is no basis for such liability being imposed. There
are no investigations, claims, suits or proceedings pending,
or, to the best of the Purchaser's knowledge, threatened or
anticipated (other than routine claims for benefits) against
any Employee Plan or the assets of any Employee Plan, and, to
the best of the Purchaser's knowledge, there are no facts that
could give rise to any liability in the event of any such
investigation, claim, suit or proceeding. All premiums
required by any Employee Plan have been paid thereunder. All
contributions due to, and payments from, the Employee Plans
that
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may have been required to be made have been made. No
"prohibited transaction" within the meaning of Section 4975 of
the Internal Revenue Code or Section 406 of ERISA has occurred
with respect to any Employee Plan, and, to the best of the
Purchaser's, knowledge, no action or failure to act with
respect to any Employee Plan could subject Purchaser, the
Surviving Corporation or any Employee Plan to any tax, penalty
or other liability, for breach of fiduciary duty or otherwise,
under ERISA or any other applicable law, whether by way of
indemnity or otherwise.
5.11.3. With respect to any plan that, notwithstanding
Section 5.11.2 above, may be construed as a defined benefit
plan of the Purchaser, there has been no failure to make any
contribution or pay any amount due as required by Section 412
of the Internal Revenue Code, Section 302 of ERISA or the
terms of such defined benefit plan, and there has been no
request for or receipt of any funding waiver from the Internal
Revenue Service. No trust has been established in connection
with such defined benefit plan pursuant to Section 4049 of
ERISA (as in effect on December 17, 1987), and no liabilities
that would have a material adverse effect on the condition of
the business of the Purchaser have been asserted against the
Purchaser or any entity with which it would be considered a
"single employer" in connection with the Pension Plan by the
Pension Benefit Guaranty Corporation ('PBGC") or by a trustee
appointed pursuant to Section 4042(b) or (c) of ERISA, and no
Lien has been attached and neither the PBGC nor the Internal
Revenue Service has threatened to attach a Lien on any assets
of the Purchaser or any entity within which it would be
considered a "single employer" as a result of any failure to
comply with the Internal Revenue Code or the Treasury
regulations thereunder or ERISA. Neither the Purchaser nor any
entity with which it is or would be considered a "single
employer" has provided or is required to provide security to
any such defined benefit plan pursuant to Section 40 1(a) Of
the Internal Revenue Code. Neither the Purchaser nor any
entity with which it is or would be considered a "single
employer" has incurred or reasonably expects to incur any
Liabilities under Title IV of ERISA with respect to any such
defined benefit plan. Neither the Purchaser nor any entity
with which it is or would be considered a "single employer"
has transferred any assets or liabilities of such defined
benefit plan which had, at the date of such transfer,
"unfunded benefit liabilities" within the meaning of Section
400 1(a)(18) of ERISA. No "reportable event", within the
meaning of Section 4043(b) of ERISA, has occurred with respect
to any such defined benefit plan. As of September 30, 1998, no
such defined benefit plan had any amount of "unfunded benefit
liability", within the meaning of Section 4001(a)(18) of
ERISA, and termination of any such defined benefit plan has
not resulted and will not result in any liability to the
Purchaser or any entity with which it is or would be
considered a "single employer", or the Surviving Corporation.
5.11.4. Each "group health plan" within the meaning of
Section 4980B(g)(2) of the Internal Revenue Code maintained by
the Purchaser or any entity with which the Purchaser is or
would be considered a "single employer" has been administered
in good faith in compliance with the continuation coverage
requirements contained in the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), as set forth
at Section 4980B of the Internal Revenue Code and any
regulations promulgated or proposed thereunder (if such
proposed regulations constitute substantial authority within
the meaning of Section 6662 of the Internal Revenue Code and
any regulations promulgated thereunder).
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5.11.5. The Purchaser (except to the extent that any of the
following noncompliance's, failures or liabilities would not,
either individually or in the aggregate, have a material
adverse effect on the Purchaser), the business or the assets
of the Purchaser: (i) is in material compliance with all
applicable federal and state laws, rules and regulations
respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case,
with respect to all employees of the Purchaser; (ii) has
withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to
Employees of the Purchaser; (iii) is not liable for any
arrearages of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) other than routine
payments to be made in the normal course of business and
consistent with past practice and reserved for on the
September 30, 1998 balance sheet included within the
Purchaser's financial statements, is not liable for any
payment to any trust or other fund or to any governmental or
administrative authority with respect to unemployment
compensation benefits, Social Security or other benefits for
employees of the Purchaser's said financial statements.
5.13. Neither the Purchaser nor any Affiliate of the Purchaser is
party to any collective bargaining agreement, written or oral, which
covers any Employees or which is binding upon the Purchaser. There have
been, and there are, no strikes, grievances, disputes or controversies
pending or, to the best of the Purchaser's knowledge, threatened between
the Purchaser and any of its employees or any union or other
organization claiming to represent such employees' interests. There is
no request for union representation pending or, to the best of the
Purchaser's knowledge, no present union organizing or election
activities in progress or threatened with respect to any employees of
the Purchaser. There is no unfair labor practice complaint pending
before the National Labor Relations Board or, to the best of the
Purchaser's knowledge, threatened against or relating to the Purchaser
or any of its employees.
5.14. TAX MATTERS. The Purchaser has filed all federal, state and
local tax returns and all information returns and reports required to be
filed by or with respect to it under the laws of the United States or
any state or other jurisdiction for all periods ending on or prior to
the date hereof and will timely file all such returns and reports
required to be filed from the date hereof through the Closing Date. All
such reports and returns were or will be in all material respects
accurately prepared in accordance with all applicable statutes, rules
and regulations and are or will be correct as filed. The Purchaser has
paid all taxes (including, without limitation, taxes for which the
Purchaser is a collection agent - e.g., withholding, excise, sales, use,
Social Security and similar taxes) which have become due or payable (and
will pay on or prior to the Closing Date all taxes which have become due
or payable on or prior to the Closing Date). The Purchaser is not a
party to or has not been notified that it is the subject of any pending,
proposed or threatened action, investigation, proceeding, claim or
assessment by or before the Internal Revenue Service or any other
governmental authority, and no claim for assessment, deficiency or
collection of taxes, or proposed assessment, deficiency or collection,
for which the Purchaser may be liable, and which is material to the
Purchaser, has been asserted or threatened against it. The Purchaser has
not received any notice of any material deficiency, assessment or
collection or proposed deficiency, assessment or collection from the
Internal Revenue Service or any other governmental authority which has
not been satisfied, nor does the Purchaser have any reason to believe
that any such notice will be received in the future. The charges,
accruals and reserves shown in the said Purchaser's financial statements
in respect of taxes for all fiscal periods to date are, adequate. There
are no material unpaid assessments or proposals for
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additional taxes for which the Purchaser does not have adequate
reserves, nor does the Purchaser know of any basis therefor for any
such period. To the best knowledge of the management of the Purchaser
there are no tax rulings, requests for rulings or closing agreements
relating to the Purchaser which could affect its liability for taxes
for any period.
6. FURTHER COVENANTS AND AGREEMENTS.
6.1. CONDUCT OF BUSINESS. Without limiting in any way any rights of
Purchaser or Merger Subsidiary under Section 7, during the period from
the date of this Agreement to the Closing Date, or until this Agreement
has been canceled in accordance with its terms, except as (i) otherwise
consented to by Purchaser in writing, (ii) otherwise expressly permitted
or contemplated under this Agreement, or (iii) otherwise required by
law, the Target Corporation will:
6.1.1. carry on, and cause the Target Corporation to carry
on its Business in, and only in, the usual, regular and
ordinary course in the same manner as heretofore conducted
and, to the extent consistent with such Business, use best
efforts to preserve intact its present business organization
and relationships with customers, vendors, suppliers,
Employees and others having business relations with the Target
Corporation,
6.1.2. not, and ensure that the Target Corporation does
not, terminate or replace, or amend or modify' in any material
respect, any of the Material Contracts, or waive any material
obligation or right of any party under any such Material
Contract;
6.1.3. not, and ensure that the Target Corporation does
not, incur or increase any Indebtedness or Liabilities other
than in the ordinary course of business consistent with past
practice, or issue or sell any debt or equity securities, or
pay any amount or make any distribution or dividend to any
shareholder of the Target Corporation; provided however, the
payments specified in Section 3.1 are expressly permitted.
6.1.4. not, and ensure that the Target Corporation does
not, make any loan to any director, shareholder or Employee of
the Target Corporation or grant to any Employee of the Target
Corporation any unusual or non-routine increase in
compensation, bonus, or any severance or termination pay, or
enter into any new, or modify or amend any existing employment
agreement with any Employee;
6.1.5. not, and ensure that the Target Corporation does
not, adopt or amend in any material respect, any collective
bargaining, bonus, profit sharing, compensation, stock option,
pension, retirement, deferred compensation, or similar plan
for the benefit of Employees of the Target Corporation,'
6.1.6. not, and ensure that the Target Corporation does
not, fail to take any action required for the ordinary and
usual operation of the Business;
6.1.7. not, and ensure that the Target Corporation does
not, make any material change with respect to accounting
policies or procedures;
6.1.8. not, and ensure that the Target Corporation does
not, make any tax election of any kind;
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6.1.9. not, and ensure that the Target Corporation does
not, sell, assign, pledge, dispose of or encumber any of the
Assets other than sales of Inventories to customers of the
Target Corporation in the ordinary course of business
consistent with past practice;
6.1.10. except as provided in Section 3.1, not, and ensure
that the Target Corporation does not, pay, discharge or
satisfy any claims, Liabilities, Indebtedness or obligations,
other than the payment, discharge or satisfaction thereof when
due and payable in the ordinary course of business consistent
with past practice, and does not make any capital expenditures
in excess of $10,000 in the aggregate (for the Target
Corporation);
6.1.11. comply, and ensure that the Target Corporation
complies, in all material respects, with its material
obligations under the Material Contracts;
6.1.12. after written notification to, and consultation
with, Purchaser, defend, initiate or proceed with, and cause
the Target Corporation to defend, initiate or proceed with, as
the case may be, any matter before any governmental,
regulatory or administrative authority that is necessary to
protect the Business or the Assets or any material part
thereof,
6.1.13. cause the Target Corporation to (i) maintain the
Assets in the same repair, order and condition as existed on
September 30, 1998, (ii) maintain insurance for the Assets
comparable in all material respects to that in effect on the
date hereof, and (iii) in the event of casualty, loss or
damage to any of the Assets prior to the Closing Date for
which the Target Corporation is insured, either repair or
replace such damaged assets with assets of industry grade
quality and usefulness or, at the option of Purchaser, retain
in the Target Corporation's bank account the proceeds of such
insurance;
6.1.14. comply, and cause the Target Corporation to comply,
with all legal and regulatory requirements applicable to the
Target Corporation, the Business or the Assets, except where
the failure to comply would not, individually or in the
aggregate with other failures, have a material adverse effect
on the condition (financial or otherwise) of the Target
Corporation, the Business or the Assets;
6.1.15. not, and ensure that the Target Corporation does
not, enter into any Material Contract or become obligated to
enter into any Material Contract;
6.1.16. maintain, and cause the Target Corporation to
maintain, its Records in the usual, regular and ordinary
manner, and on a basis consistent with the Historical
Financial Statements;
6.1.17. obtain and maintain, and cause the Target
Corporation to obtain and maintain, all consents,
authorizations and approvals from all appropriate federal,
state and local governmental agencies or authorities which are
necessary or required for the operation of the Business as
presently or then conducted by it, as and when such consents,
authorizations and approvals are necessary or required;
6.1.18. comply, and cause the Target Corporation to comply,
with all applicable laws, rules, ordinances, regulations,
codes, orders, decrees, licenses and permits of all applicable
jurisdictions and governmental authorities or agencies
relating to it, its properties, the Assets
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or the conduct of the Business, except where the failure to
comply would not, individually or in the aggregate with other
failures, have a material adverse effect on the condition
(financial or otherwise) of the Target Corporation, the
Business or the Assets;
6.1.19. use best efforts to cause the transactions
contemplated by this Agreement to be consummated in accordance
with the terms hereof and use best efforts to refrain from
taking any action which would result in any of the conditions
to Purchaser's or Merger Subsidiary's obligation to consummate
the transactions contemplated by this Agreement being
unsatisfied in accordance with the terms hereof,
6.1.20. collect, and cause the Target Corporation to
collect, the Receivables in the ordinary course of business
consistent with past practice, except to the extent it is in
the best interests of the Target Corporation to accelerate or
compromise (as the case may be) a Receivable;
6.1.21. pay, and cause the Target Corporation to pay, its
trade accounts payable in the ordinary course of business
consistent with past practice and not default under, or breach
any term or provision of, or fail in any material respect to
perform, or suffer or permit to exist any condition or event
which, after notice or lapse of time, or both, would
constitute a default under any Contract or any License,
consent or insurance policy;
6.1.22. if the Target Corporation receives or becomes aware
of any finding, order, complaint, citation or notice prior to
Closing which states that any aspect of the Business or its
operations or the condition of any of the Assets violates any
law, rule, regulation or code of any governmental authority
(each, an "Administrative Violation"), promptly notify
Purchaser of the Administrative Violation, and remove or
correct the Administrative Violation;
6.1.23. not directly or indirectly solicit or engage in
discussions or negotiations with, or provide any information
to or otherwise cooperate with, any other Person or entity
which seeks to, or expresses an interest in, acquiring all or
any substantial part of the Assets or the Business (either
directly or by purchase of capital stock of the Target
Corporation or merger), or directly or indirectly enter into
any agreement with or grant any option to any third person or
entity in connection with any transaction affecting the XCD
Shares, the Assets, the Business or which is inconsistent with
this Agreement;
6.1.24. not, and ensure that the Target Corporation does
not, amend in any respect or for any reason the Articles of
Incorporation or Bylaws of the Target Corporation or elect or
appoint any new or additional director or officer of the
Target Corporation or take any other action with respect to
the capital stock, corporate structure or management or
organic documents of the Target Corporation; and
6.1.25. pay, and cause to be paid, all Taxes payable by the
Target Corporation when due and payable.
The Target Corporation will promptly notify Purchaser of any material
adverse change in the financial condition, results of operations, properties,
Assets, or prospects of the Business. From the date hereof to the Closing,
neither the Target Corporation, nor any XCD Shareholder, will take any action or
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engage in any transaction which would render any representation and warranty of
the Target Corporation inaccurate in any material respect as of the date hereof
or as of the Closing Date or as of any date between the date hereof and the
Closing Date.
6.2. THIRD PARTY CONSENTS.
6.2.1. The Target Corporation will use reasonable
commercial efforts to obtain at the earliest practicable date
and in any event before the Closing all consents, governmental
authorizations, approvals, estoppel certificates and filings
required to be obtained or made by either or which may be
necessary for the consummation of the transactions
contemplated by this Agreement to occur without causing
impairment to, or loss of any Contract or License, or which
are reasonably required by Purchaser or its counsel in
writing.
6.2.2. On or prior to the Closing Date, the Target
Corporation shall use reasonable commercial efforts to obtain
all such waivers and consents under any Contract to which the
Target Corporation is a party as are necessary to prevent a
breach or violation of, or acceleration of, or default under,
any such Contract as a result of the consummation of the
transactions contemplated by this Agreement.
6.3. ACCESS: INFORMATION. From the date hereof to and including the
Closing Date or, 'if Closing does not occur, termination of this
Agreement, the Target Corporation shall (a) afford to the officers,
employees, attorneys, accountants and other authorized representatives
of Purchaser reasonable access, during normal business hours, to the
offices, plants, properties, books and records of the Target Corporation
in order that Purchaser may have full opportunity to make such
operational, legal, financial, accounting and other reviews or
investigations of the Business and the Assets as Purchaser shall desire
to make, (b) permit, and cause the Target Corporation's independent
public accountants to permit, Purchaser's independent public accountants
to inspect its work papers and other records relating to the Business
and the Assets, and (c) furnish, and cause the officers and Employees of
the Target Corporation to furnish, to Purchaser and its authorized
representatives such additional financial and operating data and other
information regarding the Target Corporation's assets, properties,
contracts, goodwill and business including, without limitation, the
Assets and the Business, as Purchaser' shall from time to time
reasonably request including, without limitation, all interim financial
and operating reports relating to the Business prepared by or for
officers of the Target Corporation.
6.4. AUDITED FINANCIAL STATEMENTS. The Target Corporation has
caused to be prepared and delivered to Purchaser the Audited Financial
Statements prepared by independent certified public accountants (the
"Audit Accountants"). Purchaser acknowledges receipt of the Audited
Financial Statements. The Target Corporation confirms that it will cause
the Audit Accountants to provide to Purchaser and its auditors, upon
request, all schedules, accountant's work papers and notes, and a
detailed explanation of all assumptions used in conducting any prior
audits, examinations or reviews of the Target Corporation's books,
records and financial statements.
6.5. INTERIM FINANCIAL STATEMENTS AND OTHER FINANCIAL REPORTS. As
soon as they are prepared, but in all events no later than the thirtieth
day of the month following the end of the respective months to which
they relate (or, if applicable, the thirtieth day following the end of
the fiscal quarter to which they relate), the Target Corporation shall
deliver the applicable Interim Financial Statements to Purchaser, which
shall be complete and accurate in all material respects. In addition, no
later than the
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business day preceding, and no earlier than the fifth business day
preceding, the Closing Date, the Target Corporation shall deliver to
Purchaser the following, each as of the then most recent practicable
date (but in all events as of a date no earlier than the tenth day
preceding the Closing Date), each of which shall be complete and
accurate in all material respects: (a) a list of its Inventories; (b)
a schedule of its accounts receivable showing aging on a 30, 60, 90
and over 90-day basis; (c) a schedule of its accounts payable showing
thereon any accounts payable which are 30, 60, 90 or more than 90-days
past due; and (d) a list of its purchase commitments.
6.6. INSURANCE PROCEEDS. If any Assets are destroyed or damaged or
taken in condemnation, the insurance proceeds or condemnation award with
respect thereto shall remain an Asset of the Business and the property
of the Target Corporation, and such proceeds shall not be withdrawn by,
or distributed to, any person.
6.7. CALIFORNIA FRANCHISE BOARD TAX CLEARANCE. On or promptly
following the execution and delivery of this Agreement, the appropriate
parties shall cause to be executed and filed all documents necessary to
obtain the California Franchise Tax Board Clearance.
6.8. FINANCING. Purchaser shall have received (i) a commitment to
borrow no less than the aggregate cash consideration required for this
transaction from it's principal lender, and (ii) the lender's consent to
this transaction, to enable Purchaser to consummate the transactions
contemplated hereby. To the knowledge of Purchaser, there is no reason
to believe such financing and consent will not be received.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER AND MERGER SUBSIDIARY.
All obligations of Purchaser and Merger Subsidiary under this Agreement are
subject to the satisfaction of the following conditions precedent on or before
the Closing Date, any of which may be waived in whole or in part at the sole
discretion of Purchaser:
7.1. OPINION OF COUNSEL. Purchaser shall have received an opinion
of Raymond Ridge, Esq., counsel to the Target Corporation and the XCD
Shareholders addressed to Purchaser and Merger Subsidiary and dated the
Closing Date, in form and content reasonably satisfactory to Purchaser
and its counsel.
7.2. PERFORMANCE BY TARGET CORPORATION AND XCD SHAREHOLDERS. All of
the terms, covenants, agreements and conditions of this Agreement to be
complied with and performed by the Target Corporation and the XCD
Shareholders on or before the Closing Date shall have been complied with
and performed in all material respects.
7.3. REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Target Corporation and the XCD Shareholders in
this Agreement shall have been true and correct in all material respects
at the date hereof and as of the Closing Date with the same force and
effect as though all such representations and warranties had been again
made as of the Closing Date.
7.4. NO ACTIONS OR PROCEEDINGS. No action, suit, proceeding or
investigation by or before any court, administrative agency or other
governmental authority shall have been instituted or threatened to
restrain, prohibit or invalidate the transactions contemplated by this
Agreement or which may affect the right of Purchaser or the Merger
Subsidiary directly or indirectly to own, operate or control, after
Closing, the Target Corporation or the Business or any material portion
thereof or
33
<PAGE>
which could have any material adverse effect on the Target Corporation,
the Business or the Assets or the value or prospects of any of them.
7.5. NO MATERIAL ADVERSE CHANGE. To the best knowledge of
management of XCD, Incorporated and the XCD Shareholders, since January
1, 1998: (a) there shall have occurred no material adverse change in (i)
the Business or Assets, the condition of the Target Corporation
(financial or otherwise), or the results of operations of the Target
Corporation or the Business, whether or not arising from transactions in
the ordinary course of business, or (ii) the Target Corporation's
prospects or its industry segment generally; (b)neither the Assets nor
the Business shall have been adversely affected in any material way by,
or sustained any material loss, whether or not insured, as a result of
any fire, flood, accident, explosion or other calamity or casualty or
any strike, labor disturbance, riot, act of God or the public enemy; and
(c) no condemnation proceedings affecting any of the real property
owned, Leaseholds or Improvements shall have been commenced and the
Target Corporation shall have not received notice of the proposed
commencement of any such proceedings.
7.6. OFFICER'S CERTIFICATE. Purchaser and Merger Subsidiary shall
have received from the Target Corporation and the XCD Shareholders, in
form and substance reasonably satisfactory to Purchaser and its counsel,
a certificate, dated the Closing Date, of the Target Corporation and the
XCD Shareholders, as to the satisfaction of the conditions set forth in
Sections 7.2, 7.3, 7.4 and 7.5, and as to such other matters as are
reasonably required by Purchaser or its counsel.
7.7. SATISFACTION OF COUNSEL. All corporate and other actions and
proceedings of the Target Corporation in connection with the
transactions contemplated hereby, all resolutions, documents and
instruments incidental thereto, and all other related legal matters,
shall be reasonably satisfactory in form and substance to Purchaser and
its counsel, and Purchaser shall have received all such resolutions,
documents and instruments, or copies thereof: certified if requested, as
its counsel shall have reasonably requested.
7.8. CONSENTS AND ESTOPPELS. All consents of third parties under
any Contract or License, and all consents, orders, approvals and
authorizations of; and registrations, qualifications and filings with,
any regulatory or governmental authority, required in connection with
the consummation of the transactions contemplated hereby (or of the kind
referred to in Section 6.2), and all estoppel letters from landlords and
lenders reasonably requested by Purchaser, shall have been obtained in
form and content reasonably satisfactory to Purchaser.
7.9. TITLE REPORTS. Lien, Judgment and Other Searches. Purchaser
shall have received true and complete copies of the results of searches
of appropriate title records, UCC filings, tax liens, fixture filings,
judgments and pending judicial proceedings in each state and county in
which the Target Corporation maintains (or has within the last five
years maintained) an office as of an effective search date no earlier
than 10 days prior to the Closing Date,, showing that there is on file
in such records no effective encumbrance, UCC financing statement or
federal, state or local Tax Lien, or other Lien, or judgment naming the
Target Corporation or any trade names used in the conduct of the
Business, except as described in Schedule 4.7 or otherwise disclosed to
Purchaser in writing prior to the date hereof
7.10. EMPLOYMENT AGREEMENTS. Certain of the Key Employees shall have
executed and delivered to the Surviving Corporation their Employment
Agreements, Exhibits "A-1" through "A-5" hereto, certain other employees
shall have released and waived any rights to options from XCD,
34
<PAGE>
Incorporated and the consulting agreements between Advent Technology
Incorporated and Advent Research, Incorporated and XCD, Incorporated
shall have been canceled with no continuing liability or obligation to
XCD, Incorporated or Merger Subsidiary.
7.11. MERGER DOCUMENTS. XCD shall have executed and delivered to
Merger Subsidiary, in suitable form for filing, the Agreement of Merger,
Exhibit "B" hereto.
7.12. CALIFORNIA FRANCHISE TAX BOARD CLEARANCE. The California
Franchise Tax Board shall have issued a Tax Clearance Certificate for
XCD.
7.13. INVESTMENT LETTERS. Each XCD Shareholder shall have delivered
to Purchaser an investment letter in form and substance acceptable to
Purchaser and its counsel with respect to their acquisition of Troy
Shares hereunder containing, among other things, the restrictions
described in Sections 2.8 and 2.9 hereinabove.
7.14. FINANCING. Purchaser shall have actually received the
financing referred to in Section 6.8.
7.15. NO DISSENTERS. There shall be no XCD Shareholders who have
exercised their dissenter's rights under California law.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF XCD. All obligations of the
Target Corporation under this Agreement are subject to the satisfaction of the
following conditions precedent on or before the Closing Date, any of which may
be waived in whole or in part at the sole discretion of the Target Corporation.
8.1. OPINION OF COUNSEL. The Target Corporation and the XCD
Shareholders shall have received an opinion of Raymond F. Schuler, Esq.
or Oppenheimer Wolff & Donnelly LLP, counsel to Purchaser and Merger
Subsidiary, addressed to the Target Corporation and dated the Closing
Date, in form and content reasonably satisfactory to the Target
Corporation, and its counsel.
8.2. PERFORMANCE BY PURCHASER. All the terms, covenants, agreements
and conditions of this Agreement to be complied with and performed by
Purchaser or Merger Subsidiary on or before the Closing Date shall have
been complied with and performed in all material respects.
8.3. REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Purchaser and Merger Subsidiary in this Agreement
shall have been true and correct in all material respects at the date
hereof and as of the Closing Date with the same force and effect as
though all such representations and warranties had been again made as of
the Closing Date.
8.4. NO ACTIONS OR PROCEEDINGS. No action, suit, proceeding or
investigation by or before any court, administrative agency or other
governmental authority shall have been instituted or threatened to
restrain, prohibit or invalidate the transactions contemplated by this
Agreement or which may affect the right of Purchaser or the Merger
Subsidiary directly or indirectly to own, operate or control, after
Closing, the Target Corporation or the Business or any material portion
thereof; or which could have any material adverse effect on the
Purchaser, the Business or the Assets of the Purchaser or the value or
prospects of any of them.
8.5. OFFICER'S CERTIFICATE. The XCD Shareholders shall have
received from Purchaser and Merger Subsidiary, in form and substance
reasonably satisfactory to them, a certificate, dated the Closing Date,
of the President or any Vice President of each of Purchaser and Merger
Subsidiary, certifying
35
<PAGE>
as to the satisfaction of the conditions set forth in Sections 8.2, 8.3
and 8.4 and as to such other matters as are reasonably required by
Target Corporation or its counsel.
8.6. EMPLOYMENT AGREEMENTS. The Surviving Corporation shall have
executed and delivered to the Employees the Employment Agreements
(Exhibits "A-1" through "A-5" hereto).
8.7. SATISFACTION OF COUNSEL. All corporate and other actions and
proceedings of Purchaser and Merger Subsidiary in connection with the
transactions contemplated hereby, all resolutions, documents and
instruments incidental thereto, and all other related legal matters,
shall be reasonably satisfactory in form and substance to the Target
Corporation and the XCD Shareholders and their counsel, and such parties
shall have received all such resolutions, documents and instruments, or
copies thereof; certified if requested, as its counsel shall have
reasonably requested.
8.8. MERGER DOCUMENTS. Merger Subsidiary shall have executed and
delivered to XCD, in suitable form for filing, the Agreement of Merger.
8.9. MERGER CONSIDERATION. The Merger Consideration shall have been
paid or reasonably satisfactory provisions for its payment shall have
been made.
8.10. The Target Corporation and the XCD Shareholders shall have
received the opinion from Kieckhafer & Schiffer LLP as to that portion
of the transaction which is tax free under Section 368 (a) (1) (A) of
the Internal Revenue Code of 1986. as amended.
8.11. The XCD Shareholders shall have received the Registration
Rights Agreement in the form of Exhibit "C" attached hereto, duly
executed by the Purchaser.
9. INDEMNIFICATION.
9.1. INDEMNITIES.
9.1.1. Purchaser and Merger Subsidiary jointly and
severally agree to indemnify and hold harmless the Target
Corporation and the XCD Shareholders from, against and in
respect of any and all Liabilities, losses, costs and expenses
(including reasonable attorneys' fees and costs incurred
before and at trial, at all tribunal levels, whether or not
suit is instituted, and in establishing this right to
indemnification) asserted against or suffered or incurred by
the Target Corporation or any of the XCD Shareholders to the
extent caused by or resulting from a breach by Purchaser or
Merger Subsidiary of any of its representations, warranties,
covenants or obligations herein contained.
9.1.2. The XCD Shareholders jointly and severally agree to
indemnify and hold harmless the Purchaser and Merger
Subsidiary from and against and in respect of any and all
Liabilities, losses, costs and expenses (including reasonable
attorneys' fees and costs incurred before and at trial, at all
tribunal levels, whether or not suit is instituted, and in
establishing this right to indemnification) asserted against,
suffered or incurred by Purchaser or Merger Subsidiary to the
extent caused by or resulting from (i) a breach by the Target
Corporation or the XCD Shareholders of any of their
representations, warranties, covenants or obligations herein
contained; (ii) any tax liabilities of the Target Corporation
accrued or incurred prior to the Closing; (iii) any liability
or obligation arising in any way from any product
36
<PAGE>
manufactured or sole, or service rendered by the Target
Corporation prior to the Closing; and (iv) any claims made
by Employees or former Employees of the Target Corporation
pertaining to services rendered or actions of or conditions
at the Target Corporation prior to the Closing.
9.2. CLAIMS PROCEDURES.
9.2.1. In the event that any claim is asserted against the
Surviving Corporation, Purchaser shall prepare a proposed
statement of adjustment ("Statement of Adjustment") and
deliver the Statement of Adjustment to Agent who shall have
twenty (20) days to review and verify' the Statement of
Adjustment (the "Review Period"). If Agent does not object in
writing to the Statement of Adjustment within the Review
Period, then the Statement of Adjustment shall be final and
binding on all of the XCD Shareholders. If Agent does so
object within the Review Period, then the parties shall meet
as soon as practicable to attempt to resolve any such
objection of Agent. If the parties agree in writing on a
Statement of Adjustment, then the XCD Shareholders shall
immediately pay their pro rata share of the amount set forth
in the Statement of Adjustment.
9.2.2. If the parties cannot agree on a Statement of
Adjustment within twenty (20) days after the Review Period,
then the claim shall be settled by arbitration in accordance
with the Commercial Rules of the American Arbitration
Association then in effect. The decision of a sole arbitrator
shall, except for mistakes of law, be final and binding upon
the parties hereto, and judgment upon the award rendered by
the arbitrator, may be entered in any court having
jurisdiction thereof The arbitrator shall be an existing or
former judge of a court of record within the United States or
an attorney in good standing admitted to practice for a period
of at least ten (10) years within the United States. No
arbitration shall involve parties other than the parties
hereto and their respective successors and assigns or be in
any respect binding with respect to any such other parties.
The situs of the arbitration will be in the County of Orange,
State of California. The parties to any arbitration arising
hereunder shall have the right to take depositions and to
obtain discovery regarding the subject matter of the
arbitration and to use and exercise all of the same rights,
remedies and procedures, and be subject to all of the same
duties, liabilities, and obligations in the arbitration with
respect to the subject matter thereof; as if the subject
matter of the arbitration were pending in a civil action
before a court of highest jurisdiction in the state where the
arbitration is held. The arbitrator shall have the power to
enforce said discovery by imposition of same terms,
conditions, consequences, liabilities, sanctions and penalties
as can be or maybe imposed in like circumstances in a civil
action by a court of highest jurisdiction of the state in
which the arbitration is held, except the power to order the
arrest or imprisonment of a person. All costs of the
arbitration, including the cost of any record or transcripts
of the arbitration, administrative fees, the fee of the
arbitrator, and all other fees and costs, shall be borne
equaly by the parties.
9.2.3. In the event that any claim is asserted against the
Surviving Corporation, or the Surviving Corporation is made a
party defendant in any action or proceeding, and such claim,
action or proceeding involves a matter which is the subject of
indemnification under Section 9.1.2., then the Agent shall be
notified as promptly as possible. Agent shall have the right
to join in the defense of said claim, action or proceeding at
the Agent's (and the XCD
37
<PAGE>
Shareholders') sole cost and expense. Unless the parties
otherwise agree in writing as to the manner in which the Agent
(or the XCD Shareholders) shall defend, compromise or settle
(exercising reasonable business judgment) such claim,
Purchaser and Merger Subsidiary shall be entitled to defend,
compromise or settle such claim, for the account and at the
risk of the Agent and the XCD Shareholders.
9.3. LIMITATIONS. The respective rights of the parties to
indemnification under this Agreement shall expire on, and shall be of no
further force and effect after, the applicable time set forth in Section
10.15. No indemnification shall be claimed or made until the party
claiming indemnification shall have incurred damages in the aggregate
amount of Twenty-Five Thousand Dollars ($25,000) and such
indemnification shall only apply to the amount by which such claims
exceed $25,000. Furthermore, the maximum amount indemnifiable shall be
limited to $500,000 and payable solely by return to the Purchaser of
unencumbered Troy Shares valued at $7.00 per share. The foregoing
limitations shall not apply to claims which result from any criminal or
fraudulent act or omission or any willful, intentional or knowing
misrepresentation, breach of warranty or breach of covenant.
10. MISCELLANEOUS.
10.1. ATTORNEYS' FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement. or because of an alleged
dispute. breach, default or misrepresentation in connection with any of
the provisions of this Agreement. the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and
other costs incurred in that action or proceeding in addition to any
other remedies to which it, he or they may be entitled at law or equity.
The rights and remedies granted herein are cumulative and not exclusive
of any other right or remedy granted herein or provided by law.
10.2. EXPENSES. Except as otherwise specifically provided in this
Agreement, each party will pay its own expenses incident to this
Agreement and the transactions contemplated hereby, including legal and
accounting fees and disbursements.
10.3. AMENDMENTS AND WAIVERS. The parties hereto may, by written
agreement signed by the parties, modify any of the covenants or
agreements or extend the time for the performance of any of the
obligations contained in this Agreement or in any document delivered
pursuant to this Agreement. My party hereto may waive, by written
instrument signed by such party, any inaccuracies in the representations
and warranties of another party or compliance by another party with any
of its obligations contained in this Agreement or in any document
delivered pursuant to this Agreement. This Agreement may be amended only
by written instrument signed by the parties hereto.
10.4. TRANSFERABILITY ASSIGNMENT. The rights and obligations of
Purchaser and Merger Subsidiary shall not be assignable. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors. Nothing herein expressed or implied is
intended to confer upon any person.. other than the parties hereto and
their respective successors any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
10.5. TERMINATION. In the event that the Closing cannot be held
because any of the conditions to the Closing cannot be fulfilled on or
prior to November 14, 1998, or any extended date for the Closing agreed
to by the parties hereto, none of the parties shall have any obligation
or liability of
38
<PAGE>
any nature whatever to the other parties hereto, and all expenses
incurred by any party hereto shall be for its own account, except as
may otherwise be specifically provided in this Agreement; provided,
however, that no party hereto shall be deemed to have waived any
rights it may have arising from the breach or default of another party
of any of the latter's representations, warranties, covenants or
indemnities under this Agreement.
10.6. NOTICES. Any notice, request or other document to be given
hereunder to a party hereto shall be in writing and delivered in person
or sent by registered or certified mail, postage prepaid, return receipt
requested, or by facsimile or telex, or an overnight air courier
service, as follows:
If to Purchaser or Merger Subsidiary, addressed to it at:
Troy Group, Inc.
2331 South Pullman Street
Santa Ana, California 92705
Attention: Patrick J. Dirk, C.E.O.
Telecopier No.: (949) 250-9565
With a copy to: Raymond F. Schuler, Esquire
c/o Oppenheimer Wolff & Donnelly LLP
500 Newport Center Drive, Suite 700
Newport Beach, California 92660
Telecopier No.: (714) 719-6030
If to the Target Corporation or to the XCD Shareholders (or any of them),
addressed to it or them at:
XCD INCORPORATED
1692 Browning
Irvine, California 92606
Attention: Keith Sugawara, President
Telecopier No.: (949) 399-0825
With a copy to: Raymond L Ridge. Esq.
660 Newport Center Drive. Ste. 780
Newport Beach, California 92660
Telecopier No.: (949) 718-0989
All such notices, requests and other documents shall be deemed to have been duly
given at the time delivered by hand, if personally delivered; three business
days after being deposited in the mail, first class postage prepaid, return
receipt requested, if mailed; when answered back, if telexed; when receipt
confirmed, if sent by facsimile; and the next business day after timely delivery
to the courier, if sent by an overnight air courier service guaranteeing next
day delivery. Any party hereto may change its address for receiving notices,
requests and other documents by giving written notice of such change to the
other parties hereto.
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<PAGE>
10.7. GOVERNING LAW; CHOICE OF FORUM. This Agreement shall be
governed by and construed in accordance with the laws of the State of
Delaware. Subject to the claims procedures set forth in Section 9.2
hereof which shall take precedence with respect to indemnification
matters covered by Section 9 hereof, the parties to this Agreement (and
each other agreement executed in connection herewith or pursuant hereto)
consent to jurisdiction for any action, suit or proceeding relating to
this Agreement (and any agreement executed in connection herewith or
pursuant hereto) in the courts of the United States of America sitting
in Orange County in the State of California, or, if such courts shall
not have jurisdiction over the subject matter thereof; in the courts of
the State of California sitting in Orange County and each such party
hereby irrevocably and unconditionally agrees to submit to the
jurisdiction of such courts for purposes of any such action, suit or
proceeding. Each party irrevocably waives any objection it may have to
the venue of any action, suit or proceeding brought in such courts or to
the convenience of the forum. Final judgment in any such action, suit or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment, a certified or true copy of which
shall be conclusive evidence of the fact and the amount of any
indebtedness or liability of any party therein described.
10.8. PARTIAL INVALIDITY. In the event that any provision of this
Agreement shall be held invalid or unenforceable by any court of
competent jurisdiction, and is not reformed by such court, such holding
shall not invalidate or render unenforceable any other provision hereof,
except if such holding materially adversely affects a party's ability to
realize the essential benefits of this Agreement.
10.9. SECTION HEADINGS. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
10.10. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, or by the
execution and attachment of counterpart signature pages to one or more
counterparts, but all of which together shall constitute one and the
same instrument.
10.11. ENTIRE AGREEMENT. This Agreement, together with the Schedules
and Exhibits and the agreements, certificates and instruments delivered
pursuant hereto or thereto, contain the entire agreement among the
parties hereto, and supersede all prior agreements and undertakings
between or among the parties hereto relating to the subject matter
hereof and thereof; including, without limitation, any letter of intent
or proposal executed or delivered by or on behalf of any of the parties
prior to the date hereof
10.12. PUBLIC ANNOUNCEMENTS. Neither party shall make any public
announcements concerning the transactions contemplated by this Agreement
or the consummation thereof without first obtaining the prior written
consent of the other as to the content, form and timing of any such
announcement (except that Purchaser may make such announcements, at such
times, as Purchaser, in its sole discretion, deems necessary or
appropriate to comply with applicable securities laws).
10.13. GENDER. With respect to the language of this Agreement, the
use of the masculine gender shall include the feminine and neuter, and
the use of the neuter shall include the masculine and/or feminine, in
each case, as the context reasonably requires.
10.14. NO WAIVER: CUMULATIVE REMEDIES. No failure on the part of any
party to exercise, and no delay in the exercise of, any right, power,
privilege or remedy of such party hereunder, or under any
40
<PAGE>
other agreement or instrument executed in connection herewith or
pursuant hereto, or pursuit of any particular right, power, privilege
or remedy hereunder or thereunder at any particular time, singly or
together with others, or any partial exercise thereof; shall operate
as a waiver of, or preclude the exercise or availability of, any
right, power, privilege or remedy of such party under this Agreement
or any such other agreement or instrument executed in connection
herewith or pursuant hereto.
10.15. SURVIVAL. The representations, warranties, covenants and
agreements contained in this Agreement, and in any agreements,
certificates or other instruments delivered pursuant to this Agreement,
shall survive the Closing and the Merger and the consummation of the
transactions contemplated hereby, and shall remain in full force and
effect, regardless of any investigation made by or on behalf of any
party or of the actual or constructive knowledge by any party of
inaccuracy or breach thereof Notwithstanding any of the foregoing to the
contrary, any claim asserting a breach of any of the representations and
warranties of the parties set forth in Sections 4 or 5, or of any of the
covenants of the parties set forth in Section 6, must be asserted in
writing to the breaching party no later than the end of the 12th full
month following the Closing Date, failing which such claim shall be
barred, except that such limitation shall not apply to any criminal or
fraudulent act or omission., or any willful, intentional or knowing
misrepresentation. breach of warranty or breach of covenant.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
as of the day and year first above written.
"PURCHASER"
TROY GROUP, INC.,
a Delaware corporation
By: /c/ Patrick J. Dirk
-----------------------------------------------------
Patrick J. Dirk, Chairman and Chief Executive Officer
"MERGER SUBSIDIARY"
TROY MERGER SUBSIDIARY, INC.
41
<PAGE>
By: /s/ Patrick J. Dirk
---------------------------------
Patrick J. Dirk,
Chairman and Chief Executive Officer
"TARGET CORPORATION"
XCD INCORPORATED., a California corporation
By: /s/ Keith Sugawara
---------------------------------
Keith Sugawara, President
"XCD SHAREHOLDERS"
/s/ Keith Sugawara
---------------------------------
Keith Sugawara
/s/ Lee Aydelotte
---------------------------------
Lee Aydelotte
/s/ Jon Asahina
---------------------------------
Jon Asahina
/s/ William Hegardt
---------------------------------
William Hegardt
/s/ James Okubo
---------------------------------
James Okubo
/s/ Ronald Kanemura
---------------------------------
Ronald Kanemura
42
<PAGE>
WARRANT
TO PURCHASE COMMON STOCK OF
TROY GROUP, INC.
(SUCCESSOR TO TROY SYSTEMS INC.)
This is to certify that Broadland Capital Partners or registered assigns,
is entitled to purchase from Troy Group, Inc., a Delaware corporation, up to
250,000 Stock Units, in whole or in part, at the purchase prices per Stock Unit
and, all on the terms and conditions and pursuant to the provisions hereinafter
provided, and pursuant to the provisions of a certain Consulting Agreement dated
October 1, 1997 and as amended as of December 30, 1998 and June 8, 1999 between
Broadland Capital Partners and Troy Group, Inc., successor to Troy Systems Inc.,
a California corporation (the "Consulting Agreement").
This Warrant is granted pursuant to the Consulting Agreement in order to
incentivise Broadland Capital Partners, through its principal, Morgan Payne, to
significantly assist the Company to achieve three important corporate goals
(collectively hereinafter referred to as the "Goals") as follows:
(a) To become a publicly owned company either through an initial
public offering of shares (the "IPO") or a merger with an already
public entity, (or otherwise) by November 30, 2001 (the "First
Goal");
(b) (this Second Goal is deleted); and
(c) from September 1998 and until November 30, 2001, to acquire
entities having an aggregate annual revenue of Fifteen Million
Dollars ($15,000,000) (the "Third Goal").
The nature of this Warrant is as follows:
(i) The Warrant shall be to purchase shares of the Company's
common stock at a price of $3.50 per share or, with
respect to the portion of this Warrant that vests upon
completion of the IPO, the IPO price(the "Warrant Price").
(ii) NUMBER OF STOCK UNITS SUBJECT TO WARRANT; This Warrant
grants to Broadland the right to purchase up to 250,000
shares of the Company's common stock at the Warrant Price.
(iii) The Warrant shall vest as follows:
Warrants to Purchase 250,000 shares of Troy Common Stock shall be
vested and exercisable as follows:
<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE VESTING
-------- -------------- -------
<S> <C> <C>
50,000 At IPO Price At the completion of the IPO
50,000 $3.50/Share At Closing of XCD acquisition
50,000 $3.50/Share At Closing of Telgate acquisition
50,000 $3.50/Share At Closing of major or strategic acquisition
25,000 $3.50/Share At Closing of minor or strategic acquisition
10,000 $3.50/Share At Closing of minor acquisition
15,000 $3.50/Share Other acquisition projects - as negotiated
</TABLE>
<PAGE>
(iv) The Warrants must be exercised within five (5) years after
they vest or, thereafter, they shall expire and become null
and void.
DEFINITIONS
The terms defined in this Section, whenever used in this Warrant, shall, unless
the context otherwise requires, have the respective meanings hereinafter
specified.
"Commission" shall mean the Securities and Exchange Commission, or any
federal agency then administering the Securities Act.
"Common Stock" shall mean the Company's authorized Common Stock as
constituted on the date the Company first becomes an publicly owned
entity, and any stock into which such Common Stock may thereafter be
changed, and shall also include stock of the Company of any other class,
which is not preferred as to dividends or assets over any other class of
stock of the Company and which is not subject to redemption, issued to
the holders of shares of Common Stock upon any reclassification thereof.
"Company" shall mean Troy Group, Inc., a Delaware corporation and
successor to Troy Systems Inc., a California corporation, and any
successor corporation by merger, consolidation or otherwise.
"Consultant" shall mean Broadland Capital Partners.
"Consulting Agreement" shall mean the Consulting Agreement dated
October 1, 1997 between the Company and the Consultant pursuant to which
this Warrant has been issued.
"Current Warrant Price" per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean
the amount equal to the quotient resulting from dividing the purchase
price per Stock Unit as provided above by the number of shares (including
any fractional share) of Common Stock comprising a Stock Unit on such
date.
"Fair Market Value" means, with respect to the Company's Common Stock,
as of any date:
(a) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed
or admitted but transactions in the Common Stock are reported on
the Nasdaq National Market System, the reported closing price of
the Common Stock on such exchange or by the Nasdaq National Market
System as of such date (or, if no shares were traded on such day,
as of the next preceding day on which there was such a trade); or
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(b) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the Nasdaq National Market
System, and bid and asked prices therefor in the over-the-counter
market are reported by Nasdaq or National Quotation Bureau, Inc.
(or any comparable reporting service), the mean of the closing bid
and asked prices as of such date, as so reported by Nasdaq, or, if
not so reported thereon, as reported by National Quotation Bureau,
Inc. (or such comparable reporting service); or
(c) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the Nasdaq National Market
System, and such bid and asked prices are not so reported by
Nasdaq or National Quotation Bureau, Inc. (or any comparable
reporting service), such price as the Company's Board of Directors
determines in good faith in the exercise of its reasonable
discretion.
"Outstanding" when used with reference to Common Stock shall mean, at
any date as of which the number of shares thereof is to be determined,
all issued shares of Common Stock, except shares then owned or held by or
for the account of the Company.
"Person" shall mean an individual, a corporation, a partnership, a
trust, an unincorporated organization or a government or any agency or
political subdivision thereof.
"Securities Act" shall mean the Securities Act of 1933, or any similar
federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Stock Unit" shall mean one share of Common Stock as such stock was
constituted on the date that the Company shall first become a publicly
owned entity, and thereafter shall mean such number of shares (including
any fractional shares) of Common Stock as shall result from the
adjustments specified in Section III hereof.
"Warrants" shall mean this Warrant dated October 1, 1997, originally
issued by the Company, and all Warrants issued upon transfer, division or
combination of, or in substitution for, any thereof. All Warrants shall
at all times be identical as to terms and conditions and date, and any
Warrant issued in exchange or substitution for any other Warrant shall
bear the same expiration date as such other Warrant.
"Warrant Price" shall mean $3.50 per share or, with respect to the
portion of this Warrant that vests upon completion of the IPO, the IPO
price.
"Warrant Stock" shall mean the shares of Common Stock purchasable by
the holders of the Warrants upon the exercise thereof.
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SECTION I
EXERCISE OF WARRANT
A. MANNER OF EXERCISE. The rights represented by this Warrant may be
exercised by the holder, in whole or in part (but not as to a fractional
share), by written notice of exercise delivered to the Company
accompanied by the surrender of this Warrant (properly endorsed if
required) at the principal office of the Company and upon payment to it,
by cash, certified check or bank draft, of the Warrant Price for such
shares. In addition, the holder may elect to pay the full purchase price
by receiving a number of shares of Common Stock computed using the
following formula:
X=Y(A-B)
------
A
Where: X= the number of shares of Common Stock to be issued to the
holder.
Y= the number of shares of Common Stock as to which this
Warrant is being exercised.
A= the Fair Market Value of one share of Common Stock.
B= Warrant Price.
The Company agrees that the Warrant Stock so purchased shall be and are
deemed to be issued as of the close of business on the date on which this
Warrant shall have been surrendered and payment made for such Warrant
Stock as aforesaid. Certificates for the shares of the Warrant Stock so
purchased shall be delivered to the holder within 15 days after the
rights represented by this Warrant shall have been so exercised, and,
unless this Warrant has expired, a new Warrant representing the number of
Warrant Stock, if any, with respect to which this Warrant has not been
exercised shall also be delivered to the holder within such time.
B. PAYMENT OF TAXES, ETC. All shares of Warrant Stock issuable upon the
exercise of this Warrant shall be validly issued, fully paid and
nonassessable, and the Company shall pay all expenses in connection with,
and all taxes and other governmental charges that may be imposed in
respect of, the issue or delivery thereof. The Company shall not be
required, however, to pay any tax or other charge imposed in connection
with any transfer involved in the issue of any certificate for shares of
Warrant Stock in any name other than that of the registered holder of
this Warrant, and in such case the Company shall not be required to issue
or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the Company's satisfaction that no
such tax or other charge is due.
C. FRACTIONAL SHARES. The Company shall not be required to issue a
fractional share of stock upon any exercise of any Warrant. As to any
final fraction of a share
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which the holder of one or more Warrants, the rights under which are
exercised in the same transaction, would otherwise be entitled to
purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the same fraction
of the Current Warrant Price per share of Common Stock on the business
day which next precedes the day of exercise.
SECTION II
TRANSFER, DIVISION AND COMBINATION
This Warrant and all rights hereunder are transferable, in whole or in
part, on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at its office in the City of Santa Ana, State of
California, or elsewhere in the State of California maintained for the purpose
pursuant to Section VIII, together with a written assignment of this Warrant
duly executed by the holder hereof or his agent or attorney and payment of funds
sufficient to pay any stock transfer taxes payable upon the making of such
transfer. Upon such surrender and payment the Company shall execute and deliver
a new Warrant or Warrants in the name of the assignee or assignees and in the
denominations specified in such instrument of assignment, and this Warrant shall
promptly be canceled. If and when this Warrant is assigned in blank, the
Company may (but shall not be obliged to) treat the bearer hereof as the
absolute owner of this Warrant for all purposes and the Company shall not be
affected by any notice to the contrary. A Warrant may be exercised by a new
holder for the purchase of shares of Common Stock without having a new Warrant
issued.
This Warrant may be divided or combined with other Warrants upon
presentation hereof at the principal executive office of the Company, or at the
aforesaid office or agency of the Company together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the holder hereof or his agent or attorney. Subject to compliance
with the preceding paragraph as to any transfer which may be involved in such
division or combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice.
The Company shall pay all expenses, taxes (other than stock transfer
taxes) and other charges payable in connection with the preparation, issue and
delivery of Warrants under this Section.
The Company agrees to maintain, at its aforesaid office, books for the
registration and transfer of the Warrants.
5
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SECTION III
ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE
Adjustments contemplated by this Section III will only be made with
respect to such events occurring after the closing of the IPO or the merger, as
the case may be. The number of shares of Common Stock comprising a Stock Unit
of Warrant Stock, or the price at which a Stock Unit of Warrant Stock may be
purchased upon exercise of this Warrant, shall be subject to adjustment from
time to time as set forth in this Section.
A. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at any time or
from time to time the Company shall
(1) take a record of the holders of its Common Stock for the purpose
of entitling them to receive a dividend payable in, or other
distribution of, Common Stock, or
(2) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
(3) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock
then the number of shares of Common Stock comprising a Stock Unit of
Warrant Stock immediately after the happening of any such event shall be
adjusted so as to consist of the number of shares of Common Stock which a
record holder of the number of shares Common Stock comprising a Stock
Unit immediately prior to the happening of such event would own or be
entitled to receive after the happening of such event.
B. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION. The
following provisions shall be applicable to the making of adjustments of
the number of shares of Common Stock comprising a Stock Unit hereinbefore
provided for in this Section:
(1) TREASURY STOCK. The sale or other disposition of any issued
shares of Common Stock owned or held by or for the account of the
Company shall not be deemed an issuance thereof for any purpose of
this Section except in the case of a dividend payable in, or other
distribution of, such shares to holders of Common Stock of the
Company, in which case an adjustment shall be made under
Subsection A of this Section.
(2) FRACTIONAL INTERESTS. In computing adjustments under this
Section, fractional interests in Common Stock shall be taken
into account to the nearest one-thousandth of a share.
C. MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS. In case the Company
shall merge or consolidate into another corporation, or shall sell,
transfer or otherwise dispose of all or substantially all of its
property, assets or business to another corporation and pursuant to the
terms of such merger, consolidation or disposition of assets, shares
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of common stock of the successor or acquiring corporation are to be
received by or distributed to the holders of Common Stock of the Company,
then each holder of a Warrant shall have the right thereafter to receive,
upon exercise of such Warrant, Stock Units each comprising the number of
shares of common stock of the successor or acquiring corporation
receivable upon or as a result of such merger, consolidation or
disposition of assets by a holder of the number of shares of Common Stock
comprising a Stock Unit immediately prior to such event. If pursuant to
the terms of such merger, consolidation or disposition of assets, any
cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights)
are to be received by or distributed to the holders of Common Stock of
the Company in addition to common stock of the successor or acquiring
corporation, there shall be a reduction of the purchase price per Stock
Unit equal to the amount applicable to the number of shares of Common
Stock then comprising a Stock Unit of any such cash and of the fair value
(as determined in good faith by the Board of Directors of the Company) of
any and all such shares of stock or other securities or property to be
received by or distributed to the holders of Common Stock of the Company.
In case of any such merger, consolidation or disposition of assets, the
successor or acquiring corporation shall expressly assume the due and
punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and
all of the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate (as deermined by resolution of
the Board of Directors of the Company) in order to provide for
adjustments of Stock Units which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section. For the
purposes of this Section "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class, which
is not preferred as to dividends or assets over any other class of stock
of such corporation and which is not subject to redemption, and shall
also include any evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such stock,
either immediately or upon the arrival of a specified date or the
happening of a specified event, and any warrants or other rights to
subscribe for or purchase any such stock. The foregoing provisions of
this Subsection shall similarly apply to successive mergers,
consolidations or dispositions of assets.
D. OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from time
to time the Company shall take any action affecting its Common Stock,
other than an action described in any of the foregoing Subsections A to
C, inclusive, of this Section, then, unless in the opinion of the Board
of Directors of the Company such action will not have a materially
adverse effect upon the rights of the holders of the Warrants, the number
of shares of Common Stock or other stock comprising a Stock Unit, or the
purchase price thereof, shall be adjusted in such manner and at such time
as the Board of Directors of the Company may in good faith determine to
be equitable in the circumstances.
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SECTION IV
NOTICES TO WARRANT HOLDERS
NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever the number of
shares of Common Stock comprising a Stock Unit, or the price at which a Stock
Unit may be purchased upon exercise of the Warrants, shall be adjusted pursuant
to Section III, the Company shall forthwith obtain a certificate signed by the
Company setting forth, in reasonable detail, the event requiring the adjustment
and the method by which such adjustment was calculated (including a description
of the basis on which the Board of Directors of the Company determined the fair
value of any evidences of indebtedness, shares of stock or, other securities
specifying the number of shares of Common Stock comprising a Stock Unit and (if
such adjustment was made pursuant to Section IIIC or Section IIID) describing
the number and kind of any other shares of stock comprising a Stock Unit, and
any change in the purchase price or prices thereof, after giving effect to such
adjustment or change. The Company shall promptly, and in any case within 45
days after the making of such adjustment, cause a signed copy of such
certificate to be delivered to each holder of a Warrant in accordance with
Section IX. The Company shall keep at its office in Santa Ana, State of
California, or elsewhere in the State of California, maintained for the purpose
pursuant to Section VIII, copies of all such certificates and cause the same to
be available for inspection in said office during normal business hours by any
holder of a Warrant or any prospective purchaser of a Warrant designated by a
holder thereof.
SECTION V
RESERVATION AND AUTHORIZATION OF COMMON STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL
AUTHORITY
The Company shall at all times reserve and keep available for issue upon
the exercise of Warrants such number of its authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common Stock, which shall be so issuable,
shall, when issued upon exercise of any Warrant, be duly and validly issued and
fully paid and nonassessable.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or in the Current
Warrant Price per share of Common Stock, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise of Warrants require registration with any governmental authority under
any federal or state law before such shares may be so issued, the Company will
in good faith and as expeditiously as possible endeavor to cause such shares to
be duly registered.
8
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SECTION VI
TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the Company to
the holders of its Common Stock with respect to which any provision of
Section III refers to the taking of a record of such holders, the Company
will in each such case take such a record and will take such record as of the
close of business on a business day. The Company will not at any time,
except upon dissolution, liquidation or winding up of the Company, close its
stock transfer books or Warrant transfer books so as to result in preventing
or delaying the exercise or transfer of any Warrant.
SECTION VII
LOSS OR MUTILATION
Upon receipt by the Company of evidence satisfactory to it (in the
exercise of reasonable discretion) of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and (in case of loss, theft or
destruction) of indemnity satisfactory to it (in the exercise of reasonable
discretion), and in case of mutilation upon surrender and cancellation
hereof, the Company will execute and deliver in lieu hereof a new Warrant of
like tenor.
SECTION VIII
OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company shall
maintain an office in the City of Santa Ana, State of California, or
elsewhere in the State of California, where the Warrants may be presented for
exercise, transfer, division or combination as in this Warrant provided.
Such office shall be the principal executive office of the Company specified
in Section IX unless and until the Company shall designate and maintain some
other office for such purposes and give written notice thereof to the holders
of all outstanding Warrants.
SECTION IX
NOTICES GENERALLY
Any notice, demand or delivery pursuant to the provisions hereof shall
be sufficiently given or made if sent by first class mail, postage prepaid,
addressed to any holder of a Warrant at his last known address appearing on
the books of the Company, or, except as herein otherwise expressly provided,
to the Company at its principal executive office, 2331 South Pullman Street,
Santa Ana, California 92705, Attention: Patrick J. Dirk, Chief Executive
Officer, or such other address as shall have been furnished to the party
giving or making such notice, demand or delivery.
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SECTION X
LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
SECTION XI
This Warrant shall be governed by the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this amended Warrant to be
duly executed and its corporate seal to be impressed hereon and attested by its
Secretary or an Assistant Secretary.
Dated as of
TROY GROUP, INC., successor to
Troy Systems Inc.
BY:
-----------------------
Patrick J. Dirk, Chairman and
Chief Executive Officer
Attest:
- -------------------------
Secretary
[Seal]
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SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases ________ of the number of Stock Units of TROY
SYSTEMS INC., purchasable with this Warrant, and herewith makes payment
therefor, all at the price and on the terms and conditions specified in this
Warrant and requests that certificates for the shares of Common Stock hereby
purchased (and any securities or other property issuable upon such exercise) be
issued in the name of and delivered to _______________________________ whose
address is ____________________ and, if such Stock Unites shall not include all
of the Stock Units issuable as provided in this Warrant, that a new Warrant of
like tenor and date for the balance of the Stock Units issuable thereunder be
delivered to the undersigned.
Dated:
--------------------------
---------------------------------
(Signature of Registered Owner)
---------------------------------
(Street Address)
---------------------------------
(City) (State) (Zip Code)
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ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
Stock Units set forth below:
Name and Address of Assignee No. of Stock Units
- ---------------------------- ------------------
and does hereby irrevocably constitute and appoint ___________________ Attorney
to make such transfer on the books of TROY SYSTEMS INC., maintained for the
purpose, with full power of substitution in the premises.
Dated:
--------------------
------------------------------
(Signature)
------------------------------
(Witness)
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatever.
The signature to this assignment must be guaranteed by a bank or
trust company having an officer or correspondent in Santa Ana, California, or by
a firm having membership on a national securities exchange.
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EXHIBIT 4.2
WARRANT
TO PURCHASE COMMON STOCK OF
TROY GROUP, INC.
This is to certify that Steve Holmes, or registered assigns is entitled to
purchase from Troy Group, Inc., a Delaware corporation, up to 50,000 Stock
Units, in whole or in part, at the purchase price per Stock Unit and all on the
terms and conditions and pursuant to the provisions hereinafter provided.
The nature of this Warrant is as follows:
(i) The Warrant shall be to purchase Stock Units at the Warrant
Price.
(ii) The Warrant grants to Mr. Holmes the right to purchase up to
50,000 Stock Units at the Warrant Price.
(iii) The Warrant shall be exercisable in full for the period
commencing on the date hereof and ending five years from the date hereof, at
which time this Warrant shall expire and become null and void.
DEFINITIONS
The terms defined in this Section, whenever used in this Warrant, shall, unless
the context otherwise requires, have the respective meanings hereinafter
specified.
"Commission" shall mean the Securities and Exchange Commission, or any
federal agency then administering the Securities Act.
"Common Stock" shall mean the Company's authorized Common Stock as
constituted on the date hereof, and any stock into which such Common Stock may
thereafter be changed, and shall also include stock of the Company of any other
class, which is not preferred as to dividends or assets over any other class of
stock of the Company and which is not subject to redemption, issued to the
holders of shares of Common Stock upon any reclassification thereof.
"Company" shall mean Troy Group, Inc., a Delaware corporation, and any
successor corporation by merger, consolidation or otherwise.
"Current Warrant Price" per share of Common Stock, for the purpose of any
provision of this Warrant at the date herein specified, shall mean the amount
equal to the quotient resulting from dividing the purchase price per Stock Unit
as provided above by the number of shares (including any fractional share) of
Common Stock comprising a Stock Unit on such date.
<PAGE>
"Outstanding" when used with reference to Common Stock shall mean, at any
date as of which the number of shares thereof is to be determined, all issued
shares of Common Stock, except shares then owned or held by or for the account
of the Company.
"Person" shall mean an individual, a corporation a partnership, a trust, an
unincorporated organization or a government or any agency or political
subdivision thereof.
"Securities Act" shall mean the Securities Act of 1933, or any similar
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
"Stock Unit" shall mean one share of Common Stock as such stock was
constituted on the date hereof, and thereafter shall mean such number of shares
(including any fractional shares) of Common Stock as shall result from the
adjustments specified in Section 3 hereof.
"Warrant" or "Warrants" shall mean this Warrant dated October 30, 1998
originally issued by the Company, and all Warrants issued upon transfer,
division or combination of, or in substitution for, any thereof. All
Warrants shall at all times be identical as to terms and conditions and date,
and any Warrant issued in exchange or substitution for any other Warrant
shall bear the same expiration date as such other Warrant.
"Warrant Price" shall mean $7.00 per share of the Company's Common Stock.
"Warrant Stock" shall mean the shares of Common Stock purchasable by the
holders of the Warrants upon the exercise thereof.
1. EXERCISE OF WARRANT
1.1 MANNER OF EXERCISE. This Warrant may be exercised at any time or from
time to time, on any day which is not a Saturday, Sunday or public holiday under
the laws of the State of California, for all or any part of the number of Stock
Units purchasable upon its exercise. In order to exercise this Warrant, in
whole or in part, the holder hereof shall deliver to the Company at its office
in the City of Santa Ana, State of California, or elsewhere in the State of
California maintained for the purpose pursuant to Section 8, or at the office of
any transfer agent of its Common Stock, (i) a written notice of such holder's
election to exercise this Warrant, which notice shall specify the number of
Stock Units to be purchased, (ii) a certified or official bank check payable to
the order of the Company in an amount equal to the aggregate purchase price for
all Stock Units as to which this Warrant is exercised, and (iii) this Warrant.
Such notice may be in the form of the Subscription Form appearing at the end of
this Warrant. Upon receipt thereof, the Company shall, as promptly as
practicable, and in any event within 20 days thereafter, execute or cause to be
executed, and deliver to such holder a certificate or certificates representing
the aggregate number of full shares of Warrant Stock issuable upon such
exercise, together with cash in lieu of any fraction of a share, as hereinafter
provided. The stock certificate or certificates so delivered shall be in the
denomination of 100 shares each or such lesser or greater denomination as may be
specified in said notice and shall be registered in the name of
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such holder such other name as shall be designated in said notice. This
Warrant shall be deemed to have been issued, and such holder or any other
person so designated to be named therein shall be deemed to have become a
holder or record of such shares for all purposes, as of the date said notice,
together with said check or checks or wire transfer and this Warrant, is
received by the Company as aforesaid. If this Warrant shall have been
exercised in part, the Company shall, at the time of delivery of said
certificate or certificates, deliver to such holder a new Warrant evidencing
the rights of such holder to purchase the unpurchased Stock Units called for
by this Warrant, which new Warrant shall in all other respects be identical
with this Warrant, or, at the request of such holder, appropriate notation
may be made on the Warrant and the same returned to such holder.
1.2 PAYMENT OF TAXES, ETC. All shares of Warrant Stock issuable upon
the exercise of this Warrant shall be validly issued, fully paid and
nonassessable, and the Company shall pay all expenses in connection with, and
all taxes and other governmental charges that may be imposed in respect of,
the issue or delivery thereof. The Company shall not be required, however,
to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Warrant Stock in any
name other than that of the registered holder of this Warrant, and in such
case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the Company's satisfaction that no such tax or other charge is
due.
1.3 FRACTIONAL SHARES. The Company shall not be required to issue a
fractional share of stock upon any exercise of any Warrant. As to any final
fraction of a share which the holder of one or more Warrants, the rights
under which are exercised in the same transaction, would otherwise be
entitled to purchase upon such exercise, the Company shall pay a cash
adjustment in respect of such final fraction in an amount equal to the same
fraction of the Current Warrant Price per share of Common Stock on the
business day which next precedes the day of exercise.
2. TRANSFER, DIVISION AND COMBINATION
This Warrant and all rights hereunder are transferable, in whole or in
part, on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at its office in the City of Santa Ana, State of
California, or elsewhere in the State of California maintained for the
purpose pursuant to Section 8, together with a written assignment of this
Warrant duly executed by the holder hereof or his agent or attorney and
payment of funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer. Upon such surrender and payment the Company shall,
execute and deliver a new Warrant or Warrants in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled. If and when this
Warrant is assigned in blank, the Company may (but shall not be obliged to)
treat the bearer hereof as the absolute owner of this Warrant for all
purposes and the Company shall not be affected by any notice to the contrary.
A Warrant may be exercised by a new holder for the purchase of shares of
Common Stock without having a new Warrant issued.
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This Warrant may be divided or combined with other Warrants upon
presentation hereof at the principal executive office of the Company, or at
the aforesaid office or agency of the Company together with a written notice
specifying the names and denominations in which new Warrants are to be
issued, signed by the holder hereof or his agent or attorney. Subject to
compliance with the preceding paragraph as to any transfer which may be
involved in such division or combination, the Company shall execute and
deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to
be divided or combined in accordance with such notice.
The Company shall pay all expenses, taxes (other than stock transfer
taxes) and other charges payable in connection with the preparation, issue
and delivery of Warrants under this Section.
The Company agrees to maintain, at its aforesaid office, books for the
registration and transfer of the Warrants.
3. ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE
The number of shares of Common Stock comprising a Stock Unit of Warrant
Stock, or the price at which a Stock Unit of Warrant Stock may be purchased
upon exercise of this Warrant, shall be subject to adjustment from time to
time as set forth in this Section.
3.1 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at any
time or from time to time the Company shall:
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Common Stock, or
(b) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a smaller
number of shares of Common then the number of shares of Common Stock
comprising a Stock Unit of Warrant Stock immediately after the happening of
any such event shall be adjusted so as to consist of the number of shares of
Common Stock which a record holder of the number of shares Common Stock
comprising a Stock Unit immediately prior to the happening of such event
would own or be entitled to receive after the happening of such event.
3.2 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION. The
following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Stock Unit hereinbefore
provided for in this Section:
(a) TREASURY STOCK. The sale or other disposition of any issued
shares of Common Stock owned or held by or for the account of the Company
shall not be deemed an issuance thereof for any purpose of this Section
except in the case of a dividend payable in, or
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other distribution of, such shares to holders of Common Stock of the Company,
in which case an adjustment shall be made under Subsection 3.1 of this
Section.
(b) FRACTIONAL INTERESTS. In computing adjustments under this
Section, fractional interests in Common Stock shall be taken into account to
the nearest one-thousandth of a share.
3.3 MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS. In case the
Company shall merge or consolidate into another corporation, or shall sell,
transfer or otherwise dispose of all or substantially all of its property,
assets or business to another corporation (other than a subsidiary of the
Company) and pursuant to the terms of such merger, consolidation or
disposition of assets, shares of common stock of the successor or acquiring
corporation are to be received by or distributed to the holders of Common
Stock of the Company, then each holder of a Warrant shall have the right
thereafter to receive, upon exercise of such Warrant, Stock Units each
comprising the number of shares of common stock of the successor or acquiring
corporation receivable upon or as a result of such merger, consolidation or
disposition of assets by a holder of the number of shares of Common Stock
comprising a Stock Unit immediately prior to such event. If pursuant to the
terms of such merger, consolidation or disposition of assets, any cash,
shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) are to be
received by or distributed to the holders of Common Stock of the Company in
addition to common stock of the successor or acquiring corporation, there
shall be a reduction of the purchase price per Stock Unit equal to the amount
applicable to the number of shares of Common Stock then comprising a Stock
Unit of any such cash and of the fair value (as determined in good faith by
the Board of Directors of the Company) of any and all such shares of stock or
other securities or property to be received by or distributed to the holders
of Common Stock of the Company. In case of any such merger, consolidation or
disposition of assets, the successor or acquiring corporation shall expressly
assume the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by the
Company and all of the obligations and liabilities hereunder, subject to such
modificaions as may be deemed appropriate (as determined by resolution of the
Board of Directors of the Company) in order to provide for adjustments of
Stock Units which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section. For the purposes of this Section
"common stock of the successor or acquiring corporation" shall include stock
of such corporation of any class, which is not referred as to individuals or
assets over any other class of stock of such corporation and which is not
subject to redemption, and shall also include any evidences of indebtedness,
shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event, and any warrants or
other rights to subscribe for or purchase any such stock. The foregoing
provisions of this Subsection shall similarly apply to successive mergers,
consolidations or dispositions of assets.
3.4 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from time
to time the Company shall take any action affecting its Common Stock, other than
an action described in any of the foregoing Subsections 3.1 through 3.3
inclusive, of this Section, then, unless in the opinion of the Board of
Directors of the Company such action will not have a materially adverse
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effect upon the rights of the holders of the Warrants, the number of shares
of Common Stock or other stock comprising a Stock Unit, or the purchase price
thereof, shall be adjusted in such manner and at such time as the Board of
Directors of the Company may in good faith determine to be equitable in the
circumstances.
4. NOTICES TO WARRANT HOLDERS
4.1 NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever the
number of shares of Common Stock comprising a Stock Unit, or the price at
which a Stock Unit may be purchased upon exercise of the Warrants, shall be
adjusted pursuant to Section 3, the Company shall forthwith obtain a
certificate signed by the Company setting forth, in reasonable detail, the
event requiring the adjustment and the method by which such adjustment was
calculated (including a description of the basis on which the Board of
Directors of the Company determined the fair value of any evidences of
indebtedness, shares of stock or, other securities specifying the number of
shares of Common Stock comprising a Stock Unit and (if such adjustment was
made pursuant to Subsection 3.3 or Subsection 3.4) describing the number and
kind of any other shares of stock comprising a Stock Unit, and any change in
the purchase price or prices thereof, after giving effect to such adjustment
or change. The Company shall promptly, and in any case within 45 days after
the making of such adjustment, cause a signed copy of such certificate to be
delivered to each holder of a Warrant in accordance with Section 9. The
Company shall keep at its office in Santa Ana, State of California, or
elsewhere in the State of California, maintained for the purpose pursuant to
Section 8, copies of all such certificates and cause the same to be available
for inspection said office during normal business hours by any holder of a
Warrant or any prospective purchaser of a Warrant designated by a holder
thereof.
5. RESERVATION AND AUTHORIZATION OF COMMON STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL
AUTHORITY
The Company shall at all times reserve and keep available for issue upon
the exercise of Warrants such number of its authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common Stock, which shall be so
issuable, shall, when issued upon exercise of any Warrant, be duly and
validly issued and fully paid and nonassessable.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or in the Current
Warrant Price per share of Common Stock, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction
thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise of Warrants require registration with any governmental authority
under any federal or state law before such shares may be so issued, the
Company will in good faith and as expeditiously as possible endeavor to cause
such shares to be duly registered.
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6. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the Company to
the holders of its Common Stock with respect to which any provision of
Section 3 refers to the taking of a record of such holders, the Company will
in each such case take such a record and will take such record as of the
close of business on a business day. The Company will not at any time,
except upon dissolution, liquidation or winding up of the Company, close its
stock transfer books or Warrant transfer books so as to result in preventing
or delaying the exercise or transfer of any Warrant.
7. LOSS OR MUTILATION
Upon receipt by the Company of evidence satisfactory to it (in the
exercise of reasonable discretion) of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and (in case of loss, theft or
destruction) of indemnity satisfactory to it (in the exercise of reasonable
discretion), and in case of mutilation upon surrender and cancellation
hereof, the Company will execute and deliver in lieu hereof a new Warrant of
like tenor.
8. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company shall
maintain an office in the City of Santa Ana, State of California, or
elsewhere in the State of California, where the Warrants may be presented for
exercise, transfer, division or combination as in this Warrant provided.
Such office shall be the principal executive office of the Company specified
in Section 9 unless and until the Company shall designate and maintain some
other office for such purposes and give written notice thereof to the holders
of all outstanding Warrants.
9. NOTICES GENERALLY
Any notice, demand or delivery pursuant to the provisions hereof shall
be sufficiently given or made if sent by first class mail, postage prepaid,
addressed to any holder of a Warrant at his last known address appearing on
the books of the Company, or, except as herein otherwise expressly provided,
to the Company at its principal executive office, 2331 Pullman Street, Santa
Ana, California 92705, Attention: Patrick J. Dirk, Chief Executive Officer,
or such other address as shall have been furnished to the party giving or
making such notice, demand or delivery.
10. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase shares of Common Stock, and no mere enumeration herein of
the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the purchase price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
11. This Warrant shall be governed by the laws of the State of Delaware.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and its corporate seal to be impressed hereon and attested by its Secretary or
an Assistant Secretary.
Dated: October 30, 1998
TROY GROUP, INC.
BY: /s/ Patrick J. Dirk
----------------------------------------
Patrick J. Dirk, Chief Executive Officer
Attest:
/s/ Del Conrad
- ----------------------
Secretary
[Seal]
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SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases _________________________________ of the
number of Stock Units of TROY GROUP, INC., purchasable with this Warrant, and
herewith makes payment therefor, all at the price and on the terms and
conditions specified in this Warrant and requests that certificates for the
shares of Common Stock hereby purchased (and any securities or other property
issuable upon such exercise) be issued in the name of and delivered to
____________________ whose address is ____________________________________
and, if such Stock Units shall not include all of the Stock Units issuable as
provided in this Warrant, that a new Warrant of like tenor and date for the
balance of the Stock Units issuable thereunder be delivered to the
undersigned.
Dated:_________________________
_________________________________
(Signature of Registered Owner)
_________________________________
(Street Address)
_________________________________
(City) (State) (Zip Code)
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<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
Stock Units set forth below:
Name and Address of Assignee No. of Stock Units
- ---------------------------- ------------------
and does hereby irrevocably constitute and appoint _______________ Attorney
to make such transfer on the books of TROY GROUP, INC., maintained for the
purpose, with full power of substitution in the premises.
Dated: _____________________
_________________________________
(Signature)
_________________________________
(Witness)
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatever.
The signature to this assignment must be guaranteed by a bank or
trust company having an officer or correspondent in Santa Ana, California, or
by a firm having membership on a national securities exchange.
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EXHIBIT 4.3
WARRANT
TO PURCHASE COMMON STOCK OF
TROY GROUP, INC.
This is to certify that RAYMOND F. SCHULER or registered assigns is
entitled to purchase from TROY GROUP, INC., a Delaware corporation, up to
50,000 Stock Units, in whole or in part, at the purchase price per Stock Unit
and all on the terms and conditions and pursuant to the provisions
hereinafter provided.
This Warrant is granted in connection with legal services provided in
connection with the first public offering of shares of the Company's Common
Stock.
The nature of this Warrant is as follows:
(i) The Warrant shall be to purchase shares of the Company's Common
Stock at the Warrant Price. The Warrant shall have no force, life or effect
unless and until the closing by the Company of an initial public offering of
its Common Stock that is registered under Section 5 of the Securities Act
(the "IPO") and shall not have any beneficial or legal interest in shares of,
or otherwise in the equity of, the Company until the closing of the IPO and,
then, if and when the closing of the IPO occurs, only through this Warrant
and Stock Units purchased through it.
(ii) Number of Stock Units subject to Warrant: This Warrant grants to
Mr. Schuler the right to purchase up to 50,000 shares of the Company's Common
Stock at the Warrant Price.
(iii) The Warrants must be exercised within five (5) years after they
vest or, thereafter, they shall expire and become null and void.
DEFINITIONS
The terms defined in this Section, whenever used in this Warrant, shall,
unless the context otherwise requires, have the respective meanings
hereinafter specified.
"Commission" shall mean the Securities and Exchange Commission, or any
federal agency then administering the Securities Act.
"Common Stock" shall mean the Company's authorized Common Stock as
constituted on the date of the closing of the IPO, and any stock into which
such Common Stock may thereafter be changed, and shall also include stock of
the Company of any other class, which is not preferred as to dividends or
assets over any other class of stock of the Company and which is not subject
to redemption, issued to the holders of shares of Common Stock upon any
reclassification thereof.
<PAGE>
"Company" shall mean Troy Group, Inc., a Delaware corporation, and any
successor corporation by merger, consolidation or otherwise.
"Current Warrant Price" per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the purchase price per
Stock Unit as provided above by the number of shares (including any
fractional share) of Common Stock comprising a Stock Unit on such date.
"Outstanding" when used with reference to Common Stock shall mean, at
any date as of which the number of shares thereof is to be determined, all
issued shares of Common Stock, except shares then owned or held by or for the
account of the Company.
"Person" shall mean an individual, a corporation, a partnership, a
trust, an unincorporated organization or a government or any agency or
political subdivision thereof.
"Securities Act" shall mean the Securities Act of 1933, or any similar
federal statute, and the rules and regulations of the Commission thereunder,
all as the same shall be in effect at the time.
"Stock Unit" shall mean one share of Common Stock as such stock was
constituted on the date of the closing of the IPO, and thereafter shall mean
such number of shares (including any fractional shares) of Common Stock as
shall result from the adjustments specified in Section 3 hereof.
"Warrant" or "Warrants" shall mean this Warrant dated June 1, 1998
originally issued by the Company, and all Warrants issued upon transfer,
division or combination of, or in substitution for, any thereof. All
Warrants shall at all times be identical as to terms and conditions and date,
and any Warrant issued in exchange or substitution for any other Warrant
shall bear the same expiration date as such other Warrant.
"Warrant Price" shall mean $3.50 per share of the Company's Common Stock.
"Warrant Stock" shall mean the shares of Common Stock purchasable by the
holders of the Warrants upon the exercise thereof.
1. EXERCISE OF WARRANT
1.1 MANNER OF EXERCISE. Following the closing of the IPO, this
Warrant may be exercised at any time or from time to time, on any day which
is not a Saturday, Sunday or public holiday under the laws of the State of
California, for all or any part of the number of Stock Units purchasable upon
its exercise. In order to exercise this Warrant, in whole or in part, the
holder hereof shall deliver to the Company at its office in the City of Santa
Ana, State of California, or elsewhere in the State of California maintained
for the purpose pursuant to Section 8, or at the office of any transfer agent
of its Common Stock, (i) a written notice of such holder's election to
exercise this Warrant, which notice shall specify the number of Stock Units
to be purchased, (ii)
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a certified or official bank check payable to the order of the Company in an
amount equal to the aggregate purchase price for all Stock Units as to which
this Warrant is exercised, and (iii) this Warrant. Such notice may be in the
form of the Subscription Form appearing at the end of this Warrant. Upon
receipt thereof, the Company shall, as promptly as practicable, and in any
event within 20 days thereafter, execute or cause to be executed, and deliver
to such holder a certificate or certificates representing the aggregate
number of full shares of Warrant Stock issuable upon such exercise, together
with cash in lieu of any fraction of a share, as hereinafter provided. The
stock certificate or certificates so delivered shall be in the denomination
of 100 shares each or such lesser or greater denomination as may be specified
in said notice and shall be registered in the name of such holder such other
name as shall be designated in said notice. This Warrant shall be deemed to
have been issued, and such holder or any other person so designated to be
named therein shall be deemed to have become a holder or record of such
shares for all purposes, as of the date said notice, together with said check
or checks or wire transfer and this Warrant, is received by the Company as
aforesaid. If this Warrant shall have been exercised in part, the Company
shall, at the time of delivery of said certificate or certificates, deliver
to such holder a new Warrant evidencing the rights of such holder to purchase
the unpurchased Stock Units called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant, or, at the
request of such holder, appropriate notation may be made on the Warrant and
the same returned to such holder.
1.2 PAYMENT OF TAXES, ETC. All shares of Warrant Stock issuable upon
the exercise of this Warrant shall be validly issued, fully paid and
nonassessable, and the Company shall pay all expenses in connection with, and
all taxes and other governmental charges that may be imposed in respect of,
the issue or delivery thereof. The Company shall not be required, however,
to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Warrant Stock in any
name other than that of the registered holder of this Warrant, and in such
case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the Company's satisfaction that no such tax or other charge is
due.
1.3 FRACTIONAL SHARES. The Company shall not be required to issue a
fractional share of stock upon any exercise of any Warrant. As to any final
fraction of a share which the holder of one or more Warrants, the rights
under which are exercised in the same transaction, would otherwise be
entitled to purchase upon such exercise, the Company shall pay a cash
adjustment in respect of such final fraction in an amount equal to the same
fraction of the Current Warrant Price per share of Common Stock on the
business day which next precedes the day of exercise.
2. TRANSFER, DIVISION AND COMBINATION
This Warrant and all rights hereunder are transferable, in whole or in
part, on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at its office in the City of Santa Ana, State of
California, or elsewhere in the State of California maintained for the
purpose pursuant to Section 8, together with a written assignment of this
Warrant duly executed by the holder hereof or his agent or attorney and
payment of funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer. Upon such surrender and payment
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<PAGE>
the Company shall execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees and in the denominations specified in such
instrument of assignment, and this Warrant shall promptly be canceled. If
and when this Warrant is assigned in blank, the Company may (but shall not be
obliged to) treat the bearer hereof as the absolute owner of this Warrant for
all purposes and the Company shall not be affected by any notice to the
contrary. A Warrant may be exercised by a new holder for the purchase of
shares of Common Stock without having a new Warrant issued.
This Warrant may be divided or combined with other Warrants upon
presentation hereof at the principal executive office of the Company, or at
the aforesaid office or agency of the Company together with a written notice
specifying the names and denominations in which new Warrants are to be
issued, signed by the holder hereof or his agent or attorney. Subject to
compliance with the preceding paragraph as to any transfer which may be
involved in such division or combination, the Company shall execute and
deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to
be divided or combined in accordance with such notice.
The Company shall pay all expenses, taxes (other than stock transfer
taxes) and other charges payable in connection with the preparation, issue
and delivery of Warrants under this Section.
The Company agrees to maintain, at its aforesaid office, books for the
registration and transfer of the Warrants.
3. ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE
The number of shares of Common Stock comprising a Stock Unit of Warrant
Stock, or the price at which a Stock Unit of Warrant Stock may be purchased
upon exercise of this Warrant, shall be subject to adjustment from time to
time as set forth in this Section provided that any such adjustments shall
only be made for actions or events occurring after the closing of the
Company's IPO.
3.1 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at any
time or from time to time the Company shall:
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Common Stock, or
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common
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<PAGE>
then the number of shares of Common Stock comprising a Stock Unit of Warrant
Stock immediately after the happening of any such event shall be adjusted so
as to consist of the number of shares of Common Stock which a record holder
of the number of shares Common Stock comprising a Stock Unit immediately
prior to the happening of such event would own or be entitled to receive
after the happening of such event.
3.2 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION.
The following provisions shall be applicable to the making of adjustments of
the number of shares of Common Stock comprising a Stock Unit hereinbefore
provided for in this Section:
(a) TREASURY STOCK. The sale or other disposition of any issued
shares of Common Stock owned or held by or for the account of the Company
shall not be deemed an issuance thereof for any purpose of this Section
except in the case of a dividend payable in, or other distribution of, such
shares to holders of Common Stock of the Company, in which case an
adjustment shall be made under Subsection 3.1 of this Section.
(b) FRACTIONAL INTERESTS. In computing adjustments under this
Section, fractional interests in Common Stock shall be taken into account
to the nearest one-thousandth of a share.
3.3 MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS. In case the
Company shall merge or consolidate into another corporation, or shall sell,
transfer or otherwise dispose of all or substantially all of its property,
assets or business to another corporation (other than a subsidiary of the
Company) and pursuant to the terms of such merger, consolidation or
disposition of assets, shares of common stock of the successor or acquiring
corporation are to be received by or distributed to the holders of Common
Stock of the Company, then each holder of a Warrant shall have the right
thereafter to receive, upon exercise of such Warrant, Stock Units each
comprising the number of shares of common stock of the successor or acquiring
corporation receivable upon or as a result of such merger, consolidation or
disposition of assets by a holder of the number of shares of Common Stock
comprising a Stock Unit immediately prior to such event. If pursuant to the
terms of such merger, consolidation or disposition of assets, any cash,
shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) are to be
received by or distributed to the holders of Common Stock of the Company in
addition to common stock of the successor or acquiring corporation, there
shall be a reduction of the purchase price per Stock Unit equal to the amount
applicable to the number of shares of Common Stock then comprising a Stock
Unit of any such cash and of the fair value (as determined in good faith by
the Board of Directors of the Company) of any and all such shares of stock or
other securities or property to be received by or distributed to the holders
of Common Stock of the Company. In case of any such merger, consolidation or
disposition of assets, the successor or acquiring corporation shall expressly
assume the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by the
Company and all of the obligations and liabilities hereunder, subject to such
modificaions as may be deemed appropriate (as determined by resolution of the
Board of Directors of the Company) in order to provide for adjustments of
Stock Units which shall be as
5
<PAGE>
nearly equivalent as practicable to the adjustments provided for in this
Section. For the purposes of this Section "common stock of the successor or
acquiring corporation" shall include stock of such corporation of any class,
which is not referred as to individuals or assets over any other class of
stock of such corporation and which is not subject to redemption, and shall
also include any evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such stock,
either immediately or upon the arrival of a specified date or the happening
of a specified event, and any warrants or other rights to subscribe for or
purchase any such stock. The foregoing provisions of this Subsection shall
similarly apply to successive mergers, consolidations or dispositions of
assets.
3.4 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from
time to time the Company shall take any action affecting its Common Stock,
other than an action described in any of the foregoing Subsections 3.1
through 3.3 inclusive, of this Section, then, unless in the opinion of the
Board of Directors of the Company such action will not have a materially
adverse effect upon the rights of the holders of the Warrants, the number of
shares of Common Stock or other stock comprising a Stock Unit, or the
purchase price thereof, shall be adjusted in such manner and at such time as
the Board of Directors of the Company may in good faith determine to be
equitable in the circumstances.
4. NOTICES TO WARRANT HOLDERS
NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever the
number of shares of Common Stock comprising a Stock Unit, or the price at
which a Stock Unit may be purchased upon exercise of the Warrants, shall be
adjusted pursuant to Section 3, the Company shall forthwith obtain a
certificate signed by the Company setting forth, in reasonable detail, the
event requiring the adjustment and the method by which such adjustment was
calculated (including a description of the basis on which the Board of
Directors of the Company determined the fair value of any evidences of
indebtedness, shares of stock or, other securities specifying the number of
shares of Common Stock comprising a Stock Unit and (if such adjustment was
made pursuant to Subsection 3.3 or Subsection 3.4) describing the number and
kind of any other shares of stock comprising a Stock Unit, and any change in
the purchase price or prices thereof, after giving effect to such adjustment
or change. The Company shall promptly, and in any case within 45 days after
the making of such adjustment, cause a signed copy of such certificate to be
delivered to each holder of a Warrant in accordance with Section 9. The
Company shall keep at its office in Santa Ana, State of California, or
elsewhere in the State of California, maintained for the purpose pursuant to
Section 8, copies of all such certificates and cause the same to be available
for inspection at said office during normal business hours by any holder of a
Warrant or any prospective purchaser of a Warrant designated by a holder
thereof.
5. RESERVATION AND AUTHORIZATION OF COMMON STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL
AUTHORITY
The Company shall at all times reserve and keep available for issue upon
the exercise of Warrants such number of its authorized but unissued shares of
Common Stock as will be
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<PAGE>
sufficient to permit the exercise in full of all outstanding Warrants. All
shares of Common Stock, which shall be so issuable, shall, when issued upon
exercise of any Warrant, be duly and validly issued and fully paid and
nonassessable.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or in the Current
Warrant Price per share of Common Stock, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction
thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise of Warrants require registration with any governmental authority
under any federal or state law before such shares may be so issued, the
Company will in good faith and as expeditiously as possible endeavor to cause
such shares to be duly registered.
6. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the Company to
the holders of its Common Stock with respect to which any provision of
Section 3 refers to the taking of a record of such holders, the Company will
in each such case take such a record and will take such record as of the
close of business on a business day. The Company will not at any time,
except upon dissolution, liquidation or winding up of the Company, close its
stock transfer books or Warrant transfer books so as to result in preventing
or delaying the exercise or transfer of any Warrant.
7. LOSS OR MUTILATION
Upon receipt by the Company of evidence satisfactory to it (in the
exercise of reasonable discretion) of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and (in case of loss, theft or
destruction) of indemnity satisfactory to it (in the exercise of reasonable
discretion), and in case of mutilation upon surrender and cancellation
hereof, the Company will execute and deliver in lieu hereof a new Warrant of
like tenor.
8. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company shall
maintain an office in the City of Santa Ana, State of California, or
elsewhere in the State of California, where the Warrants may be presented for
exercise, transfer, division or combination as in this Warrant provided.
Such office shall be the principal executive office of the Company specified
in Section 9 unless and until the Company shall designate and maintain some
other office for such purposes and give written notice thereof to the holders
of all outstanding Warrants.
9. NOTICES GENERALLY
Any notice, demand or delivery pursuant to the provisions hereof shall be
sufficiently given or made if sent by first class mail, postage prepaid,
addressed to any holder of a Warrant at
7
<PAGE>
his last known address appearing on the books of the Company, or, except as
herein otherwise expressly provided, to the Company at its principal
executive office, 2331 Pullman Street, Santa Ann, California 92705,
Attention: Patrick J. Dirk, Chief Executive Officer, or such other address as
shall have been furnished to the party giving or making such notice, demand
or delivery.
10. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase shares of Common Stock, and no mere enumeration herein of
the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the purchase price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
11. This Warrant shall be governed by the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and its corporate seal to be impressed hereon and attested by its
Secretary or an Assistant Secretary.
Dated: TROY GROUP, INC.
BY:
-------------------------
Patrick J. Dirk,
Chief Executive Officer
Attest:
- -------------------------
Secretary
[Seal]
8
<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases ___________ of the number of Stock Units of
TROY GROUP, INC., purchasable with this Warrant, and herewith makes payment
therefor, all at the price and on the terms and conditions specified in this
Warrant and requests that certificates for the shares of Common Stock hereby
purchased (and any securities or other property issuable upon such exercise)
be issued in the name of and delivered to ___________________________________
whose address is _____________________________ and, if such Stock Units shall
not include all of the Stock Units issuable as provided in this Warrant, that
a new Warrant of like tenor and date for the balance of the Stock Units
issuable thereunder be delivered to the undersigned.
Dated: _____________________
_______________________________
(Signature of Registered Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
9
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
Stock Units set forth below:
Name and Address of Assignee No. of Stock Units
- ---------------------------- ------------------
and does hereby irrevocably constitute and appoint _____________________
Attorney to make such transfer on the books of TROY GROUP, INC., maintained
for the purpose, with full power of substitution in the premises.
Dated:________________________
____________________________________
(Signature)
____________________________________
(Witness)
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatever.
The signature to this assignment must be guaranteed by a bank or
trust company having an officer or correspondent in Santa Ana, California, or
by a firm having membership on a national securities exchange.
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<PAGE>
AMENDMENT
TO
WARRANT
TO PURCHASE COMMON STOCK OF
TROY GROUP, INC.
The WARRANT to purchase Common Stock of Troy Group, Inc., issued to
Raymond F. Schuler in May, 1998, is hereby amended so as to delete section
(i) of the third full paragraph on the first page thereof and replace it with
the following:
"(i) The Warrant shall be to purchase shares of the Company's
Common Stock at the Warrant Price. The Warrant shall fully vest and
be exercisable as of June 8, 1999."
IN WITNESS THEREOF, the Company has caused this Amendment to WARRANT to
be duly executed and its corporate seal to be impressed hereon and attested
by its Secretary or an Assistant Secretary.
Dated:
TROY GROUP, INC.
BY:
---------------------------------
Patrick J. Dirk, Chief Executive Officer
Attest:
- ------------------------
Secretary
[Seal]
<PAGE>
Exhibit 5.1
[LETTERHEAD OF OPPENHEIMER WOLFF & DONNELLY LLP]
June 25, 1999
Troy Group, Inc.
2331 South Pullman Street
Santa Ana, CA 92705
Re: Registration Statement on Form S-1
File No. 333-51523
Ladies and Gentlemen:
We are acting as counsel to Troy Group, Inc., a Delaware corporation (the
"Company"), in connection with the registration by the Company of 2,875,000
shares (including 375,000 shares subject to the Underwriters' over-allotment
option) of the Company's Common Stock, $.01 par value (the "Shares"),
pursuant to the Company's Registration Statement on Form S-1, originally
filed on May 1, 1998 and as amended (the "Registration Statement").
In acting as counsel for the Company and arriving at the opinions expressed
below, we have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates or statements of officers of
the Company, certificates of public officials and other documents we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
As to the various questions of fact material to such opinions, we have, when
relevant facts were not independently established, relied upon certificates
of officers of the Company. In connection with our examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
tendered to us as originals, the legal capacity of natural persons and the
conformity to original documents of all documents submitted to us as
certified or photostatic copies.
Based on the foregoing, and subject to the qualifications and limitations stated
herein, it is our opinion that:
1. The Company has the corporate authority to
<PAGE>
issue the Shares in the manner and under the terms set forth in the
Registration Statement.
2. The Shares have been duly authorized and, when issued, delivered to and
paid for by the Underwriters referred to in the Registration Statement,
will be validly issued, fully paid and nonassessable.
We express no opinion with respect to laws other than those of the State of
Minnesota, the General Corporation Law of Delaware and the federal laws of the
United States of America, and we assume no responsibility as to the
applicability thereto, or the effect thereon, of the laws of any other
jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement, to its use as part of the Registration Statement, and
to the use of our name under the caption "LEGAL MATTERS" in the Prospectus
forming a part of the Registration Statement. Subject to the foregoing, this
opinion may be relied on only in connection with the transactions
contemplated by the Registration Statement and it may not otherwise be used
or relied on by you or any other person.
Very truly yours,
OPPENHEIMER WOLFF & DONNELLY LLP
/s/ Oppenheimer Wolff & Donnelly LLP
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1. PARTIES: This Lease ("Lease"), dated for reference purposes only
March 1, 1998, is made by and between Sanwa Bank California, Trustee of
the Suzanne Pathe Trust, for the Benefit of Georges Pathe Trust, No.
41N093004 and the Arthur Pathe Trust, for the Benefit of
_______________ ("Lessor") and XCD, Inc., a California corporation
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2. PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and
commonly known as 1692 Browning located in the County of Orange, State
of California and generally described as (describe briefly the nature of
the property) an approximate 13,631 square foot building located at
Orange County Tax Assessor's Parcel 430-211-09 ("Premises"). (See also
Paragraph 2).
1.3. TERM: Five (5) years and 0 months ("Original Term") commencing
April 1, 1998 ("Commencement Date") and ending March 31, 2003
("Expiration Date"). (See also Paragraph 3).
1.4. EARLY POSSESSION: Upon mutual execution and delivery of the
lease to each party ("Early Possession Date"). (See also Paragraphs
3.2 and 3.3).
1.5. BASE RENT: $9,746.17 per month ("Base Rent"), payable on the
first (1st) day of each month commencing April 1, 1998. (See also
Paragraph 4) [X] If this box is checked, there are provisions in this
Lease for the Base Rent to be adjusted.
1.6. BASE RENT PAID UPON EXECUTION: $9,746.17 as Base Rent for the
period April, 1998.
1.7. SECURITY DEPOSIT: $11,401.63 ("Security Deposit"). (See also
Paragraph 5).
1.8. AGREED USE: Design, development, assembly and related office
uses related to network printer interface cards. (See also Paragraph 6).
1.9. INSURING PARTY: Lessee is the "Insuring Party." (See also
Paragraph 8).
1.10. REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction
(check applicable boxes):
[X] Grubb & Ellis Company (Stan Mullin/Randy Coe) represents Lessor
exclusively ("Lessor's Broker");
[X] Daum Commercial (Don Bakos) represents Lessee exclusively ("Lessee's
Broker");
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement.
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1.11. GUARANTOR: The obligations of the Lessee under this Lease are to
be guaranteed by N/A ("Guarantor"). (See also Paragraph
37).
1.12. ADDENDA AND EXHIBITS: Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 60 and Exhibits A - Site Plan, all of
which are incorporated herein by this reference and constitute a part of
this Lease.
2. PREMISES.
2.1. LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and an
upon all of the terms, covenants and conditions set forth in this Lease.
Unless otherwise provided herein, any statement of size set forth in
this Lease, or that may have been used in calculating rental, is an
approximation which the Parties agree is reasonable and the rental based
thereon is not subject to revision whether or not the actual size is
more or less.
2.2. CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early
Possession Date, whichever first occurs ("Start Date"), and, so long as
the required service contracts described in Paragraph 7.1(b) below are
obtained by Lessee within thirty (30) days following the Start Date,
warrants that the existing electrical, plumbing, fire sprinkler,
lighting, heating, ventilating and air conditioning systems ("HVAC"),
loading doors, if any, and all other such elements in the Premises,
other than those constructed by Lessee, shall be in good operating
condition on said date and that the structural elements of the roof,
bearing walls and foundation of any buildings on the Premises (the
"Building") shall be free of material defects. If a non-compliance with
said warranty exists as of the Start Date, Lessor shall, as Lessor's
sole obligation with respect to such matter, except as otherwise
provided in this Lease, promptly after receipt of written notice from
Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If, after the Start
Date, Lessee does not give Lessor written notice of any non-compliance
with this warranty within: (i) one year as to the surface of the root
and the structural portions of the roof, foundations and bearing wails,
(ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to
the remaining systems and other elements of the Building, correction of
such non-compliance shall be the obligation of Lessee at Lessee's sole
cost and expense.
2.3. COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of
record, building codes, regulations and ordinances ("Applicable
Requirements") in effect on the Start Date. Said warranty does not apply
to the use to which Lessee will put the Premises or to any Alterations
or Utility Installations (as defined in Paragraph 7.3(a)) made or to be
made by Lessee. NOTE: Lessee is responsible for determining whether or
not the zoning is appropriate for Lessee's intended use, and
acknowledges that past uses of the Premises may no longer be allowed. If
the Premises do not comply with said warranty, Lessor shall, except as
otherwise provided, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within
six (6) months following the Start Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in
Paragraph 6.2(e) below) so as to require during the term of this Lease
the construction of an addition to or an alteration of the Building, the
remediation of any Hazardous Substance, or the
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<PAGE>
reinforcement or other physical modification of the Building ("Capital
Expenditure"), Lessor and Lessee shall allocate the cost of such work
as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique
use of the Premises by Lessee as compared with uses by tenants in
general, Lessee shall be fully responsible for the cost thereof,
provided, however that if such Capital Expenditure is required
during the last two (2) years of this Lease and the cost thereof
exceeds six (6) months' Base Rent, Lessee may instead terminate
this Lease unless Lessor notifies Lessee, in writing, within ten
(10) days after receipt of Lessee's termination notice that Lessor
has elected to pay the difference between the actual cost thereof
and the amount equal to six (6) months' Base Rent. If Lessee elects
termination, Lessee shall immediately cease the use of the Premises
which requires such Capital Expenditure and deliver to Lessor
written notice specifying a termination date at least ninety (90)
days thereafter. Such termination date shall, however, in no event
be earlier than the last day that Lessee could legally utilize the
Premises without commencing such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall
allocate the obligation to pay for such costs pursuant to the
provisions of Paragraph 7.1(c); provided, however, that if such
Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not
economically feasible to pay its share thereof, Lessor shall have
the option to terminate this Lease upon ninety (90) days prior
written notice to Lessee unless Lessee notifies Lessor, in writing,
within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure. If Lessor does
not elect to terminate, and fails to tender its share of any such
Capital Expenditure, Lessee may advance such funds and deduct same,
with Interest, from Rent until Lessor's share of such costs have
been fully paid. If Lessee is unable to finance Lessor's share, or
if the balance of the Rent due and payable for the remainder of
this Lease is not sufficient to fully reimburse Lessee on an offset
basis, Lessee shall have the right to terminate this Lease upon
thirty (30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
expenditures are intended to apply only to non-voluntary,
unexpected, and new Applicable Requirements. If the Capital
Expenditures are instead triggered by Lessee as a result of an
actual or proposed change in use, change in intensity of use, or
modification to the Premises then, and in that event, Lessee shall
be fully responsible for the cost thereof, and Lessee shall not
have any right to terminate this Lease.
2.4. ACKNOWLEDGMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical,
HVAC and fire sprinkler systems, security, environmental aspects, and
compliance with Applicable Requirements), and their suitability for
Lessee's intended use, (b) Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all
responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has
made any oral or written representations or warranties with respect to
said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to
3
<PAGE>
honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability
and/or suitability of all proposed tenants.
2.5. LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the
Start Date Lessee was the owner or occupant of the Premises. In such
event, Lessee shall be responsible for any necessary corrective work.
3. TERM.
3.1. TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2. EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other
terms of this Lease (including but not limited to the obligations to pay
Real Property Taxes and insurance premiums and to maintain the Premises)
shall, however, be in effect during such period. Any such early
possession shall not affect the Expiration Date.
3.3. DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by
the Commencement Date, if, despite said efforts, Lessor is unable to
deliver possession as agreed, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this
Lease. Lessee shall not, however, be obligated to pay Rent or perform
its other obligations until it receives possession of the Premises. If
possession is not delivered within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing
within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all
obligations hereunder. If such written notice is not received by Lessor
within said ten (10) day period, Lessee's right to cancel shall
terminate. Except as otherwise provided, if possession is not tendered
to Lessee by the Start Date and Lessee does not terminate this Lease, as
aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue
for a period equal to what Lessee would otherwise have enjoyed under the
terms hereof, but minus any days of delay caused by the acts or
omissions of Lessee. If possession of the Premises is not delivered
within four (4) months after the Commencement Date, this Lease shall
terminate unless other agreements are reached between Lessor and Lessee,
in writing.
3.4. LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its
obligation to provide evidence of insurance (Paragraph 8.5). Pending
delivery of such evidence, Lessee shall be required to perform all of
its obligations under this Lease from and after the Start Date,
including the payment of Rent, notwithstanding Lessor's election to
withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to
or concurrent with the Start Date, the Start Date shall occur but Lessor
may elect to withhold possession until such conditions are satisfied,
4. RENT.
4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to
be rent ("Rent").
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4.2. PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction
(except as specifically permitted in this Lease), on or before the day
on which it is due. Rent for any period during the term hereof which is
for less than one (1) full calendar month shall be prorated based upon
the actual number of days of said month. Payment of Rent shall be made
to Lessor at its address stated herein or to such other persons or place
as Lessor may from time to time designate in writing. Acceptance of a
payment which is less than the amount then due shall not be a waiver of
Lessor's rights to the balance of such Rent, regardless of Lessor's
endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon
execution hereof the Security Deposit as security for Lessee's faithful
performance of its obligations under this Lease. If Lessee fails to pay
Rent, or otherwise Defaults under this Lease, Lessor may use, apply or
retain all or any portion of said Security Deposit for the payment of
any amount due Lessor or to reimburse or compensate Lessor for any
liability, expense, loss or damage which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said
Security Deposit to the full amount required by this Lease. If the Base
Rent increases during the term of this Lease, Lessee shall, upon written
request from Lessor, deposit additional monies with Lessor so that the
total amount of the Security Deposit shall at all times bear the same
proportion to the increased Base Rent as the initial Security Deposit
bore to the initial Base Rent. Should the Agreed Use be amended to
accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to
increase the Security Deposit to the extent necessary, in Lessor's
reasonable judgment, to account for any increased wear and tear that the
Premises may suffer as a result thereof. If a change in control of
Lessee occurs during this Lease and following such change the financial
condition of Lessee is, in Lessor's reasonable judgment, significantly
reduced, Lessee shall deposit such additional monies with Lessor as
shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial
condition. Lessor shall not be required to keep the Security Deposit
separate from its general accounts. Within fourteen (14) days after the
expiration or termination of this Lease, if Lessor elects to apply the
Security Deposit only to unpaid Rent, and otherwise within thirty (30)
days after the Premises have been vacated pursuant to Paragraph 7.4(c)
below, Lessor shall return that portion of the Security Deposit not used
or applied by Lessor. No part of the Security Deposit shall be
considered to be held in trust, to bear interest or to be prepayment for
any monies to be paid by Lessee under this Lease.
6. USE.
6.1. USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable
thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates damage, waste
or a nuisance, or that disturbs owners and/or occupants of, or causes
damage to neighboring properties. Lessor shall not unreasonably withhold
or delay its consent to any written request for a modification of the
Agreed Use, so long as the same will not impair the structural integrity
of the improvements on the Premises or the mechanical or electrical
systems therein, is not significantly more burdensome to the Premises.
If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same,
which notice shall include an explanation of Lessor's objections to the
change in use.
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6.2. HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance,
or waste whose presence, use, manufacture, disposal,
transportation, or release, either by itself or in combination with
other materials expected to be on the Premises, is either: (i)
potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for potential liability of
Lessor to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substances shall
include, but not be limited to, hydrocarbons, petroleum, gasoline,
and/or crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the
express prior written consent of Lessor and timely compliance (at
Lessee's expense) with all Applicable Requirements. "Reportable
Use" shall mean (i) the installation or use of any above or below
ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice,
registration or business plan is required to be filed with, any
governmental authority, and/or (iii) the presence at the Premises
of a Hazardous Substance with respect to which any Applicable
Requirements requires that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials
reasonably required to be used in the normal course of the Agreed
Use, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the
Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor.
In addition, Lessor may condition its consent to any Reportable Use
upon receiving such additional assurances as Lessor reasonably
deems necessary to protect itself, the public, the Premises and/or
the environment against damage, contamination, injury and/or
liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the
Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located
in, on, under or about the Premises, other than as previously
consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor, and provide Lessor with a copy of
any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or
about the Premises (including through the plumbing or sanitary
sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended,
whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was
caused or materially contributed to by Lessee, or pertaining to or
involving any Hazardous Substance brought onto the Premises during
the term of this Lease, by or for Lessee, or any third party.
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(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, the trusts of which Lessor is trustee and their
successors, agents, employees, lenders and ground lessor, if any,
harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, claims, expenses, penalties, and attorneys'
and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee, or any third
party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous
Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of
any contamination or injury to person, property or the environment
created or suffered by Lessee, and the cost of investigation,
removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease. NO
TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY
LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER
THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS
SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH
AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and
assigns shall indemnify, defend, reimburse and hold Lessee, its
employees and lenders, harmless from and against any and all
environmental damages, including the cost of remediation, which
existed as a result of Hazardous Substances on the Premises prior
to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's
obligations, as and when required by the Applicable Requirements,
shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation
measures required by governmental entities having jurisdiction with
respect to the existence of Hazardous Substances on the Premises
prior to the Start Date, unless such remediation measure is
required as a result of Lessee's use (including "Alterations", as
defined in Paragraph 7.3(a) below) of the Premises, in which event
Lessee shall be responsible for such payment. Lessee shall
cooperate fully in any such activities at the request of Lessor,
including allowing Lessor and Lessor's agents to have reasonable
access to the Premises at reasonable times in order to carry out
Lessor's investigative and remedial responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is
legally responsible therefor (in which case Lessee shall make the
investigation and remediation thereof required by the Applicable
Requirements and this Lease shall continue in full force and
effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or
(ii) if the estimated cost to remediate such condition exceeds
twelve (12) times the then monthly Base Rent or $100,000, whichever
is greater, give written notice to Lessee, within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition, of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give a termination notice,
Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of
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the remediation of such Hazardous Substance Condition exceeds an
amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30)
days following such commitment. In such event, this Lease shall
continue in full force and effect, and Lessor shall proceed to
make such remediation as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice
and provide the required funds or assurance thereof within the
time provided, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
6.3. LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole
expense, fully, diligently and in a timely manner, materially comply
with all Applicable Requirements, the requirements of any applicable
fire insurance underwriter or rating bureau, and the recommendations of
Lessor's engineers and/or consultants which relate in any manner to the
Premises, without regard to whether said requirements are now in effect
or become effective after the Start Date. Lessee shall, within ten (10)
days after receipt of Lessor's written request, provide Lessor with
copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor
in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining
to or involving the failure of Lessee or the Premises to comply with any
Applicable Requirements.
6.4. INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined
in Paragraph 30 below) and consultants shall have the right to enter
into Premises at any time, in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the
Premises and for verifying compliance by Lessee with this Lease. The
cost of any such inspections shall be paid by Lessor, unless a violation
of Applicable Requirements, or a contamination is found to exist or be
imminent, or the inspection is requested or ordered by a governmental
authority. In such case, Lessee shall upon request reimburse Lessor for
the cost of such inspections, so long as such inspection is reasonably
related to the violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1. LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with
Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or
Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole
expense, keep the Premises, Utility Installations, and Alterations
in good order, condition and repair (whether or not the portion of
the Premises requiring repairs, or the means of repairing the same,
are reasonably or readily accessible to Lessee, and whether or not
the need for such repairs occurs as a result of Lessee's use, any
prior use, the elements or the age of such portion of the
Premises), including, but not limited to, all equipment or
facilities, such as plumbing, heating, ventilating,
air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior
and exterior), foundations, ceilings, roofs, floors, windows,
doors, plate glass, skylights, landscaping, driveways, parking
lots, fences, retaining walls, signs, sidewalks and parkways
located in, on, or adjacent to the Premises. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and
perform good maintenance practices,
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specifically including the procurement and maintenance of the
service contracts required by Paragraph 7.1(b) below. Lessee's
obligations shall include restorations, replacements or renewals
when necessary to keep the Premises and all improvements thereon or
a part thereof in good order, condition and state of repair. Lessee
shall, during the term of this Lease, keep the exterior appearance
of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age
and size in the vicinity, including, when necessary, the exterior
repainting of the Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary
form and substance for, and with contractors specializing and
experienced in the maintenance of the following equipment and
improvements, if any, if and when installed on the Premises: (i)
HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire
extinguishing systems, including fire alarm and/or smoke detection,
(iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii)
basic utility feed to the perimeter of the Building, and (ix) any
other equipment, if reasonably required by Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor
as set forth in Paragraph 8.7 below, and without relieving Lessee
of liability resulting from Lessee's failure to exercise and
perform good maintenance practices, if the Basic Elements described
in Paragraph 7.1(b) cannot be repaired other than at a cost which
is in excess of 50% of the cost of replacing such Basic Elements,
then such Basic Elements shall be replaced by Lessor, and the cost
thereof shall be prorated between the Parties and Lessee shall only
be obligated to pay, each month during the remainder of the term of
this Lease, on the date on which Base Rent is due, an amount equal
to the product of multiplying the cost of such replacement by a
fraction, the numerator of which is one, and the denominator of
which is the number of months of the useful life of such
replacement as such useful life is specified pursuant to Federal
income tax regulations or guidelines for depreciation thereof
(including interest on the unamortized balance as is then
commercially reasonable in the judgment of Lessor's accountants),
with Lessee reserving the right to prepay its obligation at any
time.
7.2. LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the
Premises, or the equipment therein, all of which obligations are
intended to be that of the Lessee. It is the intention of the Parties
that the terms of this Lease govern the respective obligations of the
Parties as to maintenance and repair of the Premises, and they expressly
waive the benefit of any statute now or hereafter in effect to the
extent it is inconsistent with the terms of this Lease.
7.3. UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" refers to all floor and window coverings, air lines,
power panels, electrical distribution, security and fire protection
systems, communication systems, lighting fixtures, HVAC equipment,
plumbing, and fencing in or on the Premises. The term "Trade
Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term
"Alterations" shall mean any modification of the improvements,
other than Utility installations or Trade Fixtures, whether by
addition or deletion. "Lessee
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Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility installations made by Lessee that are
not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall
not make any Alterations or Utility Installations to the Premises
without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice
to Lessor, as long as they are not visible from the outside, do not
involve puncturing, relocating or removing the roof or any existing
walls, and the cumulative cost thereof during this Lease as
extended does not exceed $50,000 in the aggregate or $10,000 in any
one year.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the
Lessor shall be presented to Lessor in written form with detailed
plans. Consent shall be deemed conditioned upon Lessee's: (i)
acquiring all applicable governmental permits, (ii) furnishing
Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii)
compliance with all conditions of said permits and other Applicable
Requirements in a prompt and expeditious manner. Any Alterations or
Utility Installations shall be performed in a workmanlike manner
with good and sufficient materials. Lessee shall promptly upon
completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's
Base Rent, or $10,000, Lessor may condition its consent upon Lessee
providing a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such Alteration or Utility
Installation and/or upon Lessee's posting an additional Security
Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to
or for Lessee at or for use on the Premises, which claims are or
may be secured by any mechanic's or materialmen's lien against the
Premises or any interest therein. Lessee shall give Lessor not less
than ten (10) days' notice prior to the commencement of any work
in, on or about the Premises, and Lessor shall have the right to
post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at
its sole expense defend and protect itself, Lessor and the Premises
against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety
bond in an amount equal to one and one-half times the amount of
such contested lien, claim or demand, indemnifying Lessor against
liability for the same. If Lessor elects to participate in any
such action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4. OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and
Utility Installations made by Lessee shall be the property of
Lessee, but considered a part of the Premises. Lessor may, at any
time, elect in writing to be the owner of all or any specified part
of the Lessee Owned Alterations and Utility Installations. Unless
otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be
surrendered by Lessee with the Premises.
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(b) REMOVAL. By delivery to Lessee of written notice from
Lessor not earlier than ninety (90) and not later than thirty (30)
days prior to the end of the term of this Lease, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations
be removed by the expiration or termination of this Lease. Lessor
may require the removal at any time of all or any part of any
Lessee Owned Alterations or Utility Installations made without the
required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date, with all of
the improvements, parts and surfaces thereof broom clean and free
of debris, and in good operating order, condition and state of
repair, ordinary wear and tear excepted. "Ordinary wear and tear"
shall not include any damage or deterioration that would have been
prevented by good maintenance practice. Lessee shall repair any
damage occasioned by the Installation, maintenance or removal of
Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of
any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or groundwater
contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to
timely vacate the Premises pursuant to this Paragraph 7.4(c)
without the express written consent of Lessor shall constitute a
holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1. PAYMENT FOR INSURANCE. Lessee shall maintain and pay for all
insurance required under Paragraph 8.
8.2. LIABILITY INSURANCE.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee
and Lessor against claims for bodily injury, personal injury and
property damage based upon or arising out of the ownership, use,
occupancy or maintenance of the Premises and all areas appurtenant
thereto. Such Insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF
PREMISES ENDORSEMENT" and contain the "Amendment of the Pollution
Exclusion Endorsement" for damage caused by heat, smoke or fumes
from a hostile fire. The Policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an
"insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance shall
not, however limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All Insurance carried by Lessee shall be
primary to and not contributory with any similar insurance carried
by Lessor, whose insurance shall be considered excess insurance
only.
8.3. PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with
loss payable to Lessor, any groundlessor, and to any Lender(s)
insuring loss or damage to the Premises. The amount of such
insurance
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shall be equal to the full replacement cost of the Premises, as the
same shall exist from time to time, or the amount required by any
Lenders, but in no event more than the commercially reasonable and
available insurable value thereof. If Lessor is the Insuring Party,
however, Lessee Owned Alterations and Utility Installations, Trade
Fixtures, and Lessee's personal property shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is
available and commercially appropriate, such policy or policies
shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a
Lender), including coverage for debris removal and the enforcement
of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the
result of a covered loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance
clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage
amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance
coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such
deductible amount in the event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable
to Lessor and any Lender, insuring the loss of the full Rent for
one (1) year. Said insurance shall provide that in the event the
Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of
the completion of repairs or replacement of the Premises, to
provide for one full year's loss of Rent from the date of any such
loss. Said insurance shall contain an agreed valuation provision in
lieu of any coinsurance clause, and the amount of coverage shall be
adjusted annually to reflect the projected Rent otherwise payable
by Lessee, for the next twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in
the premiums for the property insurance of such building or
buildings if said increase is caused by Lessee's acts, omissions,
use or occupancy of the Premises.
8.4. LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance
shall be full replacement cost coverage with a deductible of not to
exceed $1,000 per occurrence. The proceeds from any such insurance
shall be used by Lessee for the replacement of personal property,
Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence
that such insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will
reimburse Lessee for direct or indirect loss of earnings
attributable to all perils commonly insured against by prudent
lessees in the business of Lessee or attributable to prevention of
access to the Premises as a result of such perils.
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(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance
specified herein are adequate to cover Lessee's property, business
operations or obligations under this Lease.
8.5. INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the
state where the Premises are located, and maintaining during the
policy term a "General Policyholders Rating" of at least B+, V, as
set forth in the most current issue of "Best's Insurance Guide", or
such other rating as may be required by a Lender. Lessee shall not
do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver
to Lessor certified copies of policies of such insurance or
certificates evidencing the existence and amounts of the required
insurance. No such policy shall be cancelable or subject to
modification except after thirty (30) days prior written notice to
Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or
the length of the remaining term of this Lease, whichever is less.
If Lessee shall fail to procure and maintain the insurance required
to be carried by it, Lessor may, but shall not be required to,
procure and maintain the same.
8.6. WAIVER OF SUBROGATION. Without affecting any other rights
or remedies, Lessee and Lessor each hereby release and relieve the
other, and waive their entire right to recover damages against the
other, for loss of or damage to its property arising out of or
incident to the perils required to be insured against herein. The
effect of such releases and waivers is not limited by the amount of
insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage
insurance carriers waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so
long as the insurance is not invalidated thereby.
8.7. INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold
harmless the Premises, Lessor the trusts of which Lessor is trustee
and their successors, assigns, and agents, Lessor's master or
ground lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, liens, judgments, penalties,
attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is
brought against Lessor by reason of any of the foregoing matters,
Lessee shall upon notice defend the same at Lessee's expense by
counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first
paid any such claim in order to be defended or indemnified.
8.8. EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be
liable for injury or damage to the person or goods, wares,
merchandise or other property of Lessee, Lessee's employees,
contractors, invitees, customers, or any other person in or about
the Premises, whether such damage or injury is caused by or results
from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, HVAC, or lighting
fixtures, or from any other cause, whether the said injury or
damage results from conditions arising upon the Premises or upon
other portions of the Building of which the Premises are a part, or
from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of
Lessor. Notwithstanding Lessor's negligence
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or breach of this Lease, Lessor shall under no circumstances be liable
for injury to Lessee's business or for any loss of income or profit
therefrom.
9. DAMAGE OR DESTRUCTION.
9.1. DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, which can reasonably be
repaired in six (6) months or less from the date of the damage or
destruction. Lessor shall notify Lessee in writing within thirty
(30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations
and Utility Installations and Trade Fixtures, which cannot
reasonably be repaired in six (6) months or less from the date of
the damage or destruction. Lessor shall notify Lessee in writing
within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations
and Utility Installations and Trade Fixtures, which was caused by
an event required to be covered by the insurance described in
Paragraph 8.3(a), irrespective of any deductible amounts or
coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the
occurrence to their condition existing immediately prior thereto,
including demolition, debris removal and upgrading required by
the operation of Applicable Requirements, and without deduction
for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence
or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph
6.2(a), in, on, or under the Premises.
9.2. PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee Owned
Alterations and Utility Installations) as soon as reasonably possible
and this Lease shall continue in full force and effect; provided,
however, that Lessee shall, at Lessor's election, make the repair of any
damage or destruction the total cost to repair of which is $10,000 or
less, and, in such event, Lessor shall make any applicable insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, If the required insurance was not in
force or the insurance proceeds are not sufficient to effect such
repair, the Insuring Party shall promptly contribute the shortage in
proceeds (except as to the deductible which is Lessee's responsibility)
as and when required to complete said repairs. In the event, however,
such shortage was due to the fact that, by reason of the unique nature
of the improvements, full replacement cost insurance coverage was not
commercially reasonable and available, Lessor shall have no obligation
to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the
funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of
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such shortage and request therefor. If Lessor receives said funds or
adequate assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as
reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days
thereafter to: (i) make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case
this Lease shall remain in full force and effect, or have this Lease
terminate thirty (30) days thereafter. Lessee shall not be entitled to
reimbursement of any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there
may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either
Party.
9.3. PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or
willful act of Lessee (in which event Lessee shall make the repairs at
Lessee's expense), Lessor may either: (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) terminate this Lease by
giving written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage. Such termination
shall be effective sixty (60) days following the date of such notice. In
the event Lessor elects to terminate this Lease, Lessee shall have the
right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage without reimbursement from Lessor. Lessee shall
provide Lessor with said funds or satisfactory assurance thereof within
thirty (30) days after making such commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to
make such repairs as soon as reasonably possible after the required
funds are available. If Lessee does not make the required commitment,
this Lease shall terminate as of the date specified in the termination
notice.
9.4. TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty
(60) days following such Destruction. If the damage or destruction was
caused by the gross negligence or willful misconduct of Lessee, Lessor
shall have the right to recover Lessor's damages from Lessee, except as
provided in Paragraph 8.6.
9.5. DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss,
Lessor may terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving a written termination notice
to Lessee within thirty (30) days after the date of occurrence of such
damage. Notwithstanding the foregoing, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises,
then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or
adequate assurance thereof) needed to make the repairs on or before the
earlier of (i) the date which is ten days after Lessee's receipt of
Lessor's written notice purporting to terminate this Lease, or (ii) the
day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds
(or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's commercially reasonable expense,
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during such period, then this
Lease shall terminate on the date specified in the termination notice
and Lessee's option shall be extinguished.
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9.6. ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for
which Lessee is not responsible under this Lease, the Rent
payable by Lessee for the period required for the repair,
remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental
Value insurance. All other obligations of Lessee hereunder shall
be performed by Lessee, and Lessor shall have no liability for
any such damage, destruction, remediation, repair or restoration
except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or
restore the Premises and does not commence, in a substantial and
meaningful way, such repair or restoration within ninety (90)
days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has
actual notice, of Lessee's election to terminate this Lease on a
date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice and such repair or
restoration is not commenced within thirty (30) days thereafter,
this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said
thirty (30) days, this Lease shall continue in full force and
effect. "Commence" shall mean either the unconditional
authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first
occurs.
9.7. TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment
shall be made concerning advance Base Rent and any other advance
payments made by Lessee to Lessor. Lessor shall, in addition, return to
Lessee so much of Lessee's Security Deposit as has not been, or is not
then required to be, used by Lessor.
9.8. WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the
Premises with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1. DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"Real Property Taxes" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax
(other than inheritance, personal income or estate taxes); improvement
bond; and/or license fee imposed upon or levied against any legal or
equitable interest of Lessor in the Premises, Lessor's right to other
income therefrom, and/or Lessor's business of leasing, by any authority
having the direct or indirect power to tax and where the funds are
generated with reference to the Building address and where the proceeds
so generated are to be applied by the city, county or other local taxing
authority of a jurisdiction within which the Premises are located. The
term "Real Property Taxes" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason of
events occurring during the term of this Lease, including but not
limited to, a change in the ownership of the Premises.
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10.2.
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property
Taxes applicable to the Premises during the term of this Lease.
Subject to Paragraph 10.2(b), all such payments shall be made at
least ten (10) days prior to any delinquency date. Lessee shall
promptly furnish Lessor with satisfactory evidence that such
taxes have been paid. If any such taxes shall cover any period of
time prior to or after the expiration or termination of this
Lease, Lessee's share of such taxes shall be prorated to cover
only that portion of the tax bill applicable to the period that
this Lease is in effect, and Lessor shall reimburse Lessee for
any overpayment. if Lessee shall fail to pay any required Real
Property Taxes, Lessor shall have the right to pay the same, and
Lessee shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge
on any Rent payment, Lessor may, at Lessor's option, estimate the
current Real Property Taxes, and require that such taxes be paid
in advance to Lessor by Lessee, either: (i) in a lump sum amount
equal to the installment due, at least twenty (20) days prior to
the applicable delinquency date, or (ii) monthly in advance with
the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal
to the amount of the estimated installment of taxes divided by
the number of months remaining before the month in which said
installment becomes delinquent. When the actual amount of the
applicable tax bill is known, the amount of such equal monthly
advance payments shall be adjusted as required to provide the
funds needed to pay the applicable taxes. If the amount collected
by Lessor is insufficient to pay such Real Property Taxes when
due, Lessee shall pay Lessor, upon demand, such additional sums
as are necessary to pay such obligations. All monies paid to
Lessor under this Paragraph may be intermingled with other monies
of Lessor and shall not bear interest. In the event of a Breach
by Lessee in the performance of its obligations under this Lease,
then any balance of funds paid to Lessor under the provisions of
this Paragraph may at the option of Lessor, be treated as an
additional Security Deposit.
10.3. JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property
Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be conclusively determined by Lessor
from the respective valuations assigned in the assessor's work sheets or
such other information as may be reasonably available.
10.4. PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations,
Utility Installations, Trade Fixtures, furnishings, equipment and all
personal property of Lessee. When possible, Lessee shall cause such
property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable
to Lessee's property within ten (10) days after receipt of a written
statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
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12. ASSIGNMENT AND SUBLETTING.
12.1. LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or encumber (collectively, "assign or
assignment") or sublet all or any part of Lessee's interest in
this Lease or in the Premises without Lessor's prior written
consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative
basis, of twenty-five percent (25%) or more of the voting control
of Lessee shall constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale,
acquisition, financing, transfer, leveraged buy-out or
otherwise), whether or not a formal assignment or hypothecation
of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount
greater than twenty-five percent (25%) of such Net Worth as it
was represented at the time of the execution of this Lease or at
the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction
or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which
Lessor may withhold its consent. "Net Worth of Lessee" shall mean
the net worth of Lessee (excluding any guarantors) established
under generally accepted accounting principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph
13.1(c), or a noncurable Breach without the necessity of any
notice and grace period. If Lessor elects to treat such
unapproved assignment or subletting as a noncurable Breach,
Lessor may either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice, increase the monthly Base Rent to one
hundred ten percent (110%) of the Base Rent then in affect.
Further, in the event of such Breach and rental adjustment, (i)
the purchase price of any option to purchase the Premises held by
Lessee shall be subject to similar adjustment to one hundred ten
percent (110%) of the price previously in effect, and (ii) all
fixed and non-fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased to One Hundred Ten
Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2. TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express
written assumption by such assignee or sublessee of the
obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability
of Lessee for the payment of Rent or for the performance of any
other obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or
disapproval of an assignment. Neither a delay in the
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approval or disapproval of such assignment nor the acceptance of
Rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for Lessee's Default or
Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor
may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of Lessee's obligations
under this Lease, including any assignee or sublessee, without
first exhausting Lessor's remedies against any other person or
entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to
Lessor's determination as to the financial and operational
responsibility and appropriateness of the proposed assignee or
sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a
fee of $1,000 or ten percent (10%) of the current monthly Base
Rent applicable to the portion of the Premises which is the
subject of the proposed assignment or sublease, whichever is
greater, as consideration for Lessor's considering and processing
said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably
requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such
sublease, be deemed to have assumed and agreed to conform and
comply with each and every term, covenant, condition and
obligation herein to be observed or performed by Lessee during
the term of said assignment or sublease, other than such
obligations as are contrary to or inconsistent with provisions of
an assignment or sublease to which Lessor has specifically
consented to in writing.
12.3. ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee
of all or any part of the Premises and shall be deemed included in all
subleases under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor
may collect such Rent and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach shall
occur in the performance of Lessee's obligations, Lessee may
collect said Rent. Lessor shall not, by reason of the foregoing
or any assignment of such sublease, nor by reason of the
collection of Rent, be deemed liable to the sublessee for any
failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a Breach exists in the
performance of Lessee's obligations under this Lease, to pay to
Lessor all Rent due and to become due under the sublease.
Sublessee shall rely upon any such notice from Lessor and shall
pay all Rents to Lessor without any obligation or right to
inquire as to whether such Breach exists, notwithstanding any
claim from Lessee to the contrary.
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(b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event
Lessor shall undertake the obligations of the sublessor under
such sublease from the time of the exercise of said option to the
expiration of such sublease; provided, however, Lessor shall not
be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to
cure the Default of Lessee within the grace period, if any,
specified in such notice. The sublessee shall have a right of
reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1. DEFAULT; BREACH. A "Default" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions
or rules under this Lease. A "Breach" is defined as the occurrence of
one or more of the following Defaults, and the failure of Lessee to cure
such Default within any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of
security, or where the coverage of the property insurance
described in Paragraph 8.3 is jeopardized as a result thereof, or
without providing reasonable assurances to minimize potential
vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether
to Lessor or to a third party, when due, to provide reasonable
evidence of insurance or surety bond, or to fulfill any
obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3)
business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the
service contracts, (iii) the rescission of an unauthorized
assignment or subletting, (iv) a Tenancy Statement, (v) a
requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42
(easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten
(10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof, other than those described in subparagraphs
13.1(a), (b) or (c), above, where such Default continues for a
period of thirty (30) days after written notice; provided,
however, that if the nature of Lessee's
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Default is such that more than thirty (30) days are reasonably
required for its cure, then it shall not be deemed to be a Breach
if Lessee commences such cure within said thirty (30) day period
and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit
of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C.
Section 101 or any successor statute thereto (unless, in the case
of a petition filed against Lessee, the same is dismissed within
sixty (60) days); (iii) the appointment of a trustee or receiver
to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30)
days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises
or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to
any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the
termination of a Guarantor's liability with respect to this Lease
other than in accordance with the terms of such guaranty, (iii) a
Guarantor's becoming insolvent or the subject of a bankruptcy
filing, (iv) a Guarantor's refusal to honor the guaranty, or (v)
a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days
following written notice of any such event, to provide written
alternative assurance or security, which, when coupled with the
then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at
the time of execution of this Lease.
13.2. REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in
case of an emergency, without notice), Lessor may, at its option,
perform such duty or obligation on Lessee's behalf, including but not
limited to the obtaining of reasonably required bonds, insurance
policies, or governmental licenses, permits or approvals. The costs and
expenses of any such performance by Lessor shall be due and payable by
Lessee upon receipt of invoice therefor. If any check given to Lessor by
Lessee shall not be honored by the bank upon which it is drawn, Lessor,
at its option, may require all future payments to be made by Lessee to
be by cashiers check. In the event of a Breach, Lessor may, with or
without further notice or demand, and without limiting Lessor in the
exercise of any right or remedy which Lessor may have by reason of such
Breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and
Lessee shall immediately surrender possession to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the
unpaid Rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such
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rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time
of award exceeds the amount of such rental loss that the Lessee
proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform its obligations under
this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost
of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the
time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of
the District within which the Premises are located at the time of
award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive
Lessor's right to recover damages under Paragraph 12. If
termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to
recover in such proceeding any unpaid Rent and damages as are
recoverable therein, or Lessor may reserve the right to recover
all or any part thereof in a separate suit. If a notice and grace
period required under Paragraph 13.1 was not previously given, a
notice to pay rent or quit, or to perform or quit given to Lessee
under the unlawful detainer statute shall also constitute the
notice required by Paragraph 13.1. In such case, the applicable
grace period required by Paragraph 13.1 and the unlawful detainer
statute shall run concurrently, and the failure of Lessee to cure
the Default within the greater of the two such grace periods
shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may
sublet or assign, subject only to reasonable limitations. Acts of
maintenance, efforts to relet, and/or the appointment of a
receiver to protect the Lessor's interests, shall not constitute
a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises
are located. The expiration or termination of this Lease and/or
the termination of Lessee's right to possession shall not relieve
Lessee from liability under any indemnity provisions of this
Lease as to matters occurring or accruing during the term hereof
or by reason of Lessee's occupancy of the Premises.
13.3. INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of
any cash or other bonus, inducement or consideration for Lessee's
entering into this Lease, all of which concessions are hereinafter
referred to as "Inducement Provisions," shall be deemed conditioned upon
Lessee's full and faithful performance of all of the terms, covenants
and conditions of this Lease. Upon Breach of this Lease by Lessee, any
such Inducement Provision shall automatically be deemed deleted from
this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or
paid by Lessor under such an Inducement Provision shall be immediately
due and payable by Lessee to Lessor, notwithstanding any subsequent cure
of said Breach by Lessee. The acceptance by Lessor of rent or the cure
of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such
acceptance.
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13.4. LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to
ascertain. Such costs include, but are not limited to, processing and
accounting charges, and late charges which may be imposed upon Lessor by
any Lender. Accordingly, if any Rent shall not be received by Lessor
within five (5) days after such amount shall be due, then, without any
requirement for notice to Lessee, Lessee shall pay to Lessor a one-time
late charge equal to ten percent (10%) of each such overdue amount. The
parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such
late payment. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent the exercise of any of the other rights and
remedies granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding any provision of this
Lease to the contrary, Base Rent shall, at Lessors option, become due
and payable quarterly in advance.
13.5. INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments
(such as Base Rent) or within thirty (30) days following the date on
which it was due for non-scheduled payment, shall bear interest from the
date when due, as to scheduled payments, or the thirty-first (31st) day
after it was due as to non-scheduled payments. The interest ("Interest")
charged shall be equal to the prime rate reported in the Wall Street
Journal as published closest prior to the date when due plus four
percent (4%), but shall not exceed the maximum rate allowed by law.
Interest is payable in addition to the potential late charge provided
for in Paragraph 13.4.
13.6. BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to
perform an obligation required to be performed by Lessor. For
purposes of this Paragraph, a reasonable time shall in no event
be less than thirty (30) days after receipt by Lessor, and any
Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein
such obligation of Lessor has not been performed; provided,
however, that if the nature of Lessor's obligation is such that
more than thirty (30) days are reasonably required for its
performance, then Lessor shall not be in breach if performance is
commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within thirty
(30) days after receipt of said notice, or if having commenced
said cure they do not diligently pursue it to completion, then
Lessee may elect to cure said breach at Lessee's expense and
offset from Rent an amount equal to the greater of one month's
Base Rent or the Security Deposit, and to pay an excess of such
expense under protest, reserving Lessee's right to reimbursement
from Lessor. Lessee shall document the cost of said cure and
supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more
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than twenty-five percent (25%) of the land area portion of the premises not
occupied by any building, is taken by Condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall
have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to
the portion of the Premises remaining, except that the Base Rent shall be
reduced in proportion to the reduction in utility of the Premises caused by
such Condemnation. Condemnation awards and/or payments shall be the property
of Lessor, whether such award shall be made as compensation for diminution in
value of the leasehold, the value of the part taken, or for severance
damages; provided, however, that Lessee shall be entitled to any compensation
for Lessee's relocation expenses, loss of business goodwill and/or Trade
Fixtures, without regard to whether or not this Lease is terminated pursuant
to the provisions of this Paragraph. All Alterations and Utility
Installations made to the Premises by Lessee, for purposes of Condemnation
only, shall be considered the property of the Lessee and Lessee shall be
entitled to any and all compensation which is payable therefor. In the event
that this Lease is not terminated by reason of the Condemnation, Lessor shall
repair any damage to the Premises caused by such Condemnation.
15. BROKERS
15.1. REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee
and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers,
if any) in connection with this Lease, and that no one other than said
named Brokers is entitled to any commission or finder's fee in connection
herewith. Lessee and Lessor do each hereby agree to indemnify, protect,
defend and hold the other harmless from and against liability for
compensation or charges which may be claimed by any such unnamed broker,
finder or other similar party by reason of any dealings or actions of the
indemnifying Party, including any costs, expenses, attorneys' fees
reasonably incurred with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the
"Requesting Party") execute, acknowledge and deliver to the
Requesting Party a statement in writing in form similar to the
then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may
be reasonably requested by the Requesting Party.
(b) If the Responding Party shall fail to execute or
deliver the Estoppel Certificate within such ten day period,
the Requesting Party may execute an Estoppel Certificate
stating that: (i) the Lease is in full force and effect
without modification except as may be represented by the
Requesting Party, (ii) there are no uncured defaults in the
Requesting Party's performance, and (iii) if Lessor is the
Requesting Party, not more than one month's rent has been paid
in advance. Prospective purchasers and encumbrancers may rely
upon the Requesting Party's Estoppel Certificate, and the
Responding Party shall be estopped from denying the truth of
the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall
deliver to any potential lender or purchaser designated by
Lessor such financial statements as may be reasonably required
by such lender or
24
<PAGE>
purchaser, including but not limited to Lessee's financial
statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or
purchaser in confidence and shall be used only for the
purposes herein set forth.
17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Upon such transfer or assignment and delivery
of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all
liability with respect to the obligations and/or covenants under this Lease
thereafter to be performed by the Lessor. Subject to the foregoing, the
obligations and/or covenants in this Lease to be performed by the Lessor shall
be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. NOTICES.
23.1. NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a
manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for
delivery or mailing of notices. Either Party may by written notice to the
other specify a different address for notice, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for notice. A copy of all notices to Lessor shall be concurrently
transmitted to such party or parties at such addresses as Lessor may from
time to time hereafter designate in writing.
25
<PAGE>
23.2. DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein
and mailed with postage prepaid. Notices delivered by United States
Express Mail or overnight courier that guarantee next day delivery
shall be deemed given twenty-four (24) hours after delivery of the
same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon
telephone confirmation of receipt, provided a copy is also delivered
via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of monies or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Lessee shall, upon request of Lessor execute, acknowledge and
deliver to Lessor a short form memorandum of this Lease for recording purposes.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
26
<PAGE>
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1. SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "Security Device"),
now or hereafter placed upon the Premises, to any and all advances made
on the security thereof, and to all renewals, modifications, and
extensions thereof. Lessee agrees that the holders of any such Security
Devices (in this Lease together referred to as "Lessor's Lender") shall
have no liability or obligation to perform any of the obligations of
Lessor under this Lease. Any Lender may elect to have this Lease and/or
any Option granted hereby superior to the lien of its Security Device by
giving written notice thereof to Lessee, whereupon this Lease and such
Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2. ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party
who acquires ownership of the Premises by reason of a foreclosure of a
Security Device, and that in the event of such foreclosure such new owner
shall not: (i) be liable for any act or omission of any prior lessor or
with respect to events occurring prior to acquisition of ownership; (ii)
be subject to any offsets or defenses which Lessee might have against any
prior lessor, or (iii) be bound by prepayment of more than one (1)
month's rent.
30.3. NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable
non-disturbance agreement (a "Non-Disturbance Agreement") from the
Lender which Non-Disturbance Agreement provides that Lessee's
possession of the Premises, and this Lease, including any options to
extend the term hereof, will not be disturbed so long as Lessee is not
in Breach hereof and attorns to the record owner of the Premises.
30.4. SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents;
provided, however, that, upon written request from Lessor or a Lender in
connection with a sale, financing or refinancing of the Premises, Lessee
and Lessor shall execute such further writings as may be reasonably
required to separately document any subordination, attornment and/or
Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party brings an action or proceeding involving
the Premises to enforce the terms hereof or to declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding, action, or
appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may
be awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term, "Prevailing
Party" shall include, without limitation, a Party who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party of its claim or
defense. The attorneys' fees award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees,
costs and expenses incurred in the preparation and service of notices of Default
and consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
27
<PAGE>
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "For Sale" signs and
Lesser may during the last six (6) months of the term hereof place on the
Premises any ordinary "For Lease" signs. Lessee may at any time place on or
about the Premises any ordinary "For Sublease" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including but not limited to consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt
of an invoice and supporting documentation therefor. Lessor's consent to any
act, assignment or subletting shall not constitute an acknowledgment that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
The failure to specify herein any particular condition to Lessor's consent shall
not preclude the imposition by Lessor at the time of consent of such further or
other conditions as are then reasonable with references to the particular matter
for which consent is being given. In the event that either Party disagrees with
any determination made by the other hereunder and reasonably requests the
reasons for such determination, the determining party shall furnish its reasons
in writing and in reasonable detail within ten (10) business days following such
request.
37. GUARANTOR.
37.1. EXECUTION. The Guarantors, if any, shall each execute a guaranty
in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this Lease.
37.2. DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing
on Guarantor's behalf to obligate Guarantor, and in the case of a
corporate Guarantor, a certified copy of a resolution of its board of
directors authorizing the making of such
28
<PAGE>
guaranty, (b) current financial statements, (c) a Tenancy Statement,
or (d) written confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
40. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
41. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.
42. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
43. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
44. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
45. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
46. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY
29
<PAGE>
AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE
COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND
LESSEE WITH RESPECT TO THE PREMISES.
- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE
CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE
LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF
THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND
OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S
INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED.
- --------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<CAPTION>
<S> <C>
Executed at Newport Beach, California Executed at:
on March __, 1998. ------------------------
on:
---------------------------------
By LESSOR: SANWA BANK CALIFORNIA, a By LESSEE: XCD, Inc., a California corporation
California corporation, as Trustee of
the SUZANNE PATHE TRUST, for the Benefit
of GEORGES PATHE, TRUST No. 41N093004
and the ARTHUR PATHE TRUST for the
Benefit of GEORGES PATHE, TRUST No.
41N094010*
By: /s/ Cheryl Kelley By: /s/ Keith Sugawara
---------------------------- --------------------
Name Printed: Cheryl Kelley Name Printed: Keith Sugawara
----------------- --------------
Title: Vice President Title: President
------------------------- ---------
By: /s/ Kelly Ann Laghaei By:
--------------------------------
Name Printed: Kelly Ann Laghaei Name Printed:
----------------- ----------------------
Title: Vice President Title:
------------------------- ----------------------------
Address: Sanwa Bank California, Sanwa Trust & Address: 3002 Dow Avenue
------------------------------------ --------------------------
Investment, 4400 MacArthur Blvd., Suite 240, Tustin, CA 92780
--------------------------------------------- --------------------------
30
<PAGE>
Newport Beach, CA 92660
-------------------------------------
-------------------------------------- -----------------------------------
Telephone: (714) 472-8991 Telephone: (714) 573-7055
---------------------------- -------------------------
Facsimile: (714) 476-2321 Facsimile: ( )
---------------------------- -------------------------
Federal ID No. Federal ID No.
------------------------ ---------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777.
Fax No. (213) 687-8616.
It is understood and mutually agreed that Lessor in executing this Lease, as
Lessor, is acting in a fiduciary capacity and Lessor shall not be liable
hereunder directly or indirectly, in its individual capacity, the rights and
claims of Lessee hereunder are and shall be limited exclusively to such rights
as Lessee may have against Lessor in its fiduciary capacity and recourse by
Lessee shall be limited to recourse against the assets of the particular
trust(s) or estate(s) involved. It is further understood and agreed that in the
event the fiduciary relationship shall terminate or in the event Lessor shall be
discharged of its fiduciary capacity, Lessee shall have no claim against Lessor
on account of such termination or discharge.
31
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
SINGLE-TENANT LEASE-NET BY AND BETWEEN
SANWA BANK CALIFORNIA, AS
TRUSTEE OF THE SUZANNE PATHE TRUST,
FOR THE BENEFIT OF GEORGES PATHE
TRUST NO. 41N093004 AND THE ARTHUR PATHE TRUST, FOR THE BENEFIT OF GEORGES
PATHE, TRUST NO. 41N094010, AS LESSOR,
AND XCD, INC., A CALIFORNIA CORPORATION, AS LESSEE
47. INCORPORATION. This Addendum to Standard Industrial/Commercial
Single-Tenant Lease-Net by and between Sanwa Bank California, as trustee of
the Suzanne Pathe Trust for the Benefit of Georges Pathe, Trust No. 41N093004
and the Arthur Pathe Trust, for the Benefit of Georges Pathe, Trust No.
41N094010, as Lessor, and XCD, Inc., a California corporation, as Lessee
dated March 1, 1998 ("Addendum"), is incorporated into the attached Standard
Industrial/Commercial Single-Tenant Lease-Net by and between Lessor and
Lessee and dated March 1, 1998 (the "Lease"). Unless defined in this
Addendum, all words commencing with initial capital letters in this Addendum
shall have the same meaning prescribed to such words in the Lease. This
Addendum and the Lease are herein collectively referred to as this Lease.
48. ABATEMENT OF BASE RENT. Notwithstanding any other term or provision of
this Lease and provided Lessee is not in default pursuant to any term or
provision of this Lease, Lessee shall not be required to pay Base Rent for the
months of May and June of 1998.
49. ADJUSTMENT OF BASE RENT. Base Rent shall be increased, but never decreased,
effective as of April 1, 1999 and each April 1 thereafter during the Original
Term (collectively "Adjustment Date"), in accordance with percentage increase,
if any, in the Consumer Price Index (All Urban Consumers) (Los
Angeles-Anaheim-Riverside Consolidated Metropolitan Statistical Area;
1982-1984=100) (the "Index"), as published by the United States Department of
Labor, Bureau of Labor Statistics. The Index for the month that is two (2)
months prior to each Adjustment Date ("Comparison Month") will be compared
with the Index for the Comparison Month for the immediately preceding year
and monthly Base Rent will be increased on each Adjustment Date in accordance
with the percentage increase, if any, between such Comparison Month indices.
Notwithstanding the foregoing, in no event shall Base Rent increase by less
than four percent (4%) or by more than seven percent (7%) of the Base Rent
immediately in effect prior to each Adjustment Date.
By way of illustration only, as to the Base Rent adjustment that is to
occur on April 1, 1999, the initial Comparison Month Index would be that for
January 1999 (assume such Index at 130) which shall be compared with the Index
for January 1998 (assume such Index at 136), and because the Index for January
1999 is 4.6% higher than the Index for January 1998, based on the assumptions of
136 and 130, respectively, monthly Base Rent commencing as of April 1, 1999,
would be 4.6% higher than the installment of monthly Base Rent for the month of
March 1999; likewise, on April 1, 2000, the Index for January 2000 shall be
compared with the Index for January 1999, and the April 1, 2000, installment of
monthly Base Rent shall be adjusted accordingly. Should the Bureau of Labor
Statistics discontinue the publication of the Index, publish the Index less
frequently or alter the Index in some other manner, then Lessor shall adopt a
substitute Index or substitute procedure, which reasonably reflects and monitors
consumer prices.
1
<PAGE>
50. TENANT IMPROVEMENTS. Except as expressly provided in this Lease to the
contrary, Lessee acknowledges and agrees Lessor shall have no responsibility to
perform any improvements to the Premises, which Lessee agrees to accept in its
current and "as is" condition. Notwithstanding the foregoing, Lessor agrees to
reimburse Lessee the maximum amount of Twenty Thousand Dollars ($20,000.00) for
improvements performed to the Premises by Lessee. Lessor shall have no
obligation to reimburse Lessee the cost of any improvements to the Premises,
unless Lessee provides Lessor with the plans and specifications for the
improvements and obtains Lessor's prior written consent to the performance of
such improvements, which shall not be unreasonably withheld or delayed. In
addition, reimbursement shall be conditioned upon Lessee providing Lessor with
all information reasonably requested by Lessor, including, without limitation,
detailed invoices for the work performed, canceled checks and lien releases from
all contractors and suppliers that performed the work or provided materials for
which reimbursement is being sought. In addition, Lessee shall comply with all
the terms and provisions of this Lease relating to the improvement or alteration
of the Premises. Lessee acknowledges and agrees that upon the termination of
this Lease, if requested by Lessor, Lessee shall replace any drop ceilings
removed by Lessee.
51. SIGNS. Lessee shall be entitled, at Lessee's sole cost and expense, to
erect signage on the Premises, subject to all applicable laws, rules and
regulations. Lessee covenants and agrees, at the termination of this Lease, to
remove Lessee's signs and to repair any damage to the Premises caused by such
removal.
CK KAL KS
- ----------------- -----------------
Lessor's Initials Lessee's Initials
2
<PAGE>
52. PARKING. Lessee shall have the exclusive use of all parking on the
Premises during the term of this Lease, at no additional cost.
53. AMERICANS WITH DISABILITIES ACT. Lessee acknowledges and agrees,
notwithstanding any term or provision of this Lease or California law to the
contrary, Lessee shall be solely responsible, at Lessee's cost and expense, to
perform any improvements or alterations to the Premises required by the
Americans With Disabilities Act.
54. EXCULPATION OF LESSOR. Notwithstanding any other provision of this Lease,
Lessor shall not have any personal liability hereunder. If Lessor shall fail to
perform any covenant, term or condition of this Lease upon Lessor's part to be
performed, and if as a consequence of such default Lessee shall recover a money
judgment against Lessor, such judgment shall be satisfied only out of the net
income received by Lessor from the Premises (after payment of taxes, insurance,
maintenance and debt service). Lessee acknowledges that the obligations of
Lessor under this Lease do not constitute the personal obligations of Lessor or
the trusts of which Lessor is the trustee (collectively the "Trust") and, except
for the net income from the Premises, no other assets of Lessor or the Trust
shall be subject to recourse for the satisfaction of any liability arising from
or in connection with this Lease.
55. TERMINATION. If Lessor has not executed and delivered this Lease to Lessee
within three (3) business days from the date Lessor receives this Lease executed
by Lessee, Lessee shall have the right to terminate this Lease by delivering
written notice to Lessor. Upon Lessor's execution and delivery of this Lease to
Lessee, Lessee shall immediately pay to Lessor the Security Deposit and Base
Rent for April 1998. Lessee shall have no right to possession of the Premises
unless and until Lessee has paid the foregoing amounts to Lessor.
56. NO MODIFICATION OF THIS LEASE. Except as expressly provided in this
Addendum, the preprinted form portion of this Lease shall remain in full force
and effect and unmodified. In the event of a conflict between the terms and
provisions of the preprinted form portion of this Lease and this Addendum, the
terms and provisions of this Addendum shall control.
[ADDENDUM CONTINUES ON THE NEXT PAGE]
CK KAL KS
- ----------------- -----------------
Lessor's Initials Lessee's Initials
3
<PAGE>
57. LESSOR'S INSURANCE. Notwithstanding any term or provision of this Lease
to the contrary, Lessor shall provide Lessee with a certificate of insurance,
naming Lessee as an additional insured on the blanket general liability
insurance policy maintained by Lessor, from time to time, in the minimum
amount of $2,000,000. Lessor covenants and agrees to maintain, throughout the
term of this Lease, the insurance provided for in this Paragraph 57.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum to be
effective concurrent with the date of this Lease.
LESSEE
LESSOR
SANWA BANK CALIFORNIA, XCD, INC.,
a California corporation, as Trustee of a California corporation
the SUZANNE PATHE TRUST, for the
Benefit of GEORGES PATHE, TRUST No.
41N093004 and the ARTHUR PATHE TRUST,
for the Benefit of GEORGES PATHE, TRUST
No. 41N094010
By: /s/ Cheryl Kelley By: /s/ Keith Sugawara
--------------------- -----------------------
Its: Vice President Its: President
-------------- -------------------
By: /s/ Kelly Ann Laghaei By:
--------------------- -----------------------
Its: Vice President Its:
-------------- -------------------
* It is understood and mutually agreed that Lessor in executing this Addendum,
as Lessor, is acting in a fiduciary capacity and Lessor shall not be liable
hereunder directly or indirectly in its individual capacity, the rights and
claims of Lessee hereunder are and shall be limited exclusively to such rights
as Lessee may have against Lessor in its fiduciary capacity and recourse by
Lessee shall be limited to recourse against the assets of the particular
trust(s) or estate(s) involved. It is further understood and agreed that in the
event the fiduciary relationship shall terminate or in the event Lessor shall be
discharged of its fiduciary capacity, Lessee shall have no claim against Lessor
on account of such termination or discharge.
4
<PAGE>
CONSENT TO ASSIGNMENT OF LEASE, ASSIGNMENT AND ACCEPTANCE
THIS CONSENT TO ASSIGNMENT OF LEASE, ASSIGNMENT AND ACCEPTANCE
("Agreement") made and entered into as of this 23rd day of October, 1998 (the
"Effective Date"), by and among SANWA BANK CALIFORNIA, a California corporation,
as Trustee of the Suzanne Pathe Trust, for the Benefit of Georges Pathe, Trust
No. 4 1N093004 and the Arthur Pathe Trust, for the Benefit of Georges Pathe,
Trust No. 51N094010 ("Lessor"), XCD, INC., a California corporation
("Assignor"), and TROY XCD, INC., a Delaware corporation ("Assignee").
RECITALS
A. Lessor, as lessor, and Assignor, as lessee, entered into that certain
Standard Industrial/Commercial Single-Tenant Lease - Net dated on or about March
1, 1998 (the "Lease"), pursuant to which Lessor leased to Assignor the improved
real property located in the City of Irvine, County of Orange, State of
California and commonly known as 1692 Browning (the "Premises").
B. Assignor desires to assign to Assignee all of the interests, rights
and obligations of Assignor or pursuant to the Lease and Assignee desires to
assume all interests, rights and obligations of Assignor under the Lease.
C. Lessor has agreed to consent to assignment of the Lease by Assignor or
to Assignee, pursuant to the terms of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises set forth herein
and other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Assignor and Assignee agree as follows.
1. ASSIGNMENT OF THE LEASE. As of the Effective Date, Assignor hereby
assigns all of the interests, rights and obligations under the Lease to
Assignee, pursuant to the provisions of this Agreement.
2. ACCEPTANCE OF THE LEASE. In connection with the foregoing assignment,
Assignee hereby accepts the assignment of all of the interests, rights and
obligations of Assignor under the Lease, pursuant to the provisions of this
Agreement. Assignee, on behalf of Assignee and the successors and assigns of
Assignee, hereby agrees to be bound by and perform and abide by all of the
terms, covenants and conditions of the Lease.
3. LESSOR'S CONSENT TO ASSIGNMENT. Lessor hereby consents and agrees to
the assignment of the Lease by Assignor to Assignee, pursuant to the provisions
of this Agreement. Notwithstanding the foregoing, nothing in this Agreement
shall be construed as releasing Assignee from any obligation or liability under
the Lease. In addition, nothing in this Agreement shall be construed as the
consent of Lessor to an assignment of this Lease by Assignee.
1
<PAGE>
4. NO MODIFICATION. Lessor, Assignor and Assignee acknowledge and agree,
except as expressly provided to the contrary in this Agreement, the Lease shall
remain in full force and effect and unmodified.
5. GENERAL PROVISIONS.
5.1 NOTICES. All notices or other communications required or
permitted hereunder shall be in writing, and shall be personally delivered or
sent by registered or certified mail, postage prepaid, return receipt requested,
telegraphed, delivered or sent by facsimile, telex, telecopy or cable and shall
be deemed received upon the earlier of: (a) if personally delivered, the date of
delivery to the address of the person to receive such notice; (b) if mailed,
four (4) business days after the date of posting by the United States post
office; (c) if given by telegraph or cable, when delivered to the telegraph
company with charges prepaid; or (d) if given by facsimile, telex or telecopy,
when sent. Any notice, request, demand, direction or other communication sent by
cable, facsimile, telex or telecopy must be confirmed within forty-eight (48)
hours by letter mailed or delivered in accordance with the foregoing.
Lessor: SANWA BANK CALIFORNIA
Sanwa Trust & Investment
4400 MacArthur Boulevard, Suite 240
Newport Beach, California 92660
Attention: Ms. Cheryl Kelley
Facsimile: (949) 476-2321
Assignor: XCD, INC.
1692 Browning
Irvine, California 92606
Attention: Mr. Keith Sugawara
Facsimile: (949) 399-0825
Assignee: TROY XCD, INC.
1692 Browning
Irvine, California 92606
Attention: Mr. Keith Sugawara
Facsimile: (949) 399-0825
Notice of change of address shall be given by written notice in the manner
detailed in this Paragraph. Rejection or other refusal to accept or the
inability to deliver because of changed address of which no notice was given
shall be deemed to constitute receipt of the notice, demand, request or
communication sent.
5.2 ENTIRE AGREEMENT. This Agreement contains the entire agreement
among Lessor, Assignor and Assignee relating to the subject matter hereof and no
addition to or modification of any term or provisions of this Agreement shall be
effective unless set forth in writing, signed by all of the parties hereto.
5.3 RECITALS. The recitals of this Agreement are deemed to be part of
this Agreement.
5.4 SEVERABILITY. If any term, covenant, condition or provision of
this Agreement, or the application thereof to any person or circumstance, shall
to any extent be held by a court of competent
2
<PAGE>
jurisdiction to be invalid, void or unenforceable, the remainder of the
terms, covenants, conditions or provisions of this Agreement, or the
application thereof to any person or circumstance, shall remain in full force
and effect and shall in
5.5 ATTORNEY FEES. If any party to this Agreement shall bring any
action or proceeding against any other party arising out of or relating to this
Agreement, the prevailing party(ies) in such action shall be entitled to receive
from the nonprevailing party(ies) reasonable attorney's fees and costs incurred
in connection therewith, including the costs of reasonable investigation,
preparation and professional or expert consultation incurred by reason of such
litigation.
5.6 AUTHORITY. Each party represents and warrants it has full power
and authority to execute this Agreement and perform their respective obligations
pursuant to this Agreement and the Lease. Furthermore, the persons executing
this Agreement have been duly authorized and empowered to execute this Agreement
on behalf of such party. Upon request, the parties agree to immediately provide
each other with any resolutions or documents confirming the representations
contained in this Section 5.6.
5.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument. Notwithstanding the
foregoing, this Agreement shall not be binding on any party until Lessor,
Assignor and Assignee have each executed counterparts of this Agreement and
delivered one (1) executed original counterpart to each of the other parties.
3
<PAGE>
Lessor, Assignor and Assignee have caused this Agreement to be executed by
their duly authorized representatives to be effective as of the Effective Date.
LESSOR ASSIGNOR
SANWA BANK CALIFORNIA, a California XCD, INC., a
corporation, as Trustee of the Suzanne California corporation
Pathe Trust, for the Benefit of Georges
Pathe, Trust No. 41N093004, and the
Arthur Pathe Trust, for the Benefit of
Georges Pathe, Trust No. 51N094010
By: /s/ Cheryl Kelley By: /s/ Keith Sugawara
--------------------- -----------------------
Its: Vice President Its: President
-------------- -------------------
By: /s/ Don R. Souce By:
--------------------- -----------------------
Its: Vice President Its:
-------------- -------------------
ASSIGNEE
TROY XCD, INC., a
Delaware corporation
By: /s/ Keith Sugawara
-----------------------
Its: President
-------------------
By:
-----------------------
Its:
-------------------
4
<PAGE>
IT IS UNLAWFUL TO CONSUMMATE A SALE
OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE
ANY CONSIDERATION THEREFORE,
WITHOUT PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF
THE STATE OF CALIFORNIA, EXCEPT AS
PERMITTED IN THE COMMISSIONER'S
RULES.
INCENTIVE STOCK OPTION
AGREEMENT
ROBERT MESSINA, Optionee:
Troy Systems Inc. (the "Company"), pursuant to its 1996 Stock Option Plan
("The Plan"), has this day granted to you the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This option
is intended to qualify as an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
This option is granted to you solely in order to incentivise you as a
senior executive in the Company to exert your maximum efforts to position the
Company (hopefully within thirty-six (36) months after the date of this
option) either for a sale of more than fifty-one percent (51%) of the issued
and outstanding shares of the Company's voting Common Stock on terms
satisfactory to the Board of Directors and the Shareholders of the Company,
in their respective sole discretions, or for a conversion of the Company to a
public Company, as determined by the Board of Directors and Shareholders of
the Company in their respective sole discretions. Anything herein to the
contrary notwithstanding, this option shall not vest any beneficial or legal
rights in you as an Optionee with respect to the Company's stock until the
sale of more than fifty-one (51%) percent of the issued and outstanding shares
of the Company' s voting Common stock or until the conversion of the Company
to a public Company. The Company makes no representation that any such sale
or conversion will ever take place. The grant hereunder is intended to comply
with the provisions of Rule 701 promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"). The
Board of Directors of the Company may decide to grant vested legal and
beneficial status to the options granted in this Agreement in the event of a
substantial recapitalization of the Company.
The details of your option are as follows:
<PAGE>
1. The total number of shares of Common Stock subject to this option is
two hundred sixty-nine (269). Subject to the limitations contained herein, this
option shall be one hundred percent exercisable after the date of vesting as
described above.
2. (a) The exercise price of this option is Three Hundred Seventy-One
Dollars and Forty-Three Cent ($371.43) per share, being not less than the fair
market value of the Common Stock on the date of grant of this option.
(b) The Company may, at the discretion of the Board of Directors,
permit financing with respect to the payment of the exercise price.
3. The minimum number of shares with respect to which this option may be
exercised at any one time is one hundred (100).
4. Notwithstanding anything to the contrary contained herein, this option
may not be exercised unless the shares issuable upon exercise of this option are
then registered under the Act, or, if such shares are not then so registered,
the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Act.
5. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below or in the Plan, terminates on November 25,
2006 (which date shall be no more than ten (10) years from date this option is
granted). In no event may this option be exercised on or after the date on which
it terminates. This option shall terminate prior to the expiration of its term
as follows thirty (30) days after the termination of your employment with the
Company or an affiliate of the Company (as defined in the Plan) for any reason
or for no reason unless:
(a) such termination of employment is due to your permanent and total
disability (within the meaning of Section 422 (c) (6) of the Code), in which
event the option shall terminate on the earlier of the termination date set
forth above or twelve (12) months following such permanent and total disability;
or
(b) such termination of employment is due to your death, in which
event the option shall terminate on the earlier of the termination date set
forth above or twelve (12) months after your death; or
(c) during any part of such thirty (30) day period the option is not
exercisable solely because of the condition set forth in paragraph 4 above, in
which event the option shall not terminate until the earlier of the termination
date set forth above or until it shall have been exercisable for an aggregate
period of thirty (30) days after the termination of employment; or
(d) exercise of the option within thirty (30) days after termination
of your employment with the Company or with an affiliate would result in
liability under section 16 (b) of the Securities Exchange Act of 1934, in which
case the option will terminate on the earlier of (i) the thirtieth (30th) day
after the last date upon which exercise would result in such liability or (ii)
2
<PAGE>
six (6) months and thirty (30) days after the termination of your employment
with the Company or an Affiliate.
However this option may be exercised following termination 9f employment only as
to that number as shares as to which it was exercisable on the date of
termination of employment under the provisions of paragraph 1 of this option.
6. (A) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to subparagraph
6(f) of the Plan.
(B) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (1) the exercise of this option;
(2) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise; or (3) the disposition of shares acquired upon
such exercise;
(ii) you will notify the Company in writing within fifteen
(15) days after the date of any disposition of any of the shares of the Common
Stock issued upon exercise of this option that occurs within two (2) years after
the date of this option grant or within one (1) year after such shares of Common
stock are transferred upon exercise of this option; and
(iii) the Company (or a representative of the underwriters)
may, in connection with the first underwritten registration of the offering of
any securities of the Company under the Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date (the "Effective Date") of the registration
statement of the Company filed under the Act as may be requested by the Company
or the representative of the underwriters; provided, however, that such
restriction shall apply only if, on the Effective Date, you are an officer,
director, or owner of more than one percent (1%) of the outstanding securities
of the Company. For purposes of this restriction you will be deemed to own
securities which (i) are owned directly or indirectly by you, including
securities held for your benefit by nominees, custodians, brokers or pledgees;
(ii) may be acquired by you within sixty (60) days of the Effective Date; (iii)
are owned directly or indirectly, by or for your brothers or sisters (whether by
whole or half blood) spouse, ancestors and lineal descendants; or (iv) are
owned, directly or indirectly, by or for a corporation, partnership, estate or
trust of which you are a shareholder, partner or beneficiary, but only to the
extent of your proportionate interest therein as a shareholder, partner or
beneficiary thereof. You further agree that the Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
3
<PAGE>
7. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.
8. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company.
9. Any notices provided for in this option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the address specified
below or at such other address as you hereafter designate by written notice to
the Company.
10. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated the 27th day of November, 1996.
Very truly yours,
By /s/ Patrick J. Dirk
--------------------------------
President
Duly authorized on behalf of the
Board of Directors
4
<PAGE>
OPTIONEE RECEIPT
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments below
and understands that all rights and liabilities with respect to this option are
set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of a certain non-competition agreement.
(c) Acknowledges receipt of a copy of Section 260.141.11 of Title 10 of
the California Code of Regulations;
/s/ Robert S. Messina
------------------------------
ROBERT MESSINA
Attachments:
TROY SYSTEMS INC. 1996 Stock Option Plan
Regulation 260.141.11
5
<PAGE>
CONFORMING AMENDMENT TO
INCENTIVE STOCK OPTION AGREEMENT
The Incentive Stock Option Agreement issued to Robert Messina on
November 27, 1996 (the "Agreement"), is hereby amended as follows:
The second sentence in the second paragraph of the first page of
the Agreement shall be changed to read as follows:
"Anything herein to the contrary notwithstanding, this option
shall not vest any beneficial or legal rights in you as an Optionee
with respect to the Company's stock until November 24, 2006 or
until the earlier of either the sale of more than fifty-one (51%)
percent of the issued and outstanding shares of the Company's
voting Common stock or the conversion of the Company to a public
Company."
AGREED: February 6, 1998 TROY SYSTEMS INC.
By: /s/ Patrick J. Dirk
-----------------------------
Patrick J. Dirk, Chairman
/s/ Robert Messina
-----------------------------
Robert Messina
<PAGE>
IT IS UNLAWFUL TO CONSUMMATE A SALE OR
TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
INCENTIVE STOCK OPTION
AGREEMENT
BRIAN DIRK, Optionee:
Troy Systems Inc. (the 'Company"), pursuant to its 1996 Stock Option Plan
("The Plan"), has this day granted to you, the optionee named above, an option
to purchase shares of the common stock of the Company ("Common Stock"). This
option is intended to qualify as an "incentive stock option" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
This option is granted to you solely in order to incentivise you as a
senior executive in the Company to exert your maximum efforts to position the
Company within thirty-six (36) months after the date of this option either for a
sale of more than fifty-one percent (51%) of the issued and outstanding shares
of the Company's voting Common Stock on terms satisfactory to the Board of
Directors and the Shareholders of the Company, in their respective sole
discretions, or for a conversion of the Company to a public Company, as
determined by the Board of Directors and Shareholders of the Company in their
respective sole discretions. Anything herein to the contrary notwithstanding,
this option shall not vest any beneficial or legal rights in you as an Optionee
with respect to the Company's stock until the sale of more than fifty-one (51%)
percent of the issued and outstanding shares of the Company's voting Common
stock or until the conversion of the Company to a public Company. The Company
makes no representation that any such sale or conversion will ever take place.
The grant hereunder is intended to comply with the provisions of Rule 701
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act").
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
ninety (90). Subject to the limitations contained herein, this option shall be
one hundred percent exercisable after the date of vesting as described above.
<PAGE>
2. (a) The exercise price of this option is Four Hundred Eight Dollars
and Fifty-Six Cents ($408.56) per share, being not less than the fair market
value of the Common Stock on the date of grant of this option.
(b) The Company may, at the discretion of the Board of Directors,
permit financing with respect to the payment of the exercise price.
3. The minimum number of shares with respect to which this option may be
exercised at any one time is ten (10).
4. Notwithstanding anything to the contrary contained herein, this option
may not be exercised unless the shares issuable upon exercise of this option are
then registered under the Act, or, if such shares are not then so registered,
the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Act.
5. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below or in the Plan, terminates on November 25,
2001 (which date shall be no more than ten (10) years from date this option is
granted). In no event may this option be exercised on' or after the date on
which it terminates. This option shall terminate prior to the expiration of its
term as follows thirty (30) days after the termination of your employment with
the Company or an affiliate of the Company (as defined in the Plan) for any
reason or for no reason unless:
(a) such termination of employment is due to your permanent and total
disability (within the meaning of Section 422 (c) (6) of the Code), in which
event the option shall terminate on the earlier of the termination date set
forth above or twelve (12) months following such termination of employment; or
(b) such termination of employment is due to your death, in which
event the option shall terminate on the earlier of the termination date set
forth above or twelve (12) months after your death; or
(c) during any part of such thirty (30) day period the option is not
exercisable solely because of the condition set forth in paragraph 4 above, in
which event the option shall not terminate until the earlier of the termination
date set forth above or until it shall have been exercisable for an aggregate
period of thirty (30) days after the termination of employment; or
(d) exercise of the option within thirty (30) days after termination
of your employment with the Company or with an affiliate would result in
liability under section 16 (b) of the Securities Exchange Act of 1934, in which
case the option will terminate on the earlier of (i) the tenth (10th) day after
the last date upon which exercise would result in such liability or (ii) six (6)
months and ten (10) days after the termination of your employment with the
Company or an Affiliate.
<PAGE>
However this option may be exercised following termination of employment only as
to that number as shares as to which it was exercisable on the date of
termination of employment under the provisions of paragraph 1 of this option.
6. (A) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to subparagraph
6(f) of the Plan.
(B) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (1) the exercise of this option;
(2) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise; or (3) the disposition of shares acquired upon
such exercise;
(ii) you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of this option that occurs within two (2) years after the
date of this option grant or within one (1) year after such shares of Common
stock are transferred upon exercise of this option; and
(iii) the Company (or a representative of the underwriters) may,
in connection with the first underwritten registration of the offering of any
securities of the Company under the Act, require that you not sell or otherwise
transfer or dispose of any shares of Common Stock or other securities of the
Company during such period (not to exceed one hundred eighty (180) days)
following the effective date (the "Effective Date") of the registration
statement of the Company filed under the Act as may be requested by the Company
or the representative of the underwriters; provided, however, that such
restriction shall apply only if, on the Effective Date, you are an officer,
director, or owner of more than one percent (1%) of the outstanding securities
of the Company. For purposes of this restriction you will be deemed to own
securities which (i) are owned directly or indirectly by you, including
securities held for your benefit by nominees, custodians, brokers or pledgees;
(ii) may be acquired by you within sixty (60) days of the Effective Date; (iii)
are owned directly or indirectly, by or for your brothers or sisters (whether by
whole or half blood) spouse, ancestors and lineal descendants; or (iv) are
owned, directly or indirectly, by or for a corporation, partnership, estate or
trust of which you are a shareholder, partner or beneficiary, but only to the
extent of your proportionate interest therein as a shareholder, partner or
beneficiary thereof. You further agree that the Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
7. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.
<PAGE>
8. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company.
9. Any notices provided for in this option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the address specified
below or at such other address as you hereafter designate by written notice to
the Company.
10. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated the 27th day of November, 1996.
Very truly yours,
By /s/ Patrick J. Dirk
--------------------------------
President
Duly authorized on behalf of the
Board of Directors
<PAGE>
OPTIONEE RECEIPT
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments below
and understands that all rights and liabilities with respect to this option are
set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of a certain non-competition agreement.
(c) Acknowledges receipt of a copy of Section 260.141.11 of Title 10 of
the California Code of Regulations;
/s/ Brian P. Dirk
-----------------------------------
BRIAN DIRK
Attachments:
TROY SYSTEMS INC. 1996 Stock Option Plan
Regulation 260.141.11
<PAGE>
CONFORMING AMENDMENT TO
INCENTIVE STOCK OPTION AGREEMENT
The Incentive Stock Option Agreement issued to Brian Dirk on November 27,
1996 (the "Agreement"), is hereby amended as follows:
The second sentence in the second paragraph of the first page of
the Agreement shall be changed to read as follows:
"Anything herein to the contrary notwithstanding, this option
shall not vest any beneficial or legal rights in you as an Optionee
with respect to the Company's stock until November 24, 2001 or
until the earlier of either the sale of more than fifty-one (51%)
percent of the issued and outstanding shares of the Company's
voting Common stock or the conversion of the Company to a public
Company."
AGREED: February 6, 1998 TROY SYSTEMS INC.
By: /s/ Patrick J. Dirk
-----------------------------
Patrick J. Dirk, Chairman
/s/ Brian Dirk
-----------------------------
Brian Dirk
<PAGE>
RESTATED CONSULTING AGREEMENT
REFLECTING AMENDMENTS AS OF
DECEMBER 30, 1998 AND JUNE 8, 1999
SECOND AMENDMENT made as of June 8, 1999 to the Agreement dated as of
October 1, 1997 (the "Agreement") and amended as of December 30, 1998 between
Broadland Capital Partners ("Broadland") having an office at 13000 Sawgrass
Village Circle, Ponte Verda Beach, Florida 32004 and Troy Systems Inc. (the
"Company") having an office at 2331 South Pullman Street, Santa Ana, California
92705 as follows: The Agreement remains in full force and effect, effective as
of October 1, 1997, subject to the limited changes to the preamble and Sections
1 through 3 as restated below:
WHEREAS, in entering into this Agreement, the Company intends to enhance
its ability greatly to achieve three important corporate goals (collectively
hereinafter referred to as the "Goals") as follows:
(a) to become a publicly owned company either through an initial public
offering of shares or a merger with an already public entity, (or
otherwise) by November 30, 2001 (the "First Goal");
(b) (this Second Goal is deleted); and
(c) from September 1998 and until November 30, 2001, to use its shares as
consideration for the acquisition of entities having an aggregate
annual revenue of Fifteen Million Dollars ($15,000,000) (the "Third
Goal").
WHEREAS, Broadland, through its principal, Morgan Payne, has the
capability and experience to significantly contribute to the achievement of the
Company's Goals:
WHEREAS, in view of such capability and experience, the Company wishes to
engage the services of Broadland, and, therefore, through Broadland its
principal, Morgan Payne, upon the following terms and conditions:
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged by the parties hereto, Broadland and
the Company agree as follows:
1. Broadland, through its principal, Morgan Payne, will provide
the following services (the "Services") to the Company and its
Chief Executive Officer.
SERVICES
- Assist the Chief Executive Officer with the completion of the
Company's five-year Strategic (Equity) Plan. (Taking the Business
Plan and developing an appropriate Equity Plan to maximize the value
of the Company's Market Value.)
- Identify and assist the Chief Executive Officer in the selection of
appropriate investment banking firms.
- Assist the Chief Executive Officer with the IPO Project Management
Process.
<PAGE>
- Introduce additional market makers and research analysts subsequent to
the IPO.
- Assist the Chief Executive Officer with selection of, the building of
relationships, and the negotiations with potential acquisitions.
- Continue other services as requested by the Chief Executive Officer.
2. COMPENSATION TO BROADLAND FOR THE SERVICES:
(a) Beginning December 1, 1998 and until November 30, 2001, Broadland (in
exchange for the above-described services of Morgan Payne) shall
receive a monthly fee, payable on the first day of each month, of
Three Thousand Five Hundred Dollars ($3,500) together with
reimbursement of out-of-pocket expenses (hotel, airfare, etc.)
approved in writing in advance by the Chief Executive Officer of the
Company. This Agreement as well as said fee may be canceled upon
thirty (30) days written notice by the Company to Broadland at any
time in the Company's sole discretion.
(b) WARRANTS
(i) The text of section 2(b)(i) is hereby deleted and replaced
with the following:
"In addition to the monthly advisory fee, warrants, in the
form of Exhibit A attached hereto (the "Warrants") to
purchase shares of the Company's common stock at $3.50 per
share (or the IPO price with respect to warrants that vest
upon completion of the IPO, as described below). Neither
Broadland nor Morgan Payne shall have any beneficial or
legal interest in shares of the Company until any such
Warrants are exercised and shares are purchased thereunder."
(ii) NUMBER OF WARRANTS: The Warrants shall grant Broadland the
right to purchase up to 250,000 shares of the Company's common
stock at the Warrant Price.
(iii) THE WARRANTS SHALL VEST AS FOLLOWS: Warrants to Purchase
250,000 shares of Troy Common Stock shall be vested and
exercisable as follows:
<TABLE>
<CAPTION>
Warrants Exercise Price Vesting
-------- -------------- -------
<S> <C> <C>
50,000 At IPO Price At the completion of the IPO
50,000 $3.50/Share At Closing of XCD acquisition
50,000 $3.50/Share At Closing of Telgate acquisition
50,000 $3.50/Share At Closing of major or strategic acquisition
25,000 $3.50/Share At Closing of minor or strategic acquisition
10,000 $3.50/Share At Closing of minor acquisition
15,000 $3.50/Share Other acquisition projects as negotiated
</TABLE>
2
<PAGE>
(iv) The Warrants must be exercised within five (5) years after
they vest or, thereafter, they shall expire and become null
and void.
3. TERM:
After the date that the Company first becomes a publicly owned
entity, this Agreement shall terminate automatically upon the
first to occur of the following:
(a) The date November 30, 2001;
(b) if Broadland ceases to provide the Company with the
services of Morgan Payne;
(c) the death of Morgan Payne; or
(d) the commencement of the permanent disability of Morgan
Payne.
For purposes of the foregoing, the term "permanent disability"
shall mean the inability of Morgan Payne due to illness,
accident or any other physical or mental impairment to perform
his duties hereunder (which include limited and reasonable
services requested by the Company) in a normal manner for a
period of three (3) months, whether or not consecutive, in any
twelve (12) month period during the term of this Agreement.
Warrants which shall have vested shall be exercisable by
Morgan Payne or in the event of his death by the estate or
heirs of Morgan Payne, despite the termination of this
Agreement. Upon the termination of this Agreement, any
Warrants remaining unvested shall expire and become null and
void.
4. INDEPENDENT CONTRACTOR:
The Company and Broadland agree and acknowledge that in the
performance of this Agreement, or any part thereof, Broadland
and Morgan Payne shall together act as an independent
contractor and not as the agent, servant, employee or
representative of the Company. No other direction or control,
except as specifically set forth herein, shall be exercised by
the Company over the performance of the work of Broadland or
Morgan Payne. Neither Broadland nor Morgan Payne shall have
any right in, or claims to, any Company employee benefits and
neither is a Company employee. Except as authorized in
advance by the Chief Executive Officer of the Company, neither
Broadland nor Morgan Payne shall have any authority to bind or
obligate the Company in any manner, nor shall Broadland or
Morgan Payne commence negotiations on behalf of the Company
with any third party.
3
<PAGE>
5. NON ASSIGNMENT:
Broadland may not assign its rights or delegate its duties
under this Agreement without the prior written consent of the
Chief Executive Officer of the Company and any assignment or
delegation in contravention of this obligation shall be void.
6. DISCLOSURES:
Neither Broadland nor Morgan Payne shall disclose to any one
outside of the Company nor use for any purpose other than the
business of the Company, any confidential information,
inventions, trade secrets, or materials, without first
obtaining the written permission of the Chief Executive
Officer of the Company during the term of this Agreement and
at all times thereafter.
7. MISCELLANEOUS:
This Agreement contains the entire understanding of the
parties, and there are no representations, warranties,
promises, covenants or agreements except as specifically set
forth herein.
8. GOVERNING LAW:
This Agreement shall be governed by, and construed and
enforced in accordance with the laws of the State of
California without regard to its conflict of law rules. The
parties hereby agree to submit themselves to the exclusive
jurisdiction and venue of the Superior Court of Orange County
with respect to any dispute or interpretation arising out of
or in connection with this Agreement.
Broadland Capital Partners Troy Group, Inc. (successor to Troy
Systems, Inc.)
BY: BY:
----------------------------- -----------------------------
Morgan Payne, President Patrick J. Dirk, Chairman and
Chief Executive Officer
- --------------------------------
Morgan Payne, Individually
4
<PAGE>
SECOND AMENDMENT
TO
CONSULTING AGREEMENT
The Consulting Agreement made as of October 1, 1997 ("Agreement")
between Broadland Capital Partners ("Broadland") and Troy Systems, Inc.
("Company"), as amended as of December 30, 1998, is further amended as follows:
The text of Section 2(b)(i) is hereby deleted and replaced with
the following: "In addition to the monthly advisory fee,
warrants, in the form of Exhibit A attached hereto (the
"Warrants") to purchase shares of the Company's common stock at
$3.50 per share (or the IPO price with respect to warrants that
vest upon completion of the IPO, as described below). Neither
Broadland nor Morgan Payne shall have any beneficial or legal
interest in shares of the Company until any such Warrants are
exercised and shares are purchased thereunder."
The test of Section 2(b)(ii) is hereby deleted and replaced
with the following: "NUMBER OF WARRANTS: The Warrants shall
grant Broadland the right to purchase up to 250,000 shares of
the Company's stock at the Warrant Price."
Section 2(b)(iii), (a),(b), (c) and (d) are hereby deleted and
replaced with the following:
(iii) THE WARRANTS SHALL VEST AS FOLLOWS:
Warrants to Purchase 250,000 shares of Troy Common Stock
shall be vested and exercisable as follows:
<TABLE>
<CAPTION>
Warrants Exercise Price Vesting
-------- -------------- -------
<S> <C> <C>
50,000 At IPO Price At the completion of the IPO
50,000 $3.50/Share At Closing of XCD acquisition
50,000 $3.50/Share At Closing of Telgate acquisition
50,000 $3.50/Share At Closing of major or strategic acquisition
25,000 $3.50/Share At Closing of minor or strategic acquisition
10,000 $3.50/Share At Closing of minor acquisition
15,000 $3.50/Share Other acquisition projects as negotiated
</TABLE>
Conforming changes shall be made to the Form of Warrant
attached to the Agreement.
This Amendment is reflected in the attached Restated Consulting
Agreement and the attached first and second pages of the attached Warrant.
<PAGE>
This Amendment is made as of June 8, 1999.
Broadland Capital Partners Troy Group, Inc. (successor to Troy
Systems, Inc.)
BY: BY:
----------------------------- -----------------------------
Morgan Payne, President Patrick J. Dirk, Chairman and
Chief Executive Officer
- --------------------------------
Morgan Payne, Individually
<PAGE>
ComericA
LOAN & SECURITY AGREEMENT
(ACCOUNTS AND INVENTORY)
<TABLE>
- --------------------------------------------------------------------------------
OBLIGOR # NOTE # AGREEMENT DATE
October 20, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CREDIT LIMIT INTEREST RATE OFFICER NO./INITIALS
$5,000,000.00 B- 0.250% 48653, Barbara D'Amato
- --------------------------------------------------------------------------------
</TABLE>
THIS AGREEMENT is entered into on October 20, 1998, between Comerica
Bank-California ("Bank") as secured party, whose Headquarter Office is 333
West Santa Clara Street, San Jose, CA and Troy Group, Inc., Troy Systems
International, Inc. and Troy XCD, Inc. ("Borrower"), a Corporation whose solo
place of business (if it has only one), chief executive office (if it has
more than one place of business) or residence (if an individual) is located
at 2331 S. Pullman Street, Santa Ana, CA. The parties agree as follows:
1. DEFINITIONS
1.1 "Agreement" as used in this Agreement means and includes this Loan
& Security Agreement (Accounts and Inventory), any concurrent or subsequent
rider to this Loan & Security Agreement (Accounts and Inventory) and any
extensions, supplements, amendments or modifications to this Loan & Security
Agreement (Accounts and Inventory) and to any such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes: all
costs or expenses required to be paid by Borrower under this Agreement which are
paid or advanced by Bank; taxes and insurance premiums of every nature and kind
of Borrower paid by Bank; filing, recording, publication and search fees,
appraiser fees, auditor fees and costs, and title insurance premiums paid or
incurred by Bank in connection with Bank's transactions with Borrower; costs and
expenses incurred by Bank in collecting the Receivables (with or without suit)
to correct any default or enforce any provision of this Agreement, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
disposing of, preparing for sale and/or advertising to sell the Collateral,
whether or not a sale is consummated; costs and expenses of suit incurred by
Bank in enforcing or defending this Agreement or any portion hereof, including,
but not limited to, expenses incurred by Bank in attempting to obtain relief
from any stay, restraining order, injunction or similar process which prohibits
Bank from exercising any of its rights or remedies; and attorneys' fees and
expenses incurred by Bank in advising, structuring, drafting, reviewing,
amending, terminating, enforcing, defending or concerning this Agreement, or any
portion hereof or any agreement related hereto, whether or not suit is brought.
Bank Expenses shall include Bank's in-house legal charges at reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest so announced by Bank at its headquarters office in San Jose, California
as its "Base Rate" from time to time and which serves as the basis upon which
effective rates of interest are calculated for those loans making reference
thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes all
of the Borrower's books and records including but not limited to: minute books;
ledgers; records indicating, summarizing or evidencing Borrower's assets,
liabilities, Receivables, business operations or financial condition, and all
information relating thereto, computer programs; computer disk or tape files;
computer printouts; computer runs; and other computer prepared Information and
equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of: (1)
Eighty* percent (80.000%) of the net amount of Eligible Accounts after deducting
therefrom all payments, adjustments and credits applicable thereto ("Accounts
Receivable Borrowing Base"); and (2) the amount, if any, of the advances against
inventory agreed to be made pursuant to any Inventory Rider ("Inventory
Borrowing Base"), or other rider, amendment or modification to this Agreement,
that may now or hereafter be entered into by Bank and Borrower.
1.6 "Cash Flow" as used in this Agreement means for any applicable
period of determination, the Net Income (after deduction for income taxes and
other taxes of such person determined by reference to income or profits of such
person) for such period, plus, to the extent deducted in computation of such Net
Income, the amount of depreciation and amortization expense and the amount of
deferred tax liability during such period, all as determined in accordance with
GAAP. The applicable period of determination will be N/A, beginning with the
period from ________________________ to _________________________.
* No Formula required if Debt/Effective Tangible Net Worth is at or less than
2.00:1.00. Borrowing Base applies if Debt/Effective Tangible Net Worth is
greater than 2.00:1.00.
1
<PAGE>
1.7 "Collateral" as used in this Agreement means and includes each and
all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other assets of
Borrower in which Bank receives a security interest or which hereafter come into
the possession, custody or control of Bank; and the proceeds of any of the
foregoing, including, but not limited to, proceeds of insurance covering the
collateral and any and all Receivables, Intangibles, negotiable collateral,
Inventory, equipment, money, deposit accounts or other tangible and intangible
property of borrower resulting from the sale or other disposition of the
collateral, and the proceeds thereof. Notwithstanding anything to the contrary
contained herein, collateral shall not include any waste or other materials
which have been or may be designated as toxic or hazardous by Bank.
1.8 "Credit" as used in this Agreement means all Obligations, except
those obligations arising pursuant to any other separate contract, instrument,
note, or other separate agreement which, by its terms, provides for a specified
interest rate and term.
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer receivables,
United States government securities, claims against the United States
government, and inventories, including current portion of note receivable from
Ken Jordan.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, (i) all liabilities of a person that should be
classified as current in accordance with GAAP, including without limitation any
portion of the principal of the indebtedness classified as current, plus (ii) to
the extent not otherwise included, all liabilities of the Borrower to any of its
affiliates whether or not classified as current in accordance with GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount
determined by taking the amount of the Credit owed at the beginning of a given
day, adding any new Credit advanced or incurred on such date, and subtracting
any payments or collections which are deemed to be paid and are applied by Bank
in reduction of the Credit on that date under the provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within Thirty (30) days, or
less, from the date of invoice, have been validly assigned to Bank and strictly
comply with all of Borrower's warranties and representations to Bank; but
Eligible Accounts shall not include the following: (a) accounts with respect to
which the account debtor is an officer, employee, partner, joint venturer or
agent of Borrower; (b) accounts with respect to which goods are placed on
consignment, guaranteed sale or other terms by reason of which the payment by
the account debtor may be conditional; (c) accounts with respect to which the
account debtor is not a resident of the United States; (d) accounts with respect
to which the account debtor is the United States or any department, agency or
instrumentality of the United States; (e) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx;
(f) accounts with respect to which the account debtor is a subsidiary of,
related to, affiliated or has common shareholders, officers or directors with
Borrower; (g) accounts with respect to which Borrower is or may become liable to
the account debtor for goods sold or services rendered by the account debtor to
Borrower; (h) accounts not paid by an account debtor within ninety (90) days
from the date of the invoice; (i) accounts with respect to which account debtors
dispute liability or make any claim, or have any defense, crossclaim,
counterclaim, or offset; (j) accounts with respect to which any Insolvency
Proceeding is filed by or against the account debtor, or if an account debtor
becomes insolvent, fails or goes out of business; and (k) accounts owed by any
single account debtor which exceed twenty percent (20%) of all of the Eligible
Accounts; and (l) accounts with a particular account debtor on which over
twenty-five percent (25%) of the aggregate amount owing is greater than ninety
(90) days from the date of the invoice; (m) Allowing up to $35,000.00 per
customer per account with an aggregate cap of $400,000.00 on total foreign
accounts.*
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes for
any applicable period of determination, the sum, without duplication, of (a) all
interest paid or payable during such period by a person on debt of such person,
plus (b) all payments of principal or other sums paid or payable during such
period by such person with respect to debt of such person having a final
maturity more than one year from the date of creation of such debt, plus (c) all
debt discount and expense amortized or required to be amortized during such
period by such person, plus (d) the maximum amount of all rents and other
payments paid or required to be paid by such person during such period under any
lease or other contract or arrangement providing for use of real or personal
property in respect of which such person is obligated as a lessee, use or
obligor, plus (e) all dividends and other distributions paid or payable by such
person or otherwise accumulating during such period on any capital stock of such
person, plus (f) all loans or other advances made by such person during such
period to any Affiliate of such person. The applicable period of determination
will be N/A, beginning with the period from _________________________ to
___________________________.
* Dated terms allowed up to 45 days on foreign accounts.
2
<PAGE>
1.15 "GAAP" as used in this Agreement means as of any applicable period,
generally accepted accounting principles in effect during such period.
1.16 "Insolvency Proceeding" as used in this Agreement means and
includes any proceeding or case commenced by or against the Borrower, or any
guarantor of Borrower's Obligations, or any of Borrower's account debtors, under
any provisions of the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law, including but not limited to assignments for the benefit of
creditors, formal or informal moratoriums, composition or extensions with some
or all creditors, any proceeding seeking a reorganization, arrangement or any
other relief under the Bankruptcy code, as amended, or any other bankruptcy or
insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all of
Borrower's present and future general Intangibles and other personal property
(including, without limitation, any and all rights in any legal proceedings,
goodwill, patents, trade names, copyrights, trademarks, blueprints, drawings,
purchase orders, computer programs, computer disks, computer tapes, literature,
reports, catalogs and deposit accounts) other than goods and Receivables, as
well as Borrower's Books relating to any of the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all
present and future inventory in which Borrower has any interest, including, but
not limited to, goods held by Borrower for sale or lease or to be furnished
under a contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, advertising materials, and packing
and shipping materials, wherever located and any documents of title representing
any of the above, and any equipment, fixtures or other property used in the
storing, moving, preserving, identifying, accounting for and shipping or
preparing for the shipping of inventory, and any and all other items hereafter
acquired by Borrower by way of substitution, replacement, return, repossession
or otherwise, and all additions and accessions thereto, and the resulting
product or mass, and any documents of title respecting any of the above.
1.19 "Net Income" as used in this agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
(a) any gains or losses on the sale or other disposition, not in the
ordinary course of business, of Investments or fixed or capital assets, and
any taxes on the excluded gains and any tax deductions or credits on
account on any excluded losses; and
(b) in the case of the Borrower, net earnings of any Person in which
Borrower has an ownership interest, unless such net earnings shall have
actually been received by Borrower in the form of cash distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the benefit
of creditors or any other person or entity having powers or duties like or
similar to the powers and duties of trustee, receiver, controller, custodian or
assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any and
all loans, advances, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower's account pursuant to any
agreement authorizing Bank to charge Borrower's account), obligations, lease
payments, guaranties, covenants and duties owing by Borrower to Bank of any kind
and description whether advanced pursuant to or evidenced by this Agreement; by
any note or other instrument; or by any other agreement between Bank and
Borrower and whether or not for the payment of money, whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including, without limitation, any debt, liability or
obligation owing from Borrower to others which Bank may have obtained by
assignment, participation, purchase or otherwise, and further including, without
limitation, all interest not paid when due and all Bank Expenses which Borrower
is required to pay or reimburse by this Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and includes
any individual, corporation, partnership, joint venture, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency or other entity.
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all contracts
or agreements (whether or not yet earned or due), all merchandise returned to or
reclaimed by Borrower and the Borrower's books (except minute books) relating to
any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness of
the Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to the
Bank.
3
<PAGE>
1.25 "Subordination Agreement" as used in this Agreement a subordination
agreement in form satisfactory to Bank making all present and future
indebtedness of the Borrower to N/A subordinate to the Obligations.
1.26 "Tangible Effective Net Worth" as used in this Agreement means net
worth as determined in accordance with GAAP consistently applied, increased by
Subordinated Debt if any, and decreased by the* following: patents, licenses,
goodwill, subscription lists, organization expenses, trade receivables converted
to notes, and money due from affiliates (including officers, directors,
subsidiaries and commonly held companies. * net book value of the
1.27 "Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination, the excess of:
a. the net book value of all assets of a person (other than patents,
patent rights, trademarks, trade names, franchises, copyrights, licenses,
goodwill, and similar intangible assets) after all appropriate deductions
in accordance with GAAP (including, without limitation, reserves for
doubtful receivables, obsolescence, depreciation and amortization), over
b. all total liabilities of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of
all items of indebtedness, obligation or liability which, in accordance with
GAAP consistently applied, would be included in determining the total
liabilities of the Borrower as of the date Total Liabilities is to be
determined, including without limitation (a) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or acquired,
whether or not the obligations secured thereby shall have been assumed; (b) all
obligations which are capitalized lease obligations; and (c) all guaranties,
endorsements or other contingent or surety obligations with respect to the
indebtedness of others, whether or not reflected on the balance sheets of the
Borrower, including any obligation to furnish funds, directly or indirectly
through the purchase of goods, supplies, services, or by way of stock purchase,
capital contribution, advance or loan or any obligation to enter into a contract
for any of the foregoing.
1.29 "Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
1.30 Any and all terms used in this Agreement shall be construed and
defined in accordance with the meaning and definition of such terms under and
pursuant to the California Uniform Commercial Code (hereinafter referred to as
the "Code") as amended.
1.31 Letter of Credit sub-feature - the amount of $500,000.00 for the
issuance of Letters of Credit is to be allowed within the Borrowing Base and
within the Line amount.
2. LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such amount,
as provided for below, together with interest, as provided for below.
2.1 Upon the request of Borrower, made at any time and from time to
time during the term hereof, and so long as no Event of Default has occurred,
Bank shall lend to Borrower an amount equal to the Borrowing Base; provided,
however, that in no event shall Bank be obligated to make advances to Borrower
under this Section 2.1 whenever the Daily Balance exceeds, at any time, either
the Borrowing Base* or the sum of Five Million and no/100** ($5,000,000.00),
such amount being referred to herein as "Overadvance".
* including Letter of Credit sub-feature *below
2.2 Except as hereinbelow provided, the Credit shall bear interest, on
the Daily Balance owing, at a rate of Zero 25/100** (0.250%) percentage points
per annum above* the Base Rate (the "Rate"). The Credit shall bear interest,
from and after the occurrence of an Event of Default and without constituting a
waiver of any such Event of Default, on the Daily Balance owing, at a rate three
(3) percentage points per annum above the Rate. All interest chargeable under
this Agreement that is based upon a per annum calculation shall be computed on
the basis of a three hundred sixty (360) day year for actual days elapsed.
** See Addendum A attached hereto and made a part hereof for rate options.
The Base Rate as of the date of this Agreement is Eight (8.000%) per annum.
In the event that the Base Rate announced is, from time to time hereafter,
changed, adjustment in the Rate shall be made and based on the Base Rate in
effect on the date of such change. The Rate, as adjusted, shall apply to the
Credit until the Base Rate is adjusted again. The minimum interest payable by
the Borrower under this Agreement shall in no event be less than N/A per month.
All interest payable by Borrower under the Credit shall be due and payable on
the first day of each calendar month during the
4
<PAGE>
term of this Agreement. A late payment charge equal to 5% of each late
payment may be charged on any payment not received by the Bank within 10
calendar days after the payment due date, but acceptance of payment of this
charge shall not waive any Default under this Agreement.
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvance in accordance with Section 2.1 hereof, all Overadvances shall bear
additional interest on the amount thereof at a rate equal to N/A from the date
(N/A%) percentage points per month in excess of the interest rate set forth in
Section 2.2, from the date incurred incurred and for each month thereafter,
until repaid in full.
** Total accounts receivable and inventory advances will be temporarily limited
to $2,500,000 until an audit is completed and results are satisfactory to Bank.
3. TERM.
3.1 This Agreement shall remain in full force and effect until
terminated by notice, by either party. Notice of such termination shall be
effectuated by mailing of a registered or certified letter not less than thirty
(30) days prior to the effective date of such termination, addressed to the
other party at the address set forth herein and the termination shall be
effective as of the date so fixed in such notice. Notwithstanding the
foregoing, should Borrower be in default of one or more of the provisions of
this Agreement, Bank may terminate this Agreement at any time without notice.
Notwithstanding the foregoing, should either Bank or Borrower become insolvent
or unable to meet its debts as they mature, or fail, suspend, or go out of
business, the other party shall have the right to terminate this Agreement at
any time without notice. On the date of termination all Obligations shall
become immediately due and payable without notice or demand; no notice of
termination by Borrower shall be effective until Borrower shall have paid all
Obligations to Bank in full. Notwithstanding termination, until all Obligations
have been fully satisfied, Bank shall retain its security interest in all
existing Collateral and Collateral arising thereafter, and Borrower shall
continue to perform all of its Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all Collateral
held by Bank, and shall execute a termination of all security agreements and
security interests given by Borrower to Bank, upon the execution and delivery of
mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security interest in
all presently existing and hereafter arising Collateral in order to secure
prompt repayment of any and all Obligations owed by Borrower to Bank and in
order to secure prompt performance by Borrower of each and all of its covenants
and Obligations under this Agreement and otherwise created. Bank's security
interest in the Collateral shall attach to all Collateral without further act on
the part of Bank or Borrower. In the event that any Collateral, including
proceeds, is evidenced by or consists of a letter of credit, advice of credit,
instrument, money, negotiable documents, chattel paper or similar property
(collectively, "Negotiable Collateral"), Borrower shall, immediately upon
receipt thereof, endorse and assign such Negotiable Collateral over to Bank and
deliver actual physical possession of the Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all
Receivables without further act on the part of Bank or Borrower. Upon request
from Bank*, Borrower shall provide Bank with schedules describing all
Receivables created or acquired by Borrower (including without limitation agings
listing the names and addresses of, and amounts owing by date by account
debtors), and shall execute and deliver written assignments of all Receivables
to Bank all in a form acceptable to Bank, provided, however, Borrower's failure
to execute and deliver such schedules and/or assignments shall not affect or
limit Bank's security interest and other rights in and to the Receivables.
Together with each schedule, Borrower shall furnish Bank with copies of
Borrower's customers' invoices or the equivalent, and original shipping or
delivery receipts for all merchandise sold, and Borrower warrants the
genuineness thereof. Bank or Bank's designee may notify customers or account
debtors of collection costs and expenses to Borrower's account but, unless and
until Bank does so or gives Borrower other written instructions, Borrower shall
collect all Receivables for Bank, receive in trust all payments thereon as
Bank's trustee, and, if so requested to do so from Bank, Borrower shall
immediately deliver said payments to Bank in their original form as received
from the account debtor and all letters of credit, advices of credit,
instruments, documents, chattel paper or any similar property evidencing or
constituting Collateral. Notwithstanding anything to the contrary contained
herein, if sales of Inventory are made for cash, Borrower shall immediately
deliver to Bank, in identical form, all such cash, checks, or other forms of
payment which Borrower receives. The receipt of any check or other item of
payment by Bank shall not be considered a payment on account until such check or
other item of payment is honored when presented for payment, in which event,
said check or other item of payment shall be deemed to have been paid to Bank
Two (2) calendar days after the date Bank actually receives such check or other
item of payment.
* and upon the occurrence of an Event of Default by Borrower,
4.3 Bank's security interest in Inventory shall attach to all Inventory
without further act on the part of Bank or Borrower. Upon Bank's request*
Borrower will from time to time at Borrower's expense pledge, assemble and
deliver
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such Inventory to Bank or to a third party as Bank's bailee; or hold the same
in trust for Bank's account or store the same in a warehouse in Bank's name;
or deliver to Bank documents of title representing said Inventory; or
evidence of Bank's security interest in some other manner acceptable to Bank.
Until a default by Borrower under this Agreement or any other Agreement
between Borrower and Bank, Borrower may, subject to the provisions hereof and
consistent herewith, sell the Inventory, but only in the ordinary course of
Borrower's business. A sale of inventory in Borrower's ordinary course of
business does not include an exchange or a transfer in partial or total
satisfaction of a debt owing Borrower.
* and upon the occurrence of an Event of Default by Borrower,
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Agreement, and at any time or times hereafter at
the request of Bank, all financing statements, continuation financing
statements, security agreements, mortgages, assignments, certificates of title,
affidavits, reports, notices, schedules of accounts, letters of authority and
all other documents that Bank may request, in form satisfactory to Bank, to
perfect and maintain perfected Bank's security interest in the Collateral and in
order to fully consummate all of the transactions contemplated under this
Agreement. Borrower hereby irrevocably makes, constitutes and appoints Bank
(and any of Bank's officers, employees or agents designated by Bank) as
Borrower's true and lawful attorney-in-fact with power to sign the name of
Borrower on any financing statements, continuation financing statements,
security agreement, mortgage, assignment, certificate of title, affidavit,
letter of authority, notice of other similar documents which must be executed
and/or filed in order to perfect or continue perfected Bank's security interest
in the Collateral.
Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Receivables. Bank (through any of Its officers,
employees or agents) shall have the right at any time or times hereafter during
Borrower's usual business hours, or during the usual business hours of any third
party having control over the records of Borrower, to inspect and verify
Borrower's Books in order to verify the amount or condition of, or any other
matter, relating to, said Collateral and Borrower's financial condition.
4.5 *Borrower appoints Bank or any other person whom Bank may designate
as Borrower's attorney-in-fact, with power: to endorse Borrower's name on any
checks, notes, acceptances, money order, drafts or other forms of payment or
security that may come into Bank's possession; to sign Borrower's name on any
invoice or bill of lading relating to any Receivables, on drafts against account
debtors, on schedules and assignments of Receivables, on verifications of
Receivables and on notices to account debtors; to establish a lock box
arrangement and/or to notify the post office authorities to change the address
for delivery of Borrower's mail addressed to Borrower to an address designated
by Bank, to receive and open all mail addressed to Borrower, and to retain all
mail relating to the Collateral and forward all other mail to Borrower; to send,
whether in writing or by telephone, requests for verification of Receivables;
and to do all things necessary to carry out this Agreement. Borrower ratifies
and approves all acts of the attorney-in-fact. Neither Bank nor its
attorney-in-fact will be liable for any acts or omissions or for any error of
judgment or mistake of fact or law. This power being coupled with an
interest, is irrevocable so long as a Receivables in which Bank has security
interest remain unpaid and until the Obligations have been fully satisfied.
* Upon the occurrence of an Event of Default by Borrower,
4.6 In order to protect or perfect any security interest which Bank is
granted hereunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards, warehousemen,
or any personnel to protect the Collateral, pay any service bureau, or, obtain
any records, and all costs for the same shall be added to the Obligations and
shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries and
service providers.
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the extension
of the financial accommodations hereunder, Borrower shall execute, or cause to
be executed, and deliver to Bank, in form and substance satisfactory to Bank and
its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1) in form satisfactory to Bank for
filing and recording with the appropriate governmental authorities;
c. If Borrower is a corporation, then certified extracts from the
minutes of the meeting of its board of directors, authorizing the
borrowings and the granting of the security interest provided for herein
and authorizing specific officers to execute and deliver the agreements
provided for herein;
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d. If Borrower is a corporation, then a certificate of good standing
showing that Borrower is in good standing under the laws of the state of
its incorporation and certificates indicating that Borrower is qualified to
transact business and is in good standing in any other state in which it
conducts business;
e. If Borrower is a partnership, then a copy of Borrower's partnership
agreement certified by each general partner of Borrower;
f. UCC searches, tax lien and litigation searches, fictitious business
statement filings, insurance certificates, notices or other similar
documents which Bank may require and in such form as Bank may require, in
order to reflect, perfect or protect Bank's first priority security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement;
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgagees of any real property
on which any Collateral is located; and
i. Warranties and representations of officers.
6. WARRANTIES, REPRESENTATIONS AND COVENANTS.
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be less than
the advances made hereunder. Bank shall have the right to recompute Borrower's
Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account is
not paid in full by an account debtor within Thirty* (30) days from the date of
invoice, or an account debtor disputes liability or makes any claim with respect
thereto, or a petition in bankruptcy or other application for relief under the
Bankruptcy Code or any other insolvency law is filed by or against an account
debtor, or an account debtor makes an assignment for the benefit of creditors,
becomes insolvent, fails or goes out of business, then Bank may deem ineligible
any and all accounts owing by that account debtor, and reduce Borrower's
Borrowing Base by the amount thereof. Bank shall retain its security interest
in all Receivables and accounts, whether eligible or ineligible, until all
Obligations have been fully paid and satisfied. Returns and allowances, if any,
as between Borrower and its customers, will be on the same basis and in
accordance with the usual customary practices of the Borrower, as they exist at
this time. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Borrower shall promptly notify
Bank of all disputes and claims and settle or adjust them on terms approved by
Bank. After default by Borrower hereunder, no discount, credit or allowance
shall be granted to any account debtor by Borrower and no return of merchandise
shall be accepted by Borrower without Bank's consent. Bank may, after default by
Borrower, settle or adjust disputes and claims directly with account debtors for
amounts and upon terms which Bank considers advisable, and in such cases Bank
will credit Borrower's account with only the net amounts received by Bank in
payment of the accounts, after deducting all Bank Expenses in connection
therewith. * 45 days for foreign accounts.
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral. Bank
has and shall continue to have a first priority perfected
security interest in and to the Collateral. The Collateral
shall at all times remain free and clear of all liens,
encumbrances and security interests (except those in favor of
Bank).
b. All accounts are and will, at all times pertinent hereto, be
bona fide existing obligations created by the sale and
delivery of merchandise or the rendition of services to
account debtors in the ordinary course of business, free of
liens, claims, encumbrances and security interests (except as
held by Bank and except as may be consented to, in writing, by
Bank) and are unconditionally owed to Borrower without
defenses, disputes, offsets, counterclaims, rights of return
or cancellation, and Borrower shall have received no notice of
actual or imminent bankruptcy or insolvency of any account
debtor at the time an account due from such account debtor is
assigned to Bank.
c. At the time each account is assigned to Bank, all property
giving rise to such account shall have been delivered to the
account debtor or to the agent for the account debtor for
immediate shipment to, and unconditional acceptance by, the
account debtor. Borrower shall deliver to Bank, as Bank may
from time to time require, delivery receipts, customer's
purchase orders, shipping instructions, bills of lading and
any other evidence of shipping arrangements. Absent such a
request by Bank, copies of all such documentation shall be
held by Borrower as custodian for Bank.
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6.4 At the time each eligible account is assigned to Bank, all such
eligible accounts will be due and payable on terms set forth in Section 1.12, or
on such other terms approved in writing by Bank in advance of the creation of
such accounts and which are expressly set forth on the face of all invoices,
copies of which shall be held by Borrower as custodian for Bank, and no such
eligible account will then be past due.
6.5 Borrower shall keep the Inventory only at the following locations:
2331 S. Pullman St., Santa Ana, CA 92705, 3 Bryan Dr., Wheeling, WV 26003; and
1692 Browning, Irvine, CA 92606 and the owner or mortgagees of the respective
locations are: Dirk Investments Inc., Radco, and Sanwa Bank (as trustee).
a. Borrower, immediately upon demand by Bank therefor, shall now and
from time to time hereafter, at such intervals as are requested by Bank,
deliver to Bank, designations of inventory specifying Borrower's cost of
inventory, the wholesale market value thereof and such other matters and
information relating to the Inventory as Bank may request;
b. Borrower's Inventory, valued at the lower of Borrower's cost or the
wholesale market value thereof, at all times pertinent hereto shall not be
less than N/A Dollars ($N/A) of which no less than N/A Dollars ($N/A) shall
be in raw materials and finished goods;
c. All of the Inventory is and shall remain free from all purchase
money or other security interests, liens or encumbrances, except as held by
Bank;
d. Borrower does now keep and hereafter at all times shall keep
correct and accurate records itemizing and describing the kind, type,
quality and quantity of the inventory, its cost therefor and selling price
thereof, and the daily withdrawals therefrom and additions thereto, all of
which records shall be available upon demand to any of Bank's officers,
agents and employees for inspection and copying;
e. All inventory, now and hereafter at all times, shall be new
inventory of good and merchantable quality free from defects;
f. Inventory is not now and shall not at any time or times hereafter
be located or stored with a bailee, warehouseman or other third party
without Bank's prior written consent, and, in such event, Borrower will
concurrently therewith cause any such bailee, warehouseman or other third
party to issue and deliver to Bank, in a form acceptable to Bank, warehouse
receipts in Bank's name evidencing the storage of inventory or other
evidence of Bank's prior rights in the inventory. In any event, Borrower
shall instruct any third party to hold all such inventory for Bank's
account subject to Bank's security interests and its instructions; and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect and examine
the inventory and to check and test the same as to quality, quantity, value
and condition and Borrower agrees to reimburse Bank for Bank's reasonable
costs and expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or encumbrance
upon any of the Collateral to any person, association, firm, corporation,
entity or governmental agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting any
of Borrower's assets;
c. Permit any Judicial Officer or Assignee to be appointed or to take
possession of any or all of Borrower's* * assets
d. Other than sales of inventory in the ordinary course of Borrower's
business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower's assets;
e. Change its name, business structure, corporate identity or
structure; add any new fictitious names, liquidate, merge or consolidate
with or into any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization; wherein Bank financing is
required in excess of $3,000,000.00.
h. Enter into any transaction not in the usual course of Borrower's
business;
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i. Make any investment in securities of any person, association, firm,
entity, or corporation other than the securities of the United States of
America;
j. Make any change in Borrower's financial structure or in any of its
business objectives, purposes or operations which would adversely affect
the ability of Borrower to repay Borrower's Obligations;
k. Incur any debts outside the ordinary course of Borrower's business
except renewals or extensions of existing debts and interest thereon;
l. Make any advance or loan except in the ordinary course of
Borrower's business as currently conducted;
m. Make loans, advances or extensions of credit to any Person, except
for sales on open account and otherwise in the ordinary course of business;
n. Guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other person, whether by
agreement to purchase the indebtedness of any other Person, agreement for
the furnishing of funds to any other Person through the furnishing of
goods, supplies or services, by way of stock purchase, capital
contribution, advance or loan, for the purpose of paying or discharging (or
causing the payment or discharge of) the indebtedness of any other person,
or otherwise, except for the endorsement of negotiable instruments by the
Borrower in the ordinary course of business for deposit or collection;
o. (a) Sell, lease, transfer or otherwise dispose of properties and
assets having an aggregate book value of more than One Hundred Thousand and
no/100 Dollars ($100,000.00) (whether in one transaction or in a series of
transactions) except as to the sale of inventory in the ordinary course of
business; (b) change its name, consolidate with or merge into any other
corporation, permit another corporation to merge into it, acquire all or
substantially all the properties or assets of any other Person, enter into
any reorganization or recapitalization or reclassify its capital stock*, or
(c) enter into any sale-leaseback transaction;
* wherein Bank financing is required in excess of $3,000,000.00.
p. Purchase or hold beneficially any stock or other securities of, or
make any investment or acquire any interest whatsoever in, any other
Person, except for the common stock of the Subsidiaries owned by the
Borrower on the date of this Agreement and except for certificates of
deposit with maturities of one year or less of United States commercial
banks with capital, surplus and undivided profits in excess of One Hundred
Million Dollars ($100,000,000) and direct obligations of the United States
Government maturing within one year from the date of acquisition thereof;
q. Allow any fact, condition or event to occur or exist with respect
to any employee pension or profit sharing plans established or maintained
by it which might constitute grounds for termination of any such plan or
for the court appointment of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for
personal, family or household purposes exceeded seventy-five percent (75%) in
dollar volume of its total sales of all goods during the twelve (12) months
tpreceding the filing by Bank of a financing statement describing the
Collateral. At no time hereafter shall Borrower's sales for resale goods for
personal, family or household purposes exceed seventy-five percent (75%) in
dollar volume of its total sales.
6.8 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants and
agrees that it will not, during the term of this Agreement, without prior
written notification to Bank, relocate said sole place of business or chief
executive office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants and
covenants as follows:
a. Borrower will not make any distribution or declare or pay any
dividend (in stock or in cash)* to any shareholder or on any of its capital
stock, of any class, whether now or hereafter outstanding, or purchase,
acquire, repurchase, or redeem or retire any such capital stock;
* except for income taxes payable by S-Corp shareholders.
b. Borrower is and shall at all times hereafter be a corporation duly
organized and existing in good standing the laws of the state of its
incorporation and qualified and licensed to do business in California or
any other state in which it conducts its business;
c. Borrower has the right and power and is duly authorized to enter
into this Agreement; and
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<PAGE>
d. The execution by Borrower of this Agreement shall not constitute a
breach of any provision contained in Borrower's articles of incorporation
or by-laws.
6.10 The execution of and performance by Borrower of all of the terms
and provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under any agreement to which Borrower is now or
hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition
by purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of Inventory in the
ordinary course of business.
6.12 All assessments and taxes, whether real, personal or otherwise, due
or payable by, or imposed, levied or assessed against, Borrower or any of its
property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it by
law, and will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof. Borrower will make timely payment
or deposit of all F.I.C.A. payments and withholding taxes required of it by
applicable laws, and will upon request furnish Bank with proof satisfactory to
it that Borrower has made such payments or deposit. If Borrower fails to pay
any such assessment, tax, contribution, or make such deposit, or furnish the
required proof, Bank may, in its sole and absolute discretion and without notice
to Borrower, (i) make payment of the same or any part thereof, or (ii) set up
such reserves in Borrower's account as Bank deems necessary to satisfy the
liability therefor, or both. Bank may conclusively rely on the usual statements
of the amount owing or other official statements issued by the appropriate
governmental agency. Each amount so paid or deposited by Bank shall constitute
a Bank Expense and an additional advance to Borrower.
6.13 There are no actions or proceedings pending by or against Borrower
or any guarantor of Borrower before any court or administrative agency and
Borrower has no knowledge of any pending, threatened or imminent litigation,
governmental investigations or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed in writing to Bank. If any of the foregoing arise during
the term of the Agreement, Borrower shall immediately notify Bank in writing.
6.14 a. Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage insurance relating to Borrower's ownership and use
of the Collateral and its other assets. All such policies of insurance shall be
in such form, with such companies, and in such amounts as may be satisfactory to
Bank. Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All such
policies of insurance (except those of public liability and property damage)
shall contain an endorsement in a form satisfactory to Bank showing Bank as a
loss payee thereof, with a waiver of warranties (Form 438-BFU), and all proceeds
payable thereunder shall be payable to Bank and, upon receipt by Bank, shall be
applied on account of the Obligations owing to Bank. To secure the payment of
the Obligations, Borrower grants Bank a security interest in and to all such
policies of insurance (except those of public liability and property damage) and
the proceeds thereof, and Borrower shall direct all insurers under such policies
of insurance to pay all proceeds thereof directly to Bank.
b.* Borrower hereby irrevocably appoints Bank (and any of Bank's
officers, employees or agents designated by Bank) as Borrower's attorney for the
purpose of making, selling and adjusting claims under such policies of
insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect to such policies of
insurance. Borrower will not cancel any of such policies without Bank's prior
written consent. Each such insurer shall agree by endorsement upon the policy
or policies of insurance issued by it to Borrower as required above, or by
independent instruments furnished to Bank, that it will give Bank at least ten
(10) days written notice before any such policy or policies of insurance shall
be altered or cancelled, and that no act or default of Borrower, or any other
person, shall affect the right of Bank to recover under such policy or policies
of insurance required above or to pay any premium in whole or in part relating
thereto. Bank, without waiving or releasing any Obligations or any Event of
Default, may, but shall have no obligation to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by
Bank, as well as reasonable attorneys' fees, court costs, expenses and other
charges relating thereto, shall constitute Bank Expenses and are payable on
demand.
* On claims over $250,000,
6.15 All financial statements and information relating to Borrower which
have been or may hereafter be delivered by Borrower to Bank are true and correct
and have been prepared in accordance with GAAP consistently applied and there
has been no material adverse change in the financial condition of Borrower since
the submission of such financial information to Bank.
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6.16 a. Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied with
ledger and account cards and/or computer tapes and computer disks, computer
printouts and computer records pertaining to the Collateral which contain
information as may from time to time be requested by Bank, not modify or change
its method of accounting or enter into, modify or terminate any agreement
presently existing, or at any time hereafter entered into with any third party
accounting firm and/or service bureau for the preparation and/or storage of
Borrower's accounting records without the written consent of Bank first obtained
and without said accounting firm and/or service bureau agreeing to provide
information regarding the Receivables and Inventory and Borrower's financial
condition to Bank; permit Bank and any of its employees, officers or agents,
upon demand, during Borrower's usual business hours, or the usual business hour
of third persons having control thereof, to have access to and examine all of
the Borrower's Books relating to the Collateral, Borrower's Obligations to Bank,
Borrower's financial condition and the results of Borrower's operations and in
connection therewith, permit Bank or any of its agents, employees or officers to
copy and make extracts therefrom.
b. Borrower shall deliver to Bank within forty-five (45) days after
the end of each Quarter, a COMPANY PREPARED balance sheet and profit and loss
statement covering Borrower's operations and deliver to Bank within ninety (90)
days after the end of each of Borrower's fiscal years a(n) AUDITED UNQUALIFIED
statement of the financial condition of the Borrower for each such fiscal year,
including but not limited to, a balance sheet and profit and loss statement and
any other report requested by Bank relating to the Collateral and the financial
condition of Borrower, and a certificate signed by an authorized employee of
Borrower to the effect that all reports, statements, computer disk or tape
files, computer printouts, computer runs, or other computer prepared information
of any kind or nature relating to the foregoing or documents delivered or caused
to be delivered to Bank under this subparagraph are complete, correct and
thoroughly present the financial condition of Borrower and that there exists on
the date of delivery to Bank no condition or event which constitutes a breach or
Event of Default under this Agreement.
c. In addition to the financial statements requested above, the
Borrower agrees to provide Bank with the following schedules: (If
Debt/Effective Tangible Net Worth is greater than 2.00:1.00 measured quarterly)
detailed:
<TABLE>
<CAPTION>
<S> <C>
___XX_________ Accounts Receivable Agings on a Monthly basis within 20 days of month end
___XX_________ Accounts Payable Agings on a Monthly basis within 20 days of month end
_______________ Job Progress Reports on a _______________ basis and
___XX_________ Inventory Reports on a Monthly basis within 20 days of month end
</TABLE>
Borrowing Base Report required monthly within 20 days of month end
6.17 Borrower shall maintain the following financial ratios and
covenants on a consolidated and non-consolidated basis:
a. Working Capital in an amount not less than N/A
b Tangible Effective Net Worth in an amount not less than
55,500,000.00 prior to Initial Public Offering.
After Initial Public Offering an amount no less than $8,000,000.00.
(Both to step up by 50% of Effective After *
c. a ratio of Current Assets to Current Liabilities of not less than
N/A
d. a quick ratio of cash plus securities plus Receivables to Current
Liabilities of not less than 0.75:1.00
e. a ratio of Total Liabilities (less debt subordinated to Bank) to
Tangible Effective Net Worth of less than 2.25:1.00 prior to
Initial Public Offering. After Initial Public Offering to be less
than 3.00:1.00.
f. a ratio of Cash Flow to Fixed Charges of not less than 2.00:1.00
prior to Initial Public Offering. After Initial Public Offering to
be no less than 1.50:1.00 (both on a rolling four quarter basis).
g. Net income after taxes of N/A
h. Borrower shall not without Bank's prior written consent acquire or
expend for or commit itself to acquire or expend for fixed assets
by lease, purchase or otherwise in an aggregate amount that exceeds
N/A Dollars ($______) in any fiscal year; and
i. See Addendum "B" attached hereto and made a part hereof for
additional covenants, conditions and definitions.
11
<PAGE>
*Tax Net Profit (Quarterly)
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to
supply Bank) with such other information (including tax returns) concerning its
financial affairs (or that of any guarantor) as Bank may request from time to
time hereafter, and shall promptly notify Bank of any material adverse change in
Borrower's financial condition and of any condition or event which constitutes a
breach of or an event which constitutes an Event of Default under this
Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and
able to pay its debts (including trade debts) as they mature.
6.20 Borrower shall Immediately and without demand reimburse Bank for
all sums expended by Bank in connection with any action brought by Bank to
correct any default or enforce any provision of this Agreement, including all
Bank Expenses; Borrower authorizes and approves all advances and payments by
Bank for items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and shall be
conclusively presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements which
Borrower shall give, or cause to be given, to Bank, either now or hereafter.
6.22 Borrower shall keep all of its principal bank accounts with Bank
and shall notify the Bank immediately in writing of the existence of any other
bank account, deposit account, or any other account into which money can be
deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible, but
in no event later than thirty (30) days after Borrower knows or has reason to
know that any reportable event with respect to any deferred compensation plan
has occurred, a statement of the chief financial officer of Borrower setting
forth the details concerning such reportable event and the action which Borrower
proposes to take with respect thereto, together with a copy of the notice of
such reportable event given to the Pension Benefit Guaranty Corporation, if a
copy of such notice is available to Borrower; (b) promptly after the filing
thereof with the United States Secretary of Labor or the Pension Benefit
Guaranty Corporation, copies of each annual report with respect to each deferred
compensation plan; (c) promptly after receipt thereof, a copy of any notice
Borrower may receive from the Pension Benefit Guaranty Corporation or the
internal Revenue Service with respect to any deferred compensation plan;
provided, however, this subparagraph shall not apply to notice of general
application issued by the Pension Benefit Guaranty Corporation or the Internal
Revenue Service; and (d) when the same is made available to participants in the
deferred compensation plan, all notices and other forms of Information from time
to time disseminated to the participants by the administrator of the deferred
compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic substances,
wastes and hazardous material and shall maintain all necessary authorizations
and permits.
6.25 Borrower shall maintain insurance on the life of N/A in an amount
not to be less than ______________ _______________________ Dollars ($________)
under one or more policies issued by insurance companies satisfactory to Bank,
which policies shall be assigned to Bank as security for the Indebtedness and on
which Bank shall be named as sole beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to the
following employees: _____________________, _____________________,
________________________ to an aggregate of N/A Dollars ($N/A) per N/A.
7. EVENTS OF DEFAULT Any one or more of the following events shall constitute
a default by Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation
contained in this Agreement, or any other present or future agreement
between Borrower and Bank;
12
<PAGE>
b. If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents to Bank
is not true and correct;
c. If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of the Borrower's Obligations (whether of
principal, interest, taxes, reimbursement of Bank Expenses, or otherwise);
d. If there is a material impairment of the prospect of repayment of
all or any portion of Borrower's Obligations or a material impairment of
the value or priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject to
a writ or distress warrant, or are levied upon, or come into the possession
of any Judicial Officer or Assignee and the same are not released,
discharged or bonded against within ten (10) days thereafter;
f. if any Insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within ten (10) days thereafter;
g. If any proceeding is filed or commenced by or against Borrower for
its dissolution or liquidation;
h. If Borrower is enjoined, restrained or in any way prevented by
court order from continuing to conduct all or any material part of its
business affairs;
i. If a notice of lien, levy or assessment is filed of record with
respect to any or all of Borrower's assets by the United States Government,
or any department, agency or instrumentality thereof, or by any state,
county, municipal or other government agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a
lien, whether choate or otherwise, upon any or all of the Borrower's assets
and the same is not paid on the payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any
or all of Borrower's assets and the same is not satisfied, dismissed or
bonded against within thirty (30) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer
service bureau at the time this Agreement entered into or during the term
of this agreement such an agreement with an outside service bureau is
entered into, and at any time thereafter, without first obtaining the
written consent of Bank, Borrower terminates, modifies, amends or changes
its contractual relationship with said computer service bureau or said
computer service bureau fails to provide Bank with any requested
information or financial data pertaining to Bank's Collateral, Borrower's
financial condition or the results of Borrower's operations;
l. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an acceleration
of the maturity of Borrower's indebtedness to others, whether under any
indenture, agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which has
been subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty
or representation made to Bank by any officer or director of Borrower, or
if any such warranty or representation is withdrawn by any officer or
director;
o. If any party subordinating its claims to that of Bank's or any
guarantor of Borrower's Obligations dies or terminates its subordination or
guaranty, becomes insolvent or an Insolvency Proceeding is commenced by or
against any such subordinating party or guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of N/A percent (N/A%)
or more of the issued and outstanding stock of Borrower; or
r. If any reportable event, which the Bank determines constitutes
grounds for the termination of any deferred compensation plan by the
Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer any
such plan, shall have occurred and be continuing thirty (30) days after
written notice of such determination shall have been given to Borrower by
Bank, or any such Plan shall be terminated within the meaning of Title IV
of the Employment Retirement Income Security Act ("ERISA"), or a trustee
shall be appointed by the appropriate United States District Court to
administer any such plan, or the Pension Benefit Guaranty Corporation shall
institute proceedings to terminate any plan and in case of any event
described in this Section 7.0, the aggregate amount of the Borrower's
liability to
13
<PAGE>
the Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064
of ERISA shall exceed five percent (5%) of Borrower's Tangible Effective
Net Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank shall
refrain from exercising its rights and remedies and Event of Default shall
thereafter not be deemed to have occurred by reason of the occurrence of any of
the events set forth in Sections 7.e, 7.f or 7.j* of this Agreement if, within
ten (10)* days from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; provided, however, if the event is the
institution of Insolvency Proceedings against Borrower, Bank shall not be
obligated to make advances to Borrower during such cure period. * and 30 days
for 7.j.
8. BANK'S RIGHTS AND REMEDIES
8.1 Upon the occurrence of an Event of Default by Borrower under this
Agreement, Bank may, at its election, without notice of its election and without
demand, do any one or more of the following, all of which are authorized by
Borrower:
a. Declare Borrower's Obligations, whether evidenced by this
Agreement, installment notes, demand notes or otherwise, immediately due
and payable to the Bank;
b. Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement between Borrower and
Bank;
c. Terminate this Agreement as to any future liability or obligation
of Bank, but without affecting Bank's rights and security interests in the
Collateral, and the Obligations of Borrower to Bank;
d. Without notice to or demand upon Borrower or any guarantor, make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to
assemble the Collateral if Bank so requires and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter
the premises where the Collateral is located, take and maintain possession
of the Collateral and the premises (at no charge to Bank), or any part
thereof, and to pay, purchase, contest or compromise any encumbrance,
charge or lien which in the opinion of Bank appears to be prior or superior
to its security interest and to pay all expenses incurred in connection
therewith;
e. Without limiting Bank's rights under any security interest, Bank is
hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secrets,
trade names, trademarks and advertising matter, or any property of a
similar nature as it pertains to the Collateral, in completing production
of, advertising for sale and selling any Collateral and Borrower's rights
under all licenses and all franchise agreement shall inure to Bank's
benefit, and Bank shall have the right and power to enter into sublicense
agreements with respect to all such rights with third parties on terms
acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sales and sell (in the manner provided for herein)
the Inventory;
g. Sell or dispose the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
is commercially reasonable in the opinion of Bank. It is not necessary
that the Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral as
follows:
(1) Bank shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Bank a written
request for notice, a notice in writing of the time and place of
public sale, or, if the sale is a private sale or some disposition
other than a public sale is to be made of the Collateral, the time
on or after which the private sale or other disposition is to be
made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower's address appearing in this Agreement, at
least five (5) calendar days before the date fixed for the sale, or
at least five (5) calendar days before the date on or after which
the private sale or other disposition is to be made, unless the
Collateral is perishable or threatens to decline speedily in value.
Notice to persons other than Borrower claiming an interest in the
Collateral shall be sent to such addresses as have been furnished
to Bank;
(3) If the sale is to be a public sale, Bank shall also give
notice of the time and place by publishing a notice one time at
least five (5) calendar days before the date of the sale in a
newspaper of general circulation in the county in which the sale is
to be held; and
14
<PAGE>
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with
Bank's enforcement and exercise of any of its rights and remedies as herein
provided, whether or not suit is commenced by Bank;
j. Any deficiency which exists after disposition of the Collateral as
provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties, to
Borrower by Bank, or, in Bank's discretion, to any party who Bank believes,
in good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in satisfaction of
an obligation within the meaning of 9505 of the Uniform Commercial Code or
an action under California Code of Civil Procedure 726, apply any and all
amounts maintained by Borrower as deposit accounts (as that term is defined
under 9105 of the Uniform Commercial Code) or other accounts that Borrower
maintains with Bank against the Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and remedies
not inconsistent herewith as provided by law or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election or acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY
If Borrower fails to pay promptly when due to another person or entity,
monies which Borrower is required to pay by reason of any provision in this
Agreement, Bank may, but need not, pay the same and charge Borrower's account
therefor, and Borrower shall promptly reimburse Bank. All such sums shall
become additional indebtedness owing to Bank, shall bear interest at the rate
hereinabove provided, and shall be secured by all Collateral. Any payments made
by Bank shall not constitute (i) an agreement by it to make similar payments in
the future, or (ii) a waiver by Bank of any default under this Agreement. Bank
need not inquire as to, or contest the validity of, any such expense, tax,
security interest, encumbrance or lien and the receipt of the usual official
notice of the payment thereof shall be conclusive evidence that the same was
validly due and owing. Such payments shall constitute Bank Expenses and
additional advances to Borrower.
10. WAIVERS
10.1 Borrower agrees that checks and other instruments received by Bank
in payment or on account of Borrower's Obligations constitute only conditional
payment until such items are actually paid to Bank and Borrower waives the right
to direct the application of any and all payments at any time or times hereafter
received by Bank on account of Borrower's Obligations and Borrower agrees that
Bank shall have the continuing exclusive right to apply and reapply such
payments in any manner as Bank may deem advisable, notwithstanding any entry by
Bank upon its books.
10.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, accounts, documents, instruments chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible for
(a) the safekeeping of the Inventory; (b) any loss or damage thereto occurring
or arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency or other person whomsoever. All risk of loss, damage or
destruction of Inventory shall be borne by Borrower.
10.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm and/or
service bureau or consultant in connection with any information requested by
Bank pursuant to or in accordance with this Agreement, and agrees that a Bank
may contact directly any such accountants, accounting firm and/or service bureau
or consultant In order to obtain such information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION HEREUNDER, OR
CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT OR BREACH OF DUTY
CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND BORROWER.
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails to
pursue or enforce any term, such waiver, delay or failure to pursue or enforce
shall only be effective with respect to that single act and shall not be
construed to affect any subsequent transactions or Bank's right to later pursue
such rights and remedies.
15
<PAGE>
11. ONE CONTINUING LOAN TRANSACTION All loans and advances heretofore, now or
at any time or times hereafter made by Bank to Borrower under this Agreement or
any other agreement between Bank and Borrower, shall constitute one loan secured
by Bank's security interests in the Collateral and by all other security
interests, liens, encumbrances heretofore, now or from time to time hereafter
granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the Obligations
are a consumer loan, that portion shall not be secured by any deed of trust or
mortgage on or other security interest in the Borrower's principal dwelling
which is not a purchase money security interest as to that portion, unless
expressly provided to the contrary in another place, or (ii) if the Borrower (or
any of them) has (have) given or give(s) Bank a deed of trust or mortgage
covering real property, that deed of trust or mortgage shall not secure the loan
and any other Obligation of the Borrower (or any of them), unless expressly
provided to the contrary in another place.
12. NOTICES Unless otherwise provided in this Agreement, all notices or
demands by either party on the other relating to this Agreement shall be in
writing and sent by regular United States mail, postage prepaid, properly
addressed to Borrower or to Bank at the addresses stated in this Agreement, or
to such other addresses as Borrower or Bank may from time to time specify to the
other in writing. Requests to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE Bank is hereby authorized to make loans and
advances hereunder upon telephonic or other instructions received from anyone
purporting to be an officer, employee, or representative of Borrower, or at the
discretion of Bank if said loans and advances are necessary to meet any
Obligations of Borrower to Bank. Bank shall have no duty to make inquiry or
verify the authority of any such party, and Borrower shall hold Bank harmless
from any damage, claims or liability by reason of Bank's honor of, or failure to
honor, any such instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS Any documents, schedules, invoices or
other papers delivered to Bank, may be destroyed or otherwise disposed of by
Bank six (6) months after they are delivered to or received by Bank, unless
Borrower requests, in writing, the return of the said documents, schedules,
invoices or other papers and makes arrangements, at Borrower's expense, for
their return.
15. CHOICE OF LAW The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined according to the laws of the
State of California. The parties agree that all actions or proceedings arising
in connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or the County of Santa
Clara.
16. GENERAL PROVISIONS
16.1 This Agreement shall be binding and deemed effective when executed
by the Borrower and accepted and executed by Bank at its headquarter office.
16.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties, provided, however,
that Borrower may not assign this Agreement or any rights hereunder without
Bank's prior written consent and any prohibited assignment shall be absolutely
void. No consent to an assignment by Bank shall release Borrower or any
guarantor from their Obligations to Bank. Bank may assign this Agreement and
its rights and duties hereunder. Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in Bank's rights and benefits hereunder. In connection therewith, Bank
may disclose all documents and information which Bank now or hereafter may have
relating to Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth herein
for convenience only; unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any rule
of construction or otherwise; on the contrary, this Agreement has been reviewed
by all parties and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of all parties hereto. When permitted by the context, the singular includes the
plural and vice versa.
16.5 Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
16.6 This Agreement cannot be changed or terminated orally. Except as
to currently existing Obligations owing by Borrower to Bank, all prior
agreements, understandings, representations, warranties, and negotiations, if
any, with respect to the subject matter hereof, are merged into this Agreement.
16.7 The parties intend and agree that their respective rights, duties,
powers, liabilities, obligations and discretions shall be performed, carried
out, discharged and exercised reasonably and in good faith.
16
<PAGE>
16.8 In addition, if this Agreement is secured by a deed of trust or
mortgage covering real property, then the trustor or mortgagor shall not
mortgage or pledge the mortgaged premises as security for any other indebtedness
or obligations. This Agreement, together with all other indebtedness secured by
said deed of trust or mortgage, shall become due and payable immediately,
without notice, at the option of Bank, (a) if said trustor or mortgagor shall
mortgage or pledge the mortgaged premises for any other indebtedness or
obligations or shall convey, assign or transfer the mortgaged premises by deed,
installment sale contract or other instrument; (b) if the title to the mortgaged
premises shall become vested in any other person or party in any manner
whatsoever, or (c) if there is any disposition (through one or more
transactions) of legal or beneficial title to a controlling interest of said
trustor or mortgagor.
IN WITNESS WHEREOF, the parties hereto have caused this Loan & Security
Agreement (Accounts and Inventory) to be executed as of the date first
hereinabove written.
This Loan and Security Agreement is cross defaulted and/or cross collaterized to
all present and future indebtedness of Troy Group, Inc., Troy Systems
International, Inc. and Troy XCD, Inc.
Initial Here /s/ PJD
- --------------------
ATTEST:
/s/ R. Saulsbury
- ---------------------------
Title: Vice President
<TABLE>
<CAPTION>
<S> <C>
BORROWER: Troy Group, Inc.
Accepted and effective as of October 20, 1998 By: /s/ Patrick J. Dirk
at Bank's Headquarter Office ------------------------------
Signature of
Title: CEO
---------------------------
Comerica Bank-California By: /s/ Patrick J. Dirk
--------------------------------------- ------------------------------
Signature of
Title: CEO
---------------------------
By: /s/ Barbara D'Amato
-------------------------------------
Signature of Barbara D'Amato
Troy Systems International, Inc.
Title: Vice President
-------------------------------------
By: /s/ Patrick J. Dirk
------------------------------
Signature of
Title: CEO
---------------------------
By: /s/ Patrick J. Dirk
------------------------------
Signature of
Title: CEO
---------------------------
Troy XCD, Inc.
By: /s/ Patrick J. Dirk
------------------------------
Signature of
Title: CEO
---------------------------
</TABLE>
17
<PAGE>
LIBOR
ADDENDUM "A" TO LOAN & SECURITY AGREEMENT
This Addendum "A" to Loan & Security Agreement (this "Addendum") is
entered into as of this 20th day of October, 1998, by and between Comerica
Bank-California ("Bank") and Troy Group, Inc., Troy Systems International,
Inc. and Troy XCD, Inc. ("Borrower"). This Addendum supplements the terms of
the Loan & Security Agreement of even date herewith.
1. DEFINITIONS.
a. ADVANCE. As used herein, "ADVANCE" means a borrowing
requested by Borrower and made by Bank under the Note, including a LIBOR Option
Advance and/or a Base Rate Option Advance.
b. BUSINESS DAY. As used herein, "BUSINESS DAY" means any day
except a Saturday, Sunday or any other day designated as a holiday under Federal
or California statute or regulation.
c. LIBOR. As used herein, "LIBOR" means the rate per annum
(rounded upward if necessary, to the nearest whole 1/8 of 1%) and determined
pursuant to the following formula:
LIBOR= BASE LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
(1) "Base LIBOR" means the rate per annum determined by
Bank at which deposits for the relevant LIBOR Period would be offered to Bank in
the approximate amount of the relevant LIBOR Option Advance in the inter-bank
LIBOR market selected by Bank, upon request of Bank at 10:00 a.m. California
time, on the day that is the first day of such LIBOR Period.
(2) "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the
Federal Reserve Board, as amended), adjusted by Bank for expected changes in
such reserve percentage during the applicable LIBOR Period.
d. LIBOR BUSINESS DAY. As used herein, "LIBOR Business Day"
means a Business day on which dealings in Dollar deposits may be carried out in
the interbank LIBOR market.
e. LIBOR PERIOD. As used herein, "LIBOR PERIOD" means, with
respect to a LIBOR Option Advance:
1
<PAGE>
(1) initially, the period commencing on, as the case may
be, the date the Advance is made or the date on which the Advance is converted
to a LIBOR Option Advance, and continuing for, in every case, thirty (30), sixty
(60), ninety (90) or one hundred eighty (180) days thereafter so long as the
LIBOR Option is quoted for such period in the applicable interbank LIBOR market,
as such period is selected by Borrower in the notice of Advance as provided in
the Note or in the notice of conversion as provided in this Addendum; and
(2) thereafter, each period commencing on the last day of
the next preceding LIBOR Period applicable to such LIBOR Option Advance and
continuing for, in every case, thirty (30), sixty (60), ninety (90) or one
hundred eighty (180) days thereafter so long as the LIBOR Option is quoted for
such period in the applicable interbank LIBOR market, as such period is selected
by Borrower in the notice of continuation as provided in this Addendum.
f. NOTE. As used herein, "NOTE" means the Loan & Security
Agreement of even date herewith.
g. REGULATION D. As used herein, "REGULATION D" means
Regulation D of the Board of Governors of the Federal Reserve System as amended
or supplemented from time to time.
h. REGULATORY DEVELOPMENT. As used herein, "REGULATORY
DEVELOPMENT" means any or all of the following: (i) any change in any law,
regulation or interpretation thereof by any public authority (whether or not
having the force of law); (ii) the application of any existing law, regulation
or the interpretation thereof by any public authority (whether or not having the
force of law); and (iii) compliance by Bank with any request or directive
(whether or not having the force of law) of any public authority.
2. INTEREST RATE OPTIONS. Borrower shall have the following options
regarding the interest rate to be paid by Borrower on Advances under the Note:
a. A rate equal to TWO PERCENT (2.00%) above Bank's LIBOR (the
"LIBOR Option"), which LIBOR Option shall be in effect
during the relevant LIBOR Period; or
b. A rate equal to ONE QUARTER PERCENT (0.25%) below the "Base
Rate" as referenced in the Note and quoted from time to time
by Bank as such rate may change from time to time (the "Base
Rate Option").
3. LIBOR OPTION ADVANCE. The minimum LIBOR Option Advance will not
be less than FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($500,000.00) for any
LIBOR Option Advance.
4. PAYMENT OF INTEREST ON LIBOR OPTION ADVANCES. Interest on each
LIBOR Option Advance shall be payable pursuant to the terms of the Note.
Interest on such LIBOR
2
<PAGE>
Option Advance shall be computed on the basis of a 360-day year and shall be
assessed for the actual number of days elapsed from the first day of the
LIBOR Period applicable thereto but not including the last day thereof.
5. BANK'S RECORDS RE: LIBOR OPTION ADVANCES. With respect to each
LIBOR Option Advance, Bank is hereby authorized to note the date, principal
amount, interest rate and LIBOR Period applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to the Note, which notations shall be prima
facie evidence of the accuracy of the information noted.
6. SELECTION/CONVERSION OF INTEREST RATE OPTIONS. At the time any
Advance is requested under the Note and/or Borrower wishes to select the LIBOR
Option for all or a portion of the outstanding principal balance of the Note,
and at the end of each LIBOR Period, Borrower shall give Bank notice specifying
(a) the interest rate option selected by Borrower; (b) the principal amount
subject thereto; and (c) if the LIBOR Option is selected, the length of the
applicable LIBOR Period. Any such notice may be given by telephone so long as,
with respect to each LIBOR Option selected by Borrower, (i) Bank receives
written confirmation from Borrower not later than three (3) LIBOR Business Days
after such telephone notice is given; and (ii) such notice is given to Bank
prior to 10:00 a.m., California time, on the first day of the LIBOR Period. For
each LIBOR Option requested hereunder, Bank will quote the applicable fixed
LIBOR Rate to Borrower at approximately 10:00 a.m., California time, on the
first day of the LIBOR Period. If Borrower does not immediately accept the rate
quoted by Bank, any subsequent acceptance by Borrower shall be subject to a
redetermination of the rate by Bank; provided, however, that if Borrower fails
to accept any such quotation given, then the quoted rate shall expire and Bank
shall have no obligation to permit a LIBOR Option to be selected on such day.
If no specific designation of interest is made at the time any Advance is
requested under the Note or at the end of any LIBOR Period, Borrower shall be
deemed to have selected the Base Rate Option for such Advance or the principal
amount to which such LIBOR Period applied. At any time the LIBOR Option is in
effect, Borrower may, at the end of the applicable LIBOR Period, convert to the
Base Rate Option. At any time the Base Rate Option is in effect, Borrower may
convert to the LIBOR OPTION, and shall designate a LIBOR Period.
7. DEFAULT INTEREST RATE. From and after the maturity date of the
Note, or such earlier date as all principal owing hereunder becomes due and
payable by acceleration or otherwise, the outstanding principal balance of the
Note shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to three
percent (3.00%) above the rate of interest from time to time applicable to the
Note.
8. PREPAYMENT. Bank is not under any obligation to accept any
prepayment of any LIBOR Option Advance except as described below or as required
under applicable law. Borrower may prepay a Base Rate Option Advance at any
time, without paying any Prepayment Amount, as defined below. Borrower may
prepay a LIBOR Option Advance in increments of Five Hundred Dollars ($500.00)
prior to the end of the LIBOR Period, as long as (i) Bank is provided written
notice of such prepayment at least five (5) LIBOR Business Days prior to the
date thereof (the "Prepayment Date"); and (ii) Borrower pays the Prepayment
Amount. The
3
<PAGE>
notice of prepayment shall contain the following information: (a) the
Prepayment Date; and (b) the LIBOR Option Advance which will be prepaid. On
the Prepayment Date, Borrower shall pay to Bank, in addition to any other
amount that may then be due on the Note, the Prepayment Amount. Bank, in its
sole discretion, may accept any prepayment of a LIBOR Option Advance even if
not required to do so under the Note and may deduct from the amount to be
applied against the LIBOR Option Advance any other amounts required to be
paid as part of the Prepayment Amount.
The Prepaid Principal Amount (as defined below) will be applied to the
LIBOR Option Advance being prepaid as Bank shall determine in its sole
discretion.
If Bank exercises its right to accelerate the payment of the Note prior to
maturity based upon an Event of Default under the Note, Borrower shall pay to
Bank, in addition to any other amounts that may then be due on the Note, on the
date specified by Bank as the Prepayment Date, the Prepayment Amount.
Bank's determination of the Prepayment Amount shall be conclusive in the
absence of obvious error or fraud. If requested in writing by Borrower, Bank
shall provide Borrower a written statement specifying the Prepayment Amount.
The following (the "Prepayment Amount") shall be due and payable in full on
the Prepayment Date:
a. If the principal amount of the LIBOR Option Advance being prepaid
exceeds Seven Hundred Fifty Thousand Dollars ($750,000), then the
Prepayment Amount is the sum of: (i) the amount of the principal
balance of the LIBOR Option Advance which Borrower has elected to
prepay or the amount of the principal balance of the LIBOR Option
Advance which Bank has required Borrower to prepay because of
acceleration, as the case may be (the "Prepaid Principal
Amount"); (ii) interest accruing on the Prepaid Principal Amount
up to, but not including, the Prepayment Date; (iii) Five Hundred
Dollars ($500.00); plus (iv) the present value, discounted at the
Reinvestment Rates (as defined below) of the positive amount by
which (A) the interest Bank would have earned had the Prepaid
Principal Amount not been paid prior to the end of the LIBOR
Period at the Note's interest rate exceeds (B) the interest Bank
would earn by reinvesting the Prepaid Principal Amount at the
Reinvestment Rates.
b. If the principal amount of the LIBOR Option Advance being prepaid
is Seven Hundred Fifty Thousand Dollars ($750,000) or less, then
the Prepayment Amount is the sum of: (i) the principal amount of
the LIBOR Option Advance which Borrower has elected to prepay or
the principal amount of the LIBOR Option Advance which Bank has
required Borrower to prepay because of acceleration due to an
Event of Default under the Note, as the case may be (the "Prepaid
Principal Amount"); (ii) interest
4
<PAGE>
accruing on the Prepaid Principal Amount up to, but not
including, the Prepayment Date; plus (iii) an amount equal to
two percent (2%) of the Prepaid Principal Amount.
"Reinvestment Rates" means the per annum rates of interest equal to one
half percent (1/2%) above the rates of interest reasonably determined by Bank to
be in effect not more than seven (7) days prior to the Prepayment Date in the
secondary market for United States Treasury Obligations in amount(s) and with
maturity(ies) which correspond (as closely as possible) to the LIBOR Option
Advance being prepaid.
BY INITIALING BELOW, BORROWER ACKNOWLEDGE(S) AND AGREE(S) THAT: (A) THERE
IS NO RIGHT TO PREPAY ANY LIBOR OPTION ADVANCE, IN WHOLE OR IN PART, WITHOUT
PAYING THE PREPAYMENT AMOUNT, EXCEPT AS OTHERWISE REQUIRED UNDER APPLICABLE LAW;
(B) BORROWER SHALL BE LIABLE FOR PAYMENT OF THE PREPAYMENT AMOUNT IF BANK
EXERCISES ITS RIGHT TO ACCELERATE PAYMENT OF ANY LIBOR OPTION ADVANCE AS PART OR
ALL OF THE OBLIGATIONS OWING UNDER THE NOTE, INCLUDING, WITHOUT LIMITATION,
ACCELERATION UNDER A DUE-ON-SALE PROVISION; (C) BORROWER WAIVES ANY RIGHTS UNDER
SUCCESSOR STATUTE; AND (D) BANK HAS MADE EACH LIBOR OPTION ADVANCE PURSUANT TO
THE NOTE IN RELIANCE ON THESE AGREEMENTS.
/s/ PJD
- -------------------
BORROWER'S INITIALS
9. HOLD HARMLESS AND INDEMNIFICATION. Borrower agrees to indemnify
Bank and to hold Bank harmless from, and to reimburse Bank on demand for, all
losses and expenses which Bank sustains or incurs as a result of (i) any payment
of a LIBOR Option Advance prior to the last day of the applicable LIBOR Period
for any reason, including, without limitation, termination of the Note, whether
pursuant to this Addendum or the occurrence of an Event of Default; (ii) any
termination of a LIBOR Period prior to the date it would otherwise end in
accordance with this Addendum; or (iii) any failure by Borrower, for any reason,
to borrow any portion of a LIBOR Option Advance.
10. FUNDING LOSSES. The indemnification and hold harmless provisions
set forth in this Addendum shall include, without limitation, all losses and
expenses arising from interest and fees that Bank pays to lenders of funds it
obtains in order to fund the loans to Borrower on the basis of the LIBOR
Option(s) and all losses incurred in liquidating or re-deploying deposits from
which such funds were obtained and loss of profit for the period after
termination. A written statement by Bank to Borrower of such losses and
expenses shall be conclusive and binding, absent manifest error, for all
purposes. This obligation shall survive the termination of this Addendum and
the payment of the Note.
5
<PAGE>
11. REGULATORY DEVELOPMENTS OR OTHER CIRCUMSTANCES RELATING TO
ILLEGALITY OR IMPRACTICALITY OF LIBOR. If any Regulatory Development or other
circumstances relating to the interbank Euro-dollar markets shall, at any time,
in Bank's reasonable determination, make it unlawful or impractical for Bank to
fund or maintain, during any LIBOR Period, to determine or charge interest rates
based upon LIBOR, Bank shall give notice of such circumstances to Borrower and:
(i) In the case of a LIBOR Period in progress, Borrower shall, if
requested by Bank, promptly pay any interest which had accrued prior
to such request and the date of such request shall be deemed to be the
last day of the term of the LIBOR Period; and
(ii) No LIBOR Period may be designated thereafter until Bank determines
that such would be practical.
12. ADDITIONAL COSTS. Borrower shall pay to Bank from time to time,
upon Bank's request, such amounts as Bank determines are needed to compensate
Bank for any costs it incurred which are attributable to Bank having made or
maintained a LIBOR Option Advance or to Bank's obligation to make a LIBOR Option
Advance, or any reduction in any amount receivable by Bank hereunder with
respect to any LIBOR Option or such obligation (such increases in costs and
reductions in amounts receivable being herein called "ADDITIONAL COSTS"),
resulting from any Regulatory Developments, which (i) change the basis of
taxation of any amounts payable to Bank hereunder with respect to any LIBOR
Option Advance (other than taxes imposed on the overall net income of Bank for
any LIBOR Option Advance by the jurisdiction where Bank is headquartered or the
jurisdiction where Bank extends the LIBOR Option Advance; (ii) impose or modify
any reserve, special deposit, or similar requirements relating to any extensions
of credit or other assets of, or any deposits with or other liabilities of, Bank
(including any LIBOR Option Advance or any deposits referred to in the
definition of LIBOR); or (iii) impose any other condition affecting this
Addendum (or any of such extension of credit or liabilities). Bank shall notify
Borrower of any event occurring after the date hereof which entitles Bank to
compensation pursuant to this paragraph as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation.
Determinations by Bank for purposes of this paragraph, shall be conclusive,
provided that such determinations are made on a reasonable basis.
13. LEGAL EFFECT. Except as specifically modified hereby, all of the
terms and conditions of the Note remain in full force and effect.
6
<PAGE>
IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date
first set forth above.
TROY GROUP, INC. COMERICA BANK-CALIFORNIA
By: /s/ Patrick J. Dirk By: /s/ Barbara D'Amato
----------------------------- -------------------------------------
Barbara D'Amato
Title: CEO Title: Vice President
-------------------------- ----------------------------------
By:
-----------------------------
Title:
--------------------------
TROY SYSTEMS INTERNATIONAL, INC.
By: /s/ Patrick J. Dirk
-----------------------------
Title: CEO
--------------------------
By:
-----------------------------
Title:
--------------------------
TROY XCD, INC.
By: /s/ Patrick J. Dirk
-----------------------------
Title: CEO
--------------------------
By:
-----------------------------
Title:
--------------------------
7
<PAGE>
ADDENDUM "B"
TO LOAN AND SECURITY AGREEMENT
Attached to that certain Loan and Security
Agreement dated October 20, 1998 by and between
Troy Group, Inc., Troy Systems International,
Inc., Troy XCD, Inc. and Comerica Bank-California
and made a part thereof.
CONTROLS:
1) Annual 10-K within 15 days of filing (after Initial Public Offering);
2) Quarterly 10-Q within 15 days of filing (after Initial Public Offering);
3) Quarterly Covenant Compliance Certificate within 45 days of either 10-Q
filing or quarter end;
4) Annual personal financial statement within 120 days of calendar year end
and individual tax return with all schedules and K1s included, within 30
days of filing for Patrick Dirk;
5) Accounts Receivable and Inventory audits post-closing within 30 days;
6) Semi-annual Accounts Receivable and Inventory audits satisfactory to the
Bank;
7) Satisfactory post-closing litigation check in California and West Virginia
within 30 days; and,
8) other information as may be requested by the Bank from time to time.
OTHER COVENANTS:
1) Post-acquisition balance sheet and Covenant Compliance Certificate within
30 days of closing; and,
2) All out-of-pocket expenses incurred by Bank will be reimbursed by Troy
Group, Inc. to Bank, including but not limited to Bank audits and legal
fees, if any.
COVENANT VIOLATION:
1) In the event of a covenant violation, Bank may charge a default fee of
$1,000.00 per covenant per occurrence. In the event that Borrower shall
fail to timely deliver any financial statements, Accounts Receivable or
Accounts Payable agings, Covenant Compliance and Borrowing Base
Certificates, Borrower may pay an Administrative Fee of $100.00 per late
item per occurrence.
DEFINITIONS:
1) Effective Tangible Net Worth is defined as Net Worth, minus Intangible
Assets and Notes Receivable from shareholders/affiliates, plus Subordinated
Debt.
<PAGE>
2) Cash Flow Coverage is defined at Net Income after Tax/Distributions, plus
Non-cash Depreciation and Amortization, divided by current maturities of
long term debt and current maturities of capital leases.
<PAGE>
EXHIBIT 10.18
COMERICA
VARIABLE RATE-INSTALLMENT NOTE
- -------------------------------------------------------------------------------
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION#
$600,000.00 October 20, 1998 November 01, 2000 33-0807798
- -------------------------------------------------------------------------------
For Value Received, the undersigned promise(s) to pay to the order of
Comerica Bank-California ("Bank"), at any office of the Bank in the State of
California Six Hundred Thousand and no/100 Dollars (U.S.) in installments of
$25,000.00 each plus interest on the unpaid balance from the date of this
Note at a per annum rate equal to the Bank's base rate from time to time in
effect plus 0.000 % per annum until maturity, whether by acceleration or
otherwise, or until Default, as later defined, and after that at a default
rate equal to the rate of interest otherwise prevailing under this Note plus
3% per annum (but in no event in excess of the maximum rate permitted by
law). Interest shall be calculated for the actual number of days the
principal is outstanding on the basis of a 360 day year if this Note
evidences a business or commercial loan or a 365 day year if a consumer loan.
The Bank's "base rate" is that annual rate of interest so designated by the
Bank and which is changed by the Bank from time to time. Interest rate
changes will be effective for interest computation purposes as and when the
Bank's base rate changes. Installments of principal and accrued interest due
under this Note shall be payable on the 1st day of each MONTH, commencing on
December 01, 1998, and the entire remaining unpaid balance of principal and
accrued interest shall be payable on the Maturity Date set forth above. If
the frequency of principal and interest installments is not otherwise
specified, installments of principal and interest due under this Note shall
be payable monthly on the first day of each month.
In the event the periodic installments set forth above are inclusive of
interest, these installments are calculated at an assumed fixed interest rate
and an assumed amortization term. The amortization term ends on November 01,
2000 (if left blank, the amortization term ends on the Maturity Date). In
the event this Note evidences a business or commercial loan and the Bank's
base rate changes, the Bank, at its sole option, may from time to time
recalculate the periodic installment amount so that the remaining periodic
installments will fully amortize the remaining loan balance within the
remaining amortization term in equal installments at the interest rate then
being charged under this Note. THE UNDERSIGNED AGREE(S) TO PAY THE PERIODIC
INSTALLMENTS AS THEY MAY BE RECALCULATED BY THE BANK, AT THE BANK'S SOLE
OPTION, FROM TIME TO TIME AND ACKNOWLEDGE(S) THAT A RECALCULATION SHALL NOT
AFFECT THE MATURITY DATE OR THE OTHER TERMS AND PROVISIONS OF THIS NOTE. If
this Note or any installment under this Note shall become payable on a day
other than a day on which the Bank is open for business, this payment may be
extended to the next succeeding business day and interest shall be payable at
the rate specified in this Note during this extension. Any payments of
principal in excess of the installment payments required under this Note need
not be accepted by the Bank (except as required under applicable law), but if
accepted shall apply to the installments last falling due. A late
installment charge equal to 5% of each late installment may be charged on any
installment payment not received by the Bank within 10 calendar days after
the installment due date, but acceptance of payment of this charge shall not
waive any default under this Note.
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or
absolute, now existing or later arising, and however evidenced (collectively
"Indebtedness") are secured by and the Bank is granted a security interest in
all items deposited in any account of any of the undersigned with the Bank
and by all proceeds of these items (cash or otherwise), all account balances
of any of the undersigned from time to time with the Bank, by all property of
any of the undersigned from time to time in the possession of the Bank and by
any other collateral, rights and properties described in each and every deed
of trust, mortgage, security agreement, pledge, assignment and other
agreement which has been, or will at any time(s) later be, executed by any
(or all) of the undersigned to or for the benefit of the Bank (collectively
"Collateral"). Notwithstanding the above, (i) to the extent that any portion
of the Indebtedness is a consumer loan, that portion shall not be secured by
any deed of trust or mortgage on or other security interest in any of the
undersigned's principal dwelling or in any of the undersigned's real property
which is not a purchase money security interest as to that portion, unless
expressly provided to the contrary in another place, or (ii) if the
undersigned (or any of them) has (have) given or give(s) Bank a deed of trust
or mortgage covering real property, that deed of trust or mortgage shall not
secure this Note or any other indebtedness of the undersigned (or any of
them), unless expressly provided to the contrary in another place.
If the undersigned (or any of them) or any guarantor under a guaranty of all or
part of the Indebtedness ("guarantor") (a) fail(s) to pay this Note or any of
the Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to
pay any Indebtedness owing on a demand basis upon demand; or (b) fail(s) to
comply with any of the terms or provisions of any agreement between the
undersigned (or any of them) or any guarantor and the Bank; or (c) become(s)
insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy,
or a reorganization, arrangement or creditor composition proceeding, (if a
business entity) cease(s) doing business as a going concern, (if a natural
person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any
general partner of it dies, becomes incompetent or becomes the subject of a
bankruptcy proceeding or (if a corporation or a limited liability company) is
the subject of a dissolution, merger or
<PAGE>
consolidation: or (d) if any warranty or representation made by any of the
undersigned or any guarantor in connection with this Note or any of the
Indebtedness shall be discovered to be untrue or incomplete; or (e) if there
is any termination, notice of termination, or breach of any guaranty, pledge,
collateral assignment or subordination agreement relating to all or any part
of the Indebtedness; or (f) if there is any failure by any of the undersigned
or any guarantor to pay when due any of its indebtedness (other than to the
Bank) or in the observance or performance of any term, covenant or condition
in any document evidencing, securing or relating to such indebtedness; or (g)
if the Bank deems itself insecure, believing that the prospect of payment of
this Note or any of the Indebtedness is impaired or shall fear deterioration,
removal or waste of any of the Collateral; or (h) if there is filed or issued
a levy or writ of attachment or garnishment or other like judicial process
upon the undersigned (or any of them) or any guarantor or any of the
Collateral, including without limit, any accounts of the undersigned (or any
of them) or any guarantor with the Bank, then the Bank,upon the occurrence of
any of these events (each a "Default"), may at its option and without prior
notice to the undersigned (or any of them), declare any or all of the
Indebtedness to be immediately due and payable (notwithstanding any
provisions contained in the evidence thereof to the contrary), sell or
liquidate all or any portion of the Collateral, set off against the
Indebtedness any amounts owing by the Bank to the undersigned (or any of
them), charge interest at the default rate provided in the document
evidencing the relevant Indebtedness and exercise any one or more of the
rights and remedies granted to the Bank by any agreement with the undersigned
(or any of them) or given to it under applicable law. In addition, if this
Note is secured by a deed of trust or mortgage covering real property, then
the trustor or mortgagor shall not mortgage or pledge the mortgaged premises
as security for any other indebtedness or obligations. This Note, together
with all other indebtedness secured by said deed of trust or mortgage, shall
become due and payable immediately, without notice, at the option of the
Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged
premises for any other indebtedness or obligations or shall convey, assign or
transfer the mortgaged premises by deed, installment sale contact or other
instrument, or (b) if the title to the mortgaged premises shall become vested
in any other person or party in any manner whatsoever, or (c) if there is any
disposition (through one or more transactions) of legal or beneficial title
to a controlling interest of said trustor or mortgagor. All payments under
this Note shall be in immediately available United States funds, without
setoff or counterclaim.
If this Note is signed by two or more parties (whether by all as makers or by
one or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices and agree(s) that no extension or
indulgence to the undersigned (or any of them) or release, substitution or
nonenforcement of any security, or release or substitution of any of the
undersigned, any guarantor or any other party, whether with or without
notice, shall affect the obligations of any of the undersigned. The
undersigned waive(s) all defenses or right to discharge available under
Section 3-605 of the California Uniform Commercial Code and waive(s) all
other suretyship defenses or right to discharge. The undersigned agree(s)
that the Bank has the right to sell, assign, or grant participations, or any
interest, in any or all of the indebtedness, and that, in connection with
this right, but without limiting its ability to make other disclosures to the
full extent allowable, the Bank may disclose all documents and information
which the Bank now or later has relating to the undersigned or the
Indebtedness. The undersigned agree(s) that the Bank may provide information
relating to this Note or to the undersigned to the Bank's parent, affiliates,
subsidiaries and service providers.
The undersigned agree(s) to reimburse the holder or owner of this Note for
any and all costs and expenses (including without limit, court costs, legal
expenses and reasonable attorney fees, whether inside or outside counsel is
used, whether or not suit is instituted and, if suit is instituted, whether
at the trial court level, appellate level, in a bankruptcy, probate or
administrative proceeding or otherwise) incurred in collecting or attempting
to collect this Note or incurred in any other matter or proceeding relating
to this Note.
The undersigned acknowledge(s) and agree(s) that there arc no contrary
agreements, oral or written, establishing a term of this Note and agree(s)
that the terms and conditions of this Note may not be amended, waived or
modified except in a writing signed by an officer of the Bank expressly
stating that the writing constitutes an amendment, waiver or modification of
the terms of this Note. As used in this Note, the word "undersigned" means,
individually and collectively, each maker, accommodation party, indorser and
other party signing this Note in a similar capacity. If any provision of this
Note is unenforceable in whole or part for any reason, the remaining
provisions shall continue to be effective. THIS NOTE IS MADE IN THE STATE OF
California AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF California, WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES.
The maximum interest rate shall not exceed the highest applicable usury
ceiling.
THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING
(OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE,
KNOWINGLY AND VOLUNTARILY AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO
TRIAL BY JURY IN THE
<PAGE>
EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY
WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
This Note is cross defaulted and cross collateralized to all present and
future indebtedness of Troy Group, Inc., Troy Systems International, Inc. and
Troy XCD, Inc. This note is supported by Loan and Security Agreement in the
amount of $5,000,000.00 dated October 20, 1998. All these provisions shall
apply to this Note and shall survive until this Note is paid in full.
Initial Here /s/ PJD
----------
Troy Group, Inc.
By: /s/ Patrick J. Dirk Its: CEO
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
Troy Systems International, Inc.
By: /s/ Patrick J. Dirk Its: CEO
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
Troy XCD, Inc.
By: /s/ Patrick J. Dirk Its: CEO
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
2331 S. Pullman Street Santa Ana CA USA 92705
- ------------------------------------------------------------------------------
STREET ADDRESS CITY STATE COUNTRY ZIP CODE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
For Bank Use Only CCAR#
- ------------------------------------------------------------------------------
<S><C>
Loan Officer Loan Group Obligor(s) Name
Initials Name
BD Metro Orange Troy Group, Inc., Troy Systems International,
County Inc. and Troy XCD, Inc.
- ------------------------------------------------------------------------------
Loan Officer Loan Group No. Obligor # Note # Amount
I.D. No.
48653 95784 $600,000.00
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
COMERICA
Borrower's Authorization
- ------------------------------------------------------------------------------
Date: October 20, 1998
------------------------
I (we) hereby authorize and direct Comerica Bank-California ("Bank") to pay
to UNION BANK OF CALIFORNIA $
--------------------------------------------- --------------------------
to $
--------------------------------------------- --------------------------
to $
--------------------------------------------- --------------------------
to $
--------------------------------------------- --------------------------
of the proceeds of my (our) loan from the Bank evidenced by a note in the
original principal amount of:
$600,000.00 dated October 20, 1998.
- ----------------- -----------------
Borrower(s):
Troy Group, Inc.
By: /s/ Patrick J. Dirk Its: CEO
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
Troy Systems International, Inc.
By: /s/ Patrick J. Dirk Its: CEO
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
<PAGE>
Troy XCD, Inc.
By: /s/ Patrick J. Dirk Its: CEO
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
---------------------------------------------------------------------------
SIGNATURE OF TITLE
<PAGE>
EXHIBIT 10.19
ComericA
VARIABLE RATE-INSTALLMENT NOTE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION#
<S> <C> <C> <C>
$3,000,000.00 October 20, 1998 November 01, 2003 33-0807798
- --------------------------------------------------------------------------------
</TABLE>
For Value Received, the undersigned promise(s) to pay to the order of
Comerica Bank-California ("Bank"), at any office of the Bank in the State of
California Three Million and no/100 Dollars (U.S.) in installments of
$50,000.00 each plus* interest on the unpaid balance from the date of this
Note at a per annum rate equal to the Bank's base rate from time to time in
effect plus* 0.500 % per annum until maturity, whether by acceleration or
otherwise, or until Default, as later defined, and after that at a default
rate equal to the rate of interest otherwise prevailing under this Note plus
3% per annum (but in no event in excess of the maximum rate permitted by
law). Interest shall be calculated for the actual number of days the
principal is outstanding on the basis of a 360 day year if this Note
evidences a business or commercial loan or a 365 day year if a consumer loan.
The Bank's "base rate" is that annual rate of interest so designated by the
Bank and which is changed by the Bank from time to time. Interest rate
changes will be effective for interest computation purposes as and when the
Bank's base rate changes. Installments of principal and accrued interest due
under this Note shall be payable on the 1st day of each MONTH, commencing on
December 01, 1998, and the entire remaining unpaid balance of principal and
accrued interest shall be payable on the Maturity Date set forth above. If
the frequency of principal and interest installments is not otherwise
specified, installments of principal and interest due under this Note shall
be payable monthly on the first day of each month.
*See Addendum "A" attached hereto and made a part hereof for additional Rate
options.
In the event the periodic installments set forth above are inclusive of
interest, these installments are calculated at an assumed fixed interest rate
and an assumed amortization term. The amortization term ends on November 01,
2003 (if left blank, the amortization term ends on the Maturity Date). In
the event this Note evidences a business or commercial loan and the Bank's
base rate changes, the Bank, at its sole option, may from time to time
recalculate the periodic installment amount so that the remaining periodic
installments will fully amortize the remaining loan balance within the
remaining amortization term in equal installments at the interest rate then
being charged under this Note. THE UNDERSIGNED AGREE(S) TO PAY THE PERIODIC
INSTALLMENTS AS THEY MAY BE RECALCULATED BY THE BANK, AT THE BANK'S SOLE
OPTION, FROM TIME TO TIME AND ACKNOWLEDGE(S) THAT A RECALCULATION SHALL NOT
AFFECT THE MATURITY DATE OR THE OTHER TERMS AND PROVISIONS OF THIS NOTE. If
this Note or any installment under this Note shall become payable on a day
other than a day on which the Bank is open for business, this payment may be
extended to the next succeeding business day and interest shall be payable at
the rate specified in this Note during this extension. Any payments of
principal in excess of the installment payments required under this Note need
not be accepted by the Bank (except as required under applicable law), but if
accepted shall apply to the installments last falling due. A late
installment charge equal to 5% of each late installment may be charged on any
installment payment not received by the Bank within 10 calendar days after
the installment due date, but acceptance of payment of this charge shall not
waive any default under this Note.
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or
absolute, now existing or later arising, and however evidenced (collectively
"Indebtedness") are secured by and the Bank is granted a security interest in
all items deposited in any account of any of the undersigned with the Bank
and by all proceeds of these items (cash or otherwise), all account balances
of any of the undersigned from time to time with the Bank, by all property of
any of the undersigned from time to time in the possession of the Bank and by
any other collateral, rights and properties described in each and every deed
of trust, mortgage, security agreement, pledge, assignment and other
agreement which has been, or will at any time(s) later be, executed by any
(or all) of the undersigned to or for the benefit of the Bank (collectively
"Collateral"). Notwithstanding the above, (i) to the extent that any portion
of the Indebtedness is a consumer loan, that portion shall not be secured by
any deed of trust or mortgage on or other security interest in any of the
undersigned's principal dwelling or in any of the undersigned's real property
which is not a purchase money security interest as to that portion, unless
expressly provided to the contrary in another place, or (ii) if the
undersigned (or any of them) has (have) given or give(s) Bank a deed of trust
or mortgage covering real property, that deed of trust or mortgage shall not
secure this Note or any other indebtedness of the undersigned (or any of
them), unless expressly provided to the contrary in another place.
If the undersigned (or any of them) or any guarantor under a guaranty of all or
part of the Indebtedness ("guarantor") (a) fail(s) to pay this Note or any of
the Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to
pay any Indebtedness owing on a demand basis upon demand; or (b) fail(s) to
comply with any of the terms or provisions of any agreement between the
undersigned (or any of them) or any guarantor and the Bank; or (c) become(s)
insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy,
or a reorganization, arrangement or creditor composition proceeding, (if a
business entity) cease(s) doing business as a going concern, (if a natural
person) die(s) or become(s)
<PAGE>
incompetent, (if a partnership) dissolve(s) or any general partner of it
dies, becomes incompetent or becomes the subject of a bankruptcy proceeding
or (if a corporation or a limited liability company) is the subject of a
dissolution, merger or consolidation: or (d) if any warranty or
representation made by any of the undersigned or any guarantor in connection
with this Note or any of the Indebtedness shall be discovered to be untrue or
incomplete; or (e) if there is any termination, notice of termination, or
breach of any guaranty, pledge, collateral assignment or subordination
agreement relating to all or any part of the Indebtedness; or (f) if there is
any failure by any of the undersigned or any guarantor to pay when due any of
its indebtedness (other than to the Bank) or in the observance or performance
of any term, covenant or condition in any document evidencing, securing or
relating to such indebtedness; or (g) if the Bank deems itself insecure,
believing that the prospect of payment of this Note or any of the
Indebtedness is impaired or shall fear deterioration, removal or waste of any
of the Collateral; or (h) if there is filed or issued a levy or writ of
attachment or garnishment or other like judicial process upon the undersigned
(or any of them) or any guarantor or any of the Collateral, including without
limit, any accounts of the undersigned (or any of them) or any guarantor with
the Bank, then the Bank,upon the occurrence of any of these events (each a
"Default"), may at its option and without prior notice to the undersigned (or
any of them), declare any or all of the Indebtedness to be immediately due
and payable (notwithstanding any provisions contained in the evidence thereof
to the contrary), sell or liquidate all or any portion of the Collateral, set
off against the Indebtedness any amounts owing by the Bank to the undersigned
(or any of them), charge interest at the default rate provided in the
document evidencing the relevant Indebtedness and exercise any one or more of
the rights and remedies granted to the Bank by any agreement with the
undersigned (or any of them) or given to it under applicable law. In
addition, if this Note is secured by a deed of trust or mortgage covering
real property, then the trustor or mortgagor shall not mortgage or pledge the
mortgaged premises as security for any other indebtedness or obligations.
This Note, together with all other indebtedness secured by said deed of trust
or mortgage, shall become due and payable immediately, without notice, at the
option of the Bank, (a) if said trustor or mortgagor shall mortgage or pledge
the mortgaged premises for any other indebtedness or obligations or shall
convey, assign or transfer the mortgaged premises by deed, installment sale
contact or other instrument, or (b) if the title to the mortgaged premises
shall become vested in any other person or party in any manner whatsoever, or
(c) if there is any disposition (through one or more transactions) of legal
or beneficial title to a controlling interest of said trustor or mortgagor.
All payments under this Note shall be in immediately available United States
funds, without setoff or counterclaim.
If this Note is signed by two or more parties (whether by all as makers or by
one or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices and agree(s) that no extension or
indulgence to the undersigned (or any of them) or release, substitution or
nonenforcement of any security, or release or substitution of any of the
undersigned, any guarantor or any other party, whether with or without
notice, shall affect the obligations of any of the undersigned. The
undersigned waive(s) all defenses or right to discharge available under
Section 3-605 of the California Uniform Commercial Code and waive(s) all
other suretyship defenses or right to discharge. The undersigned agree(s)
that the Bank has the right to sell, assign, or grant participations, or any
interest, in any or all of the indebtedness, and that, in connection with
this right, but without limiting its ability to make other disclosures to the
full extent allowable, the Bank may disclose all documents and information
which the Bank now or later has relating to the undersigned or the
Indebtedness. The undersigned agree(s) that the Bank may provide information
relating to this Note or to the undersigned to the Bank's parent, affiliates,
subsidiaries and service providers.
The undersigned agree(s) to reimburse the holder or owner of this Note for
any and all costs and expenses (including without limit, court costs, legal
expenses and reasonable attorney fees, whether inside or outside counsel is
used, whether or not suit is instituted and, if suit is instituted, whether
at the trial court level, appellate level, in a bankruptcy, probate or
administrative proceeding or otherwise) incurred in collecting or attempting
to collect this Note or incurred in any other matter or proceeding relating
to this Note.
The undersigned acknowledge(s) and agree(s) that there are no contrary
agreements, oral or written, establishing a term of this Note and agree(s)
that the terms and conditions of this Note may not be amended, waived or
modified except in a writing signed by an officer of the Bank expressly
stating that the writing constitutes an amendment, waiver or modification of
the terms of this Note. As used in this Note, the word "undersigned" means,
individually and collectively, each maker, accommodation party, indorser and
other party signing this Note in a similar capacity. If any provision of this
Note is unenforceable in whole or part for any reason, the remaining
provisions shall continue to be effective. THIS NOTE IS MADE IN THE STATE OF
California AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF California, WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES.
The maximum interest rate shall not exceed the highest applicable usury
ceiling.
THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
<PAGE>
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE,
KNOWINGLY AND VOLUNTARILY AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO
TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
This Note is cross defaulted and/or cross collateralized to all present and
future indebtedness of Troy Group, Inc., Troy Systems International, Inc. and
Troy XCD, Inc. See Letter Agreement dated October 20, 1998. This Note is
supported by Loan and Security Agreement in the amount of $5,000,000.00 dated
October 20, 1998. All these provisions shall apply to this Note and shall
survive until this Note is paid in full.
Initial Here /s/ PJD
----------------
Troy Group, Inc.
By: /s/ Patrick J. Dirk Its: CEO
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
Troy Systems International, Inc.
By: /s/ Patrick J. Dirk Its: CEO
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
Troy XCD, Inc.
By: /s/ Patrick J. Dirk Its: CEO
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
By: Its:
------------------------------------------------------------------------
SIGNATURE OF TITLE
2331 S. Pullman Street Santa Ana CA USA 92705
- -----------------------------------------------------------------------------
STREET ADDRESS CITY STATE COUNTRY ZIP CODE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For Bank Use Only CCAR#
- -----------------------------------------------------------------------------------------------------
<S><C>
Loan Officer Initials Loan Group Name Obligor(s) Name
BD Metro Orange County Troy Group, Inc., Troy Systems International, Inc. and
Troy XCD, Inc.
- -----------------------------------------------------------------------------------------------------
Loan Officer I.D. No. Loan Group No. Obligor # Note # Amount
48653 95784 $3,000,000.00
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LIBOR
ADDENDUM "A" TO VARIABLE RATE-INSTALLMENT NOTE
This Addendum "A" to Variable Rate-Installment Note (this "Addendum") is
entered into as of this 20th day of October, 1998, by and between Comerica
Bank-California ("Bank") and Troy Group, Inc., Troy Systems International,
Inc. and Troy XCD, Inc. ("Borrower"). This Addendum supplements the terms of
the Variable Rate-Installment Note of even date herewith.
1. DEFINITIONS.
a. ADVANCE. As used herein, "ADVANCE" means a borrowing
requested by Borrower and made by Bank under the Note, including a LIBOR
Option Advance and/or a Base Rate Option Advance.
b. BUSINESS DAY. As used herein, "BUSINESS DAY" means any
day except a Saturday, Sunday or any other day designated as a holiday under
Federal or California statute or regulation.
c. LIBOR. As used herein, "LIBOR" means the rate per annum
(rounded upward if necessary, to the nearest whole 1/8 of 1%) and determined
pursuant to the following formula:
LIBOR= Base LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
(1) "Base LIBOR" means the rate per annum determined by
Bank at which deposits for the relevant LIBOR Period would be offered to Bank
in the approximate amount of the relevant LIBOR Option Advance in the
inter-bank LIBOR market selected by Bank, upon request of Bank at 10:00 a.m.
California time, on the day that is the first day of such LIBOR Period.
(2) "LIBOR Reserve Percentage" means the reserve
percentage prescribed by the Board of Governors of the Federal Reserve System
(or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D
of the Federal Reserve Board, as amended), adjusted by Bank for expected
changes in such reserve percentage during the applicable LIBOR Period.
d. LIBOR BUSINESS DAY. As used herein, "LIBOR Business Day"
means a Business day on which dealings in Dollar deposits may be carried out
in the interbank LIBOR market.
e. LIBOR PERIOD. As used herein, "LIBOR PERIOD" means, with
respect to a LIBOR Option Advance:
1
<PAGE>
(1) initially, the period commencing on, as the case may
be, the date the Advance is made or the date on which the Advance is
converted to a LIBOR Option Advance, and continuing for, in every case,
thirty (30), sixty (60), ninety (90) or one hundred eighty (180) days
thereafter so long as the LIBOR Option is quoted for such period in the
applicable interbank LIBOR market, as such period is selected by Borrower in
the notice of Advance as provided in the Note or in the notice of conversion
as provided in this Addendum; and
(2) thereafter, each period commencing on the last day
of the next preceding LIBOR Period applicable to such LIBOR Option Advance
and continuing for, in every case, thirty (30), sixty (60), ninety (90) or
one hundred eighty (180) days thereafter so long as the LIBOR Option is
quoted for such period in the applicable interbank LIBOR market, as such
period is selected by Borrower in the notice of continuation as provided in
this Addendum.
f. NOTE. As used herein, "NOTE" means the Variable
Rate-Installment Note of even date herewith.
g. REGULATION D. As used herein, "REGULATION D" means
Regulation D of the Board of Governors of the Federal Reserve System as
amended or supplemented from time to time.
h. REGULATORY DEVELOPMENT. As used herein, "REGULATORY
DEVELOPMENT" means any or all of the following: (i) any change in any law,
regulation or interpretation thereof by any public authority (whether or not
having the force of law); (ii) the application of any existing law,
regulation or the interpretation thereof by any public authority (whether or
not having the force of law); and (iii) compliance by Bank with any request
or directive (whether or not having the force of law) of any public authority.
2. INTEREST RATE OPTIONS. Borrower shall have the following
options regarding the interest rate to be paid by Borrower on Advances under
the Note:
WHEN DEBT/EFFECTIVE TANGIBLE NET WORTH IS AT OR LESS THAN 2.00:1.00:
a. A rate equal to Two and Three Quarter percent (2.75%) above
Bank's LIBOR, (the "LIBOR Option"), which LIBOR Option shall
be in effect during the relevant LIBOR Period; or
b. A rate equal to One half percent (0.50%) above the "Base
Rate" as referenced in the Note and quoted from time to time
by Bank as such rate may change from time to time (the "Base
Rate Option").
2
<PAGE>
WHEN DEBT/EFFECTIVE TANGIBLE NET WORTH IS GREATER THAN 2.00:1.00:
a. A rate equal to Three percent (3.00%) above Bank's LIBOR,
(the "LIBOR Option"), which LIBOR Option shall be in effect
during the relevant LIBOR Period; or
c. A rate equal to Three Quarter percent (0.75%) above the
"Base Rate" as referenced in the Note and quoted from time
to time by Bank as such rate may change from time to time
(the "Base Rate Option").
3. LIBOR OPTION ADVANCE. The minimum LIBOR Option Advance will
not be less than ONE MILLION AND 00/100 DOLLARS ($1,000,000.00) for any LIBOR
Option Advance.
4. PAYMENT OF INTEREST ON LIBOR OPTION ADVANCES. Interest on
each LIBOR Option Advance shall be payable pursuant to the terms of the Note.
Interest on such LIBOR Option Advance shall be computed on the basis of a
360-day year and shall be assessed for the actual number of days elapsed from
the first day of the LIBOR Period applicable thereto but not including the
last day thereof.
5. BANK'S RECORDS RE: LIBOR OPTION ADVANCES. With respect to
each LIBOR Option Advance, Bank is hereby authorized to note the date,
principal amount, interest rate and LIBOR Period applicable thereto and any
payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to the Note, which
notations shall be prima facie evidence of the accuracy of the information
noted.
6. SELECTION/CONVERSION OF INTEREST RATE OPTIONS. At the time
any Advance is requested under the Note and/or Borrower wishes to select the
LIBOR Option for all or a portion of the outstanding principal balance of the
Note, and at the end of each LIBOR Period, Borrower shall give Bank notice
specifying (a) the interest rate option selected by Borrower; (b) the
principal amount subject thereto; and (c) if the LIBOR Option is selected,
the length of the applicable LIBOR Period. Any such notice may be given by
telephone so long as, with respect to each LIBOR Option selected by Borrower,
(i) Bank receives written confirmation from Borrower not later than three (3)
LIBOR Business Days after such telephone notice is given; and (ii) such
notice is given to Bank prior to 10:00 a.m., California time, on the first
day of the LIBOR Period. For each LIBOR Option requested hereunder, Bank
will quote the applicable fixed LIBOR Rate to Borrower at approximately 10:00
a.m., California time, on the first day of the LIBOR Period. If Borrower
does not immediately accept the rate quoted by Bank, any subsequent
acceptance by Borrower shall be subject to a redetermination of the rate by
Bank; provided, however, that if Borrower fails to accept any such quotation
given, then the quoted rate shall expire and Bank shall have no obligation to
permit a LIBOR Option to be selected on such day. If no specific designation
of interest is made at the time any Advance is requested under the Note or at
the end of any LIBOR Period, Borrower shall be deemed to have selected the
Base Rate Option for such Advance or the principal amount to which such LIBOR
Period applied. At any time the LIBOR Option is in effect, Borrower may, at
the end of the applicable LIBOR
3
<PAGE>
Period, convert to the Base Rate Option. At any time the Base Rate Option is
in effect, Borrower may convert to the LIBOR OPTION, and shall designate a
LIBOR Period.
7. DEFAULT INTEREST RATE. From and after the maturity date of
the Note, or such earlier date as all principal owing hereunder becomes due
and payable by acceleration or otherwise, the outstanding principal balance
of the Note shall bear interest until paid in full at an increased rate per
annum (computed on the basis of a 360-day year, actual days elapsed) equal to
three percent (3.00%) above the rate of interest from time to time applicable
to the Note.
8. PREPAYMENT. Bank is not under any obligation to accept any
prepayment of any LIBOR Option Advance except as described below or as
required under applicable law. Borrower may prepay a Base Rate Option Advance
at any time, without paying any Prepayment Amount, as defined below. Borrower
may prepay a LIBOR Option Advance in increments of Five Hundred Dollars
($500.00) prior to the end of the LIBOR Period, as long as (i) Bank is
provided written notice of such prepayment at least five (5) LIBOR Business
Days prior to the date thereof (the "Prepayment Date"); and (ii) Borrower
pays the Prepayment Amount. The notice of prepayment shall contain the
following information: (a) the Prepayment Date; and (b) the LIBOR Option
Advance which will be prepaid. On the Prepayment Date, Borrower shall pay to
Bank, in addition to any other amount that may then be due on the Note, the
Prepayment Amount. Bank, in its sole discretion, may accept any prepayment
of a LIBOR Option Advance even if not required to do so under the Note and
may deduct from the amount to be applied against the LIBOR Option Advance any
other amounts required to be paid as part of the Prepayment Amount.
The Prepaid Principal Amount (as defined below) will be applied to the
LIBOR Option Advance being prepaid as Bank shall determine in its sole
discretion.
If Bank exercises its right to accelerate the payment of the Note prior
to maturity based upon an Event of Default under the Note, Borrower shall pay
to Bank, in addition to any other amounts that may then be due on the Note,
on the date specified by Bank as the Prepayment Date, the Prepayment Amount.
Bank's determination of the Prepayment Amount shall be conclusive in the
absence of obvious error or fraud. If requested in writing by Borrower, Bank
shall provide Borrower a written statement specifying the Prepayment Amount.
The following (the "Prepayment Amount") shall be due and payable in full
on the Prepayment Date:
a. If the principal amount of the LIBOR Option Advance being prepaid
exceeds Seven Hundred Fifty Thousand Dollars ($750,000), then the
Prepayment Amount is the sum of: (i) the amount of the principal
balance of the LIBOR Option Advance which Borrower has elected to
prepay or the amount of the principal balance of the LIBOR Option
Advance which Bank has required Borrower to prepay because of
acceleration, as the case
4
<PAGE>
may be (the "Prepaid Principal Amount"); (ii) interest accruing
on the Prepaid Principal Amount up to, but not including, the
Prepayment Date; (iii) Five Hundred Dollars ($500.00); plus (iv)
the present value, discounted at the Reinvestment Rates (as
defined below) of the positive amount by which (A) the interest
Bank would have earned had the Prepaid Principal Amount not been
paid prior to the end of the LIBOR Period at the Note's interest
rate exceeds (B) the interest Bank would earn by reinvesting the
Prepaid Principal Amount at the Reinvestment Rates.
b. If the principal amount of the LIBOR Option Advance being prepaid
is Seven Hundred Fifty Thousand Dollars ($750,000) or less, then
the Prepayment Amount is the sum of: (i) the principal amount of
the LIBOR Option Advance which Borrower has elected to prepay or
the principal amount of the LIBOR Option Advance which Bank has
required Borrower to prepay because of acceleration due to an
Event of Default under the Note, as the case may be (the "Prepaid
Principal Amount"); (ii) interest accruing on the Prepaid
Principal Amount up to, but not including, the Prepayment Date;
plus (iii) an amount equal to two percent (2%) of the Prepaid
Principal Amount.
"Reinvestment Rates" means the per annum rates of interest equal to one
half percent (1/2%) above the rates of interest reasonably determined by Bank
to be in effect not more than seven (7) days prior to the Prepayment Date in
the secondary market for United States Treasury Obligations in amount(s) and
with maturity(ies) which correspond (as closely as possible) to the LIBOR
Option Advance being prepaid.
BY INITIALING BELOW, BORROWER ACKNOWLEDGE(S) AND AGREE(S) THAT: (A)
THERE IS NO RIGHT TO PREPAY ANY LIBOR OPTION ADVANCE, IN WHOLE OR IN PART,
WITHOUT PAYING THE PREPAYMENT AMOUNT, EXCEPT AS OTHERWISE REQUIRED UNDER
APPLICABLE LAW; (B) BORROWER SHALL BE LIABLE FOR PAYMENT OF THE PREPAYMENT
AMOUNT IF BANK EXERCISES ITS RIGHT TO ACCELERATE PAYMENT OF ANY LIBOR OPTION
ADVANCE AS PART OR ALL OF THE OBLIGATIONS OWING UNDER THE NOTE, INCLUDING,
WITHOUT LIMITATION, ACCELERATION UNDER A DUE-ON-SALE PROVISION; (C) BORROWER
WAIVES ANY RIGHTS UNDER SUCCESSOR STATUTE; AND (D) BANK HAS MADE EACH LIBOR
OPTION ADVANCE PURSUANT TO THE NOTE IN RELIANCE ON THESE AGREEMENTS.
/s/ PJD
- --------------------
BORROWER'S INITIALS
9. HOLD HARMLESS AND INDEMNIFICATION. Borrower agrees to
indemnify Bank and to hold Bank harmless from, and to reimburse Bank on
demand for, all losses and expenses which Bank sustains or incurs as a result
of (i) any payment of a LIBOR Option Advance prior to
5
<PAGE>
the last day of the applicable LIBOR Period for any reason, including,
without limitation, termination of the Note, whether pursuant to this
Addendum or the occurrence of an Event of Default; (ii) any termination of a
LIBOR Period prior to the date it would otherwise end in accordance with this
Addendum; or (iii) any failure by Borrower, for any reason, to borrow any
portion of a LIBOR Option Advance.
10. FUNDING LOSSES. The indemnification and hold harmless
provisions set forth in this Addendum shall include, without limitation, all
losses and expenses arising from interest and fees that Bank pays to lenders
of funds it obtains in order to fund the loans to Borrower on the basis of
the LIBOR Option(s) and all losses incurred in liquidating or re-deploying
deposits from which such funds were obtained and loss of profit for the
period after termination. A written statement by Bank to Borrower of such
losses and expenses shall be conclusive and binding, absent manifest error,
for all purposes. This obligation shall survive the termination of this
Addendum and the payment of the Note.
11. REGULATORY DEVELOPMENTS OR OTHER CIRCUMSTANCES RELATING TO
ILLEGALITY OR IMPRACTICALITY OF LIBOR. If any Regulatory Development or
other circumstances relating to the interbank Euro-dollar markets shall, at
any time, in Bank's reasonable determination, make it unlawful or impractical
for Bank to fund or maintain, during any LIBOR Period, to determine or charge
interest rates based upon LIBOR, Bank shall give notice of such circumstances
to Borrower and:
(i) In the case of a LIBOR Period in progress, Borrower shall, if
requested by Bank, promptly pay any interest which had accrued prior
to such request and the date of such request shall be deemed to be the
last day of the term of the LIBOR Period; and
(ii) No LIBOR Period may be designated thereafter until Bank determines
that such would be practical.
12. ADDITIONAL COSTS. Borrower shall pay to Bank from time to
time, upon Bank's request, such amounts as Bank determines are needed to
compensate Bank for any costs it incurred which are attributable to Bank
having made or maintained a LIBOR Option Advance or to Bank's obligation to
make a LIBOR Option Advance, or any reduction in any amount receivable by
Bank hereunder with respect to any LIBOR Option or such obligation (such
increases in costs and reductions in amounts receivable being herein called
"ADDITIONAL COSTS"), resulting from any Regulatory Developments, which (i)
change the basis of taxation of any amounts payable to Bank hereunder with
respect to any LIBOR Option Advance (other than taxes imposed on the overall
net income of Bank for any LIBOR Option Advance by the jurisdiction where
Bank is headquartered or the jurisdiction where Bank extends the LIBOR Option
Advance; (ii) impose or modify any reserve, special deposit, or similar
requirements relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of, Bank (including any LIBOR Option
Advance or any deposits referred to in the definition of LIBOR); or (iii)
impose any other condition affecting this Addendum (or any of such extension
of credit or liabilities). Bank shall notify Borrower of any event occurring
after the date hereof
6
<PAGE>
which entitles Bank to compensation pursuant to this paragraph as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation. Determinations by Bank for purposes of this paragraph, shall be
conclusive, provided that such determinations are made on a reasonable basis.
13. LEGAL EFFECT. Except as specifically modified hereby, all of
the terms and conditions of the Note remain in full force and effect.
IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date
first set forth above.
TROY GROUP, INC. COMERICA BANK-CALIFORNIA
By: /s/ Patrick J. Dirk By: /s/ Barbara D'Amato
----------------------------- -------------------------
Barbara D'Amato
Title: CEO Title: Vice President
-------------------------- -------------------------
By:
-----------------------------
Title:
--------------------------
TROY SYSTEMS INTERNATIONAL, INC.
By: /s/ Patrick J. Dirk
-----------------------------
Title: CEO
--------------------------
By:
-----------------------------
Title:
--------------------------
TROY XCD, INC.
By: /s/ Patrick J. Dirk
-----------------------------
Title: CEO
--------------------------
By:
-----------------------------
7
<PAGE>
ComericA
Guaranty
- ------------------------------------------------------------------------------
The undersigned, for value received, unconditionally and absolutely
guarantee(s) to Comerica Bank-California ("Bank") a, California banking
corporation, and to the Bank's successors and assigns, payment when due,
whether by stated maturity, demand, acceleration or otherwise, of all
existing and future indebtedness to the Bank of Troy Group, Inc., Troy
Systems International, Inc. and Troy XCD, Inc. ("Borrower") of any successor
in interest, including without limit any debtor-in-possession or trustee in
bankruptcy which succeeds to the interest of this party or person (jointly
and severally the "Borrower"), however this indebtedness has been or may be
incurred or evidenced, whether absolute or contingent direct or indirect,
voluntary or involuntary, liquidated or unliquidated, joint or several, and
whether or not known to the undersigned at the time of this Guaranty or at
the time any future indebtedness is incurred (the "Indebtedness").
The Indebtedness guaranteed includes without limit: (a) any and all direct
indebtedness of the Borrower to the Bank, including indebtedness evidenced by
any and all promissory notes; (b) any and all obligations or liabilities of
the Borrower to the Bank arising under any guaranty where the Borrower has
guaranteed the payment of indebtedness owing to the Bank from a third party;
(c) any and all obligations or liabilities of the Borrower to the Bank
arising from applications or agreements for the issuance of letters of
credit; (d) any and all obligations or liabilities of the Borrower to the
Bank arising out of any other agreement by the Borrower including without
limit any agreement to indemnify the Bank for environmental liability or to
clean up hazardous waste; (e) any and all indebtedness, obligations or
liabilities for which the Borrower would otherwise be liable to the Bank were
it not for the invalidity, irregularity or unenforceability of them by reason
of any bankruptcy, insolvency or other law or order of any kind, or for any
other reason, including without limit liability for interest and attorneys'
fees on, or in connection with, any of the Indebtedness from and after the
filing by or against the Borrower of a bankruptcy petition whether an
involuntary or voluntary bankruptcy case, including, without limitation, all
attorneys' fees and costs incurred in connection with motions for relief from
stay, cash collateral motions, nondischargeability motions, preference
liability motions, fraudulent conveyance liability motions, fraudulent
transfer liability motions and all other motions brought by Borrower,
Guarantor, Bank or third parties in any way relating to Bank's rights with
respect to such Borrower, Guarantor, or third party and/or affecting any
collateral securing any obligation owed to Bank by Borrower, Guarantor, or
any third party, probate proceedings, on appeal or otherwise; (f) any and all
amendments, modifications, renewals and/or extensions of any of the above,
including without limit amendments, modifications, renewals and/or extensions
which are evidenced by new or additional instruments, documents or
agreements; and (g) all costs of collecting Indebtedness, including without
limit reasonable attorneys' fees and costs.
The undersigned waive(s) notice of acceptance of this Guaranty and
presentment, demand, protest, notice of protest, dishonor, notice of
dishonor, notice of default, notice of intent to accelerate or demand payment
of any Indebtedness, and diligence in collecting any Indebtedness, and
agree(s) that the Bank may modify the terms of any Indebtedness, compromise,
extend, increase, accelerate, renew or forbear to enforce payment of any or
all Indebtedness, or permit the Borrower to incur additional Indebtedness,
all without notice to the undersigned and without affecting in any manner the
unconditional obligation of the undersigned under this Guaranty. The
undersigned further waive(s) any and all other notices to which the
undersigned might otherwise be entitled. The undersigned acknowledge(s) and
agree(s) that the liabilities created by this Guaranty are direct and are not
conditioned upon pursuit by the Bank of any remedy the Bank may have against
the Borrower or any other person or any security. No invalidity,
irregularity or unenforceability of any part or all of the Indebtedness or
any documents evidencing the same, by reason of any bankruptcy, insolvency or
other law or order of any kind or for any other reason, and no defense or
setoff available at any time to the Borrower, shall impair, affect or be a
defense or setoff to the obligations of the undersigned under this Guaranty.
The undersigned deliver(s) this Guaranty based solely on the undersigned's
independent investigation of the financial condition of the Borrower and is
(are) not relying on any information furnished by the Bank. The undersigned
assume(s) full responsibility for obtaining any further information
concerning the Borrower's financial condition, the status of the Indebtedness
or any other matter which the undersigned may deem necessary or appropriate
from time to time. The undersigned waive(s) any duty on the part of the
Bank, and agree(s) that it is not relying upon nor expecting the Bank to
disclose to the undersigned any fact now or later known by the Bank, whether
relating to the operations or condition of the Borrower, the existence,
liabilities or financial condition of any co-guarantor of the Indebtedness,
the occurrence of
<PAGE>
any default with respect to the Indebtedness, or otherwise, notwithstanding
any effect these facts may have upon the undersigned's risk under this
Guaranty or the undersigned's rights against the Borrower. The undersigned
knowingly accept(s) the full range of risk encompassed in this Guaranty,
which risk includes without limit the possibility that the Borrower may incur
Indebtedness to the Bank after the financial condition of the Borrower, or
its ability to pay its debts as they mature, has deteriorated.
The undersigned represent(s) and warrant(s) that: (a) the Bank has made no
representation to the undersigned as to the creditworthiness of the Borrower;
and (b) the undersigned has (have) established adequate means of obtaining
from the Borrower on a continuing basis financial and other information
pertaining to the Borrower's financial condition. The undersigned agree(s)
to keep adequately informed of any facts, events or circumstances which might
in any way affect the risks of the undersigned under this Guaranty.
The undersigned grant(s) to the Bank a security interest in and the right of
setoff as to any and all property of the undersigned now or later in the
possession of the Bank. The undersigned subordinate(s) any claim of any
nature that the undersigned now or later has (have) against the Borrower to
and in favor of all Indebtedness and agree(s) not to accept payment or
satisfaction of any claim that the undersigned now or later may have against
the Borrower without the prior written consent of the Bank. Should any
payment, distribution, security, or proceeds, be received by the undersigned
upon or with respect to any claim that the undersigned now or may later have
against the Borrower, the undersigned shall immediately deliver the same to
the Bank in the form received (except for endorsement or assignment by the
undersigned where required by the Bank) for application on the Indebtedness,
whether matured or unmatured, and until delivered the same shall be held in
trust by the undersigned as the property of the Bank. The undersigned
further assign(s) to the Bank as collateral for the obligations of the
undersigned under this Guaranty all claims of any nature that the undersigned
now or later has (have) against the Borrower (other than any claim under a
deed of trust or mortgage covering real property) with full right on the part
of the Bank, in its own name or in the name of the undersigned, to collect
and enforce these claims.
The undersigned agree(s) that no security now or later held by the Bank for
the payment of any Indebtedness, whether from the Borrower, any guarantor, or
otherwise, and whether in the nature of a security interest, pledge, lien,
assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise,
shall affect in any manner the unconditional obligation of the undersigned
under this Guaranty, and the Bank, in its sole discretion, without notice to
the undersigned, may release, exchange, enforce and otherwise deal with any
security without affecting in any manner the unconditional obligation of the
undersigned under this Guaranty. The undersigned acknowledges(s) and
agree(s) that the Bank has no obligation to acquire or perfect any lien on or
security interest in any asset(s), whether realty or personalty, to secure
payment of the Indebtedness, and the undersigned is (are) not relying upon
any asset(s) in which the Bank has or may have a lien or security interest
for payment of the Indebtedness.
The undersigned acknowledge(s) that the effectiveness of this Guaranty is not
conditioned on any or all of the Indebtedness being guaranteed by anyone else.
Until the Indebtedness is irrevocably paid in full, the undersigned waive(s)
any and all rights to be subrogated to the position of the Bank or to have
the benefit of any lien, security interest or other guaranty now or later
held by the Bank for the Indebtedness or to enforce any remedy which the Bank
now or later has against the Borrower or any other parson. Until the
Indebtedness is irrevocably paid in full, the undersigned shall have no right
of reimbursement, indemnity, contribution or other right of recourse to or
with respect to the Borrower or any other person. The undersigned agree(s)
to indemnify and hold harmless the Bank from and against any and all claims,
actions, damages, costs and expenses, including without limit reasonable
attorneys' fees, incurred by the Bank in connection with the undersigned's
exercise of any right of subrogation, contribution, indemnification or
recourse with respect to this Guaranty. The Bank has no duty to enforce or
protect any rights which the undersigned may have against the Borrower or any
other person and the undersigned assume(s) full responsibility for enforcing
and protecting these rights.
Notwithstanding any provision of the preceding paragraph or anything else in
this Guaranty to the contrary, if any of the undersigned is or becomes an
"insider" or "affiliate" (as defined in Section 101 of the Federal Bankruptcy
Code, as it may be amended) with respect to the Borrower, then that
undersigned irrevocably and absolutely waives any and all rights of
subrogation, contribution, indemnification, recourse, reimbursement and any
similar rights against the Borrower (or any other guarantor) with respect to
this Guaranty, whether such rights arise under an express or implied contract
or by operation of law. It is the intention of the parties that the
undersigned shall not be (or be deemed to be) a "creditor" (as defined in
Section 101 of the Federal Bankruptcy Code, as it may be amended) of the
Borrower (or any other guarantor) by reason of the existence of this Guaranty
in the event that the Borrower becomes a
2
<PAGE>
debtor in any proceeding under the Federal Bankruptcy Code. This waiver is
given to induce the Bank to enter into certain written contracts with the
Borrower included in the Indebtedness. The undersigned warrant(s) and
agree(s) that none of Bank's rights, remedies or interests shall be directly
or indirectly impaired because of any of the undersigned's status as an
"insider" or "affiliate" of the Borrower, and undersigned shall take any
action, and shall execute any document, which the Bank may request in order
to effectuate this warranty to the Bank.
If any Indebtedness is guaranteed by two or more guarantors, the obligation
of the undersigned shall be several and also joint, each with all and also
each with any one or more of the others, and may be enforced at the option of
the Bank against each severally, any two or more jointly, or some severally
and some jointly. The Bank, in its sole discretion, may release any one or
more of the guarantors for any consideration which it deems adequate, and may
fail or elect not to prove a claim against the estate of any bankrupt,
insolvent, incompetent or deceased guarantor; and after that, without notice
to any other guarantor, the Bank may extend or renew any or all Indebtedness
and may permit the Borrower to incur additional Indebtedness, without
affecting in any manner the unconditional obligation of the remaining
guarantor(s). This action by the Bank shall not, however, be deemed to
affect any right to contribution which may exist among the guarantors.
Any of the undersigned may terminate their obligation under this Guaranty as
to future indebtedness (except as provided below) by (and only by) delivering
written notice of termination to an officer of the Bank and receiving from an
officer of the Bank written acknowledgement of delivery; provided, the
termination shall not be effective until the opening of business on the fifth
(5th) day following written acknowledgement of delivery. Any termination
shall not affect in any way the unconditional obligations of the remaining
guarantor(s), whether or not the termination is known to the remaining
guarantor(s). Any termination shall not affect in any way the unconditional
obligations of the terminating guarantor(s) as to any Indebtedness existing
at the effective date of termination or any Indebtedness created after that
pursuant to any commitment or agreement of the Bank or any Borrower loan with
the Bank existing at the effective date of termination (whether advances or
readvances by the Bank are optional or obligatory), or any modifications,
extensions or renewals of any of this Indebtedness, whether in whole or in
part, and as to all of this Indebtedness and modifications, extensions or
renewals of it, this Guaranty shall continue effective until the same shall
have been fully paid. The Bank has no duty to give notice of termination by
any guarantor(s) to any remaining guarantor(s). The undersigned shall
indemnify the Bank against all claims, damages, costs and expenses, including
without limit reasonable attorneys' fees and costs, incurred by the Bank in
connection with any suit, claim or action against the Bank arising out of any
modification or termination of a Borrower loan or any refusal by the Bank to
extend additional credit in connection with the termination of this Guaranty.
Notwithstanding any prior revocation, termination, surrender or discharge of
this Guaranty (or of any lien, pledge or security interest securing this
Guaranty) in whole or part, the effectiveness of this Guaranty, and of all
liens, pledges and security interests securing this Guaranty, shall
automatically continue or be reinstated, as the case may be, in the event
that (a) any payment received or credit given by the Bank in respect of the
Indebtedness is returned, disgorged or rescinded as a preference,
impermissible setoff, fraudulent conveyance, diversion of trust funds, or
otherwise under any applicable state or federal law, including, without
limitation, laws pertaining to bankruptcy or insolvency, in which case this
Guaranty, and all liens, pledges and security interests securing this
Guaranty, shall be enforceable against the undersigned as if the returned,
disgorged or rescinded payment or credit had not been received or given by
the Bank, and whether or not the Bank relied upon this payment or credit or
changed its position as a consequence of it; or (b) any liability is imposed,
or sought to be imposed, against the Bank relating to the environmental
condition of, or the presence of hazardous or toxic substances on, in or
about, any property given as collateral to the Bank by the Borrower, whether
this condition is known or unknown, now exists or subsequently arises
(excluding only conditions which arise after any acquisition by the Bank of
any such property, by foreclosure, in lieu of foreclosure or otherwise, to
the extent due to the wrongful act or omission of the Bank), in which case
this Guaranty, and all liens, pledges and security interests securing this
Guaranty, shall be enforceable against the undersigned to the extent of all
liability, costs and expenses (including without limit reasonable attorneys'
fees and costs) incurred by the Bank as the direct or indirect result of any
environmental condition or hazardous or toxic substances. In the event of
continuation or reinstatement of this Guaranty and the liens, pledges and
security interests securing it, the undersigned agree(s) upon demand by the
Bank to execute and deliver to the Bank those documents which the Bank
determines are appropriate to further evidence (in the public records or
otherwise) this continuation or reinstatement, although the failure of the
undersigned to do so shall not affect in any way the reinstatement or
continuation. If the undersigned do(es) not execute and deliver to the Bank
upon demand such documents, the Bank and each Bank officer is irrevocably
appointed (which appointment is coupled with an interest) the true and lawful
attorney of the undersigned (with full power of substitution) to execute and
deliver such documents in the name and on behalf of the undersigned. For
purposes of this Guaranty, "environmental condition" includes, without
limitation,
3
<PAGE>
conditions existing with respect to the surface or ground water, drinking
water supply, land surface or subsurface and the air; and "hazardous or toxic
substances' shall include any and all substances now or subsequently
determined by any federal, state or local authority to be hazardous or toxic,
or otherwise regulated by any of these authorities.
Although the intent of the undersigned and the Bank is that California law
shall apply to this Guaranty, regardless of whether California law applies,
the undersigned further agree(s) as follows: With respect to the limitation,
if any, stated in the Additional Provisions below on the amount of principal
guaranteed under this Guaranty, the undersigned agree(s) that (a) this
limitation shall not be a limitation on the amount of Borrower's Indebtedness
to the Bank; (b) any payments by the undersigned shall not reduce the maximum
liability of the undersigned under this Guaranty unless written notice to
that effect is actually received by the Bank at or prior to the time of the
payment; and (c) the liability of the undersigned to the Bank shall at all
times be deemed to be the aggregate liability of the undersigned under this
Guaranty and any other guaranties previously or subsequently given to the
Bank by the undersigned and not expressly revoked, modified or invalidated in
writing.
The undersigned waive(s) any right to require the Bank to: (a) proceed
against any person, including without limit the Borrower; (b) proceed against
or exhaust any security held from the Borrower or any other person; (c) give
notice of the terms, time and place of any public or private sale of personal
property security held from the Borrower or any other person, or otherwise
comply with the provisions of Section 9-504 of the California or other
applicable Uniform Commercial Code; (d) pursue any other remedy in the Bank's
power; or (e) make any presentments or demands for performance, or give any
notices of nonperformance, protests, notices of protest, or notices of
dishonor in connection with any obligations or evidences of Indebtedness held
by the Bank as security, in connection with any other obligations or
evidences of Indebtedness which constitute in whole, or in part Indebtedness,
or in connection with the creation of new or additional Indebtedness.
The undersigned authorize(s) the Bank, either before or after termination of
this Guaranty, without notice to or demand on the undersigned and without
affecting the undersigned's liability under this Guaranty, from time to time
to: (a) apply any security and direct the order or manner of sale of it,
including without limit, a nonjudicial sale permitted by the terms of the
controlling security agreement, mortgage or deed of trust, as the Bank in its
discretion may determine; (b) release or substitute any one or more of the
endorsers or any other guarantors of the Indebtedness; and (c) apply payments
received by the Bank from the Borrower to any indebtedness of the Borrower to
the Bank, in such order as the Bank shall determine in its sole discretion,
whether or not this indebtedness is covered by this Guaranty, and the
undersigned waive(s) any provision of law regarding application of payments
which specifies otherwise. The Bank may without notice assign this Guaranty
in whole or in part. Upon the Bank's request, the undersigned agree(s) to
provide to the Bank copies of the undersigned's financial statements.
The undersigned waive(s) any defense based upon or arising by reason of (a)
any disability or other defense of the Borrower or any other person; (b) the
cessation or limitation from any cause whatsoever, other than final and
irrevocable payment in full, of the Indebtedness; (c) any lack of authority
of any officer, director, partner, agent or any other person acting or
purporting to act on behalf of the Borrower which is a corporation,
partnership or other type of entity, or any defect in the formation of the
Borrower; (d) the application by the Borrower of the proceeds of any
Indebtedness for purposes other than the purposes represented by the Borrower
to the Bank or intended or understood by the Bank or the undersigned; (e) any
act or omission by the Bank which directly or indirectly results in or aids
the discharge of the Borrower or any Indebtedness by operation of law or
otherwise; or (f) any modification of the Indebtedness, in any form
whatsoever including without limit any modification made after effective
termination, and including without limit, the renewal, extension,
acceleration or other change in time for payment of the Indebtedness, or
other change in the terms of any indebtedness, including without limit
increase or decrease of the interest rate. The undersigned understands that,
absent this waiver, Bank's election of remedies, including but not limited to
its decision to proceed to nonjudicial foreclosure on any real property
securing the Indebtedness, could preclude Bank from obtaining a deficiency
judgment against Borrower and the undersigned pursuant to California Code of
Civil Procedure sections 580a, 580b, 580d or 726 and could also destroy any
subrogation rights which the undersigned has against Borrower. The
undersigned further understands that, absent this waiver, California law,
including without limitation, California Code of Civil Procedure sections
580a, 580b, 580d or 726, could afford the undersigned one or more affirmative
defenses to any action maintained by Bank against the undersigned on this
Guaranty.
The undersigned waives any and all rights and provisions of California Code
of Civil Procedure sections 580a, 580b, 580d and 726, including, but not
limited to any provision thereof that: (i) may limit the time period for Bank
to commence a lawsuit against Borrower or the undersigned to collect any
Indebtedness owing by Borrower or the undersigned to Bank; (ii) may entitle
Borrower or the undersigned to a judicial
4
<PAGE>
or nonjudicial determination of any deficiency owed by Borrower or the
undersigned to Bank, or to otherwise limit Bank's right to collect a
deficiency based on the fair market value of such real property security;
(iii) may limit Bank's right to collect a deficiency judgment after a sale of
any real property securing the Indebtedness; (iv) may require Bank to take
only one action to collect the Indebtedness or that may otherwise limit the
remedies available to Bank to collect the Indebtedness.
The undersigned waives all rights and defenses arising out of an election of
remedies by Bank even though that election of remedies, such as a nonjudicial
foreclosure with respect to security for a guaranteed obligation, has
destroyed the undersigned's rights of subrogation and reimbursement against
Borrower by the operation of Section 580d of the Code or Civil Procedure or
otherwise.
The undersigned acknowledges and agrees that this is a knowing and informed
waiver of the undersigned's rights as discussed above and that Bank is
relying on this waiver in extending credit to Borrower.
The undersigned acknowledge(s) that the Bank has the right to sell, assign,
transfer, negotiate, or grant participations in all or any part of the
Indebtedness and any related obligations, including without limit this
Guaranty. In connection with that right, the Bank may disclose any documents
and information which the Bank now or later acquires relating to the
undersigned and this Guaranty, whether furnished by the Borrower, the
undersigned or otherwise. The undersigned further agree(s) that the Bank may
disclose these documents and information to the Borrower. The undersigned
agree(s) that the Bank may provide information relating to this Guaranty or
to the undersigned to the Bank's parent, affiliates, subsidiaries and service
providers.
The total obligation under this Guaranty shall be UNLIMITED unless
specifically limited in the Additional Provisions of this Guaranty, and this
obligation (whether unlimited or limited to the extent indicated in the
Additional Provisions) shall include, IN ADDITION TO any limited amount of
principal guaranteed, any and all interest on all Indebtedness and any and
all costs and expenses of any kind, including without limit reasonable
attorneys' fees and costs, incurred by the Bank at any time(s) for any reason
in enforcing any of the duties and obligations of the undersigned under this
Guaranty or otherwise incurred by the Bank in any way connected with this
Guaranty, the Indebtedness or any other guaranty of the Indebtedness
(including without limit reasonable attorneys' fees and other expenses
incurred in any suit involving the conduct of the Bank, the Borrower or the
undersigned). All of these costs and expenses shall be payable immediately
by the undersigned when incurred by the Bank, without demand, and until paid
shall bear interest at the highest per annum rate applicable to any of the
Indebtedness, but not in excess of the maximum rate permitted by law. Any
reference in this Guaranty to attorneys' fees shall be deemed a reference to
fees, charges, costs and expenses of both in-house and outside counsel and
paralegals, whether or not a suit or action is instituted, and to court costs
if a suit or action is instituted, and whether attorneys' fees or court costs
are incurred at the trial court level, on appeal, in a bankruptcy,
administrative or probate proceeding or otherwise. Any reference in the
Additional Provisions or elsewhere (a) to this Guaranty being secured by
certain collateral shall NOT be deemed to limit the total obligation of the
undersigned under this Guaranty or (b) to this Guaranty being limited in any
respect shall NOT be deemed to limit the total obligation of the undersigned
under any prior or subsequent guaranty given by the undersigned to the Bank.
The undersigned unconditionally and irrevocably waive(s) each and every
defense and setoff of any nature which, under principles of guaranty or
otherwise, would operate to impair or diminish in any way the obligation of
the undersigned under this Guaranty, and acknowledge(s) that each such waiver
is by this reference incorporated into each security agreement, collateral
assignment, pledge and/or other document from the undersigned now or later
securing this Guaranty and/or the Indebtedness, and acknowledge(s) that as of
the date of this Guaranty no such defense or setoff exists. The undersigned
acknowledge(s) that the effectiveness of this Guaranty is subject to no
conditions of any kind.
This Guaranty shall remain effective with respect to successive transactions
which shall either continue the Indebtedness, increase or decrease it, or
from time to time create new Indebtedness after all or any prior Indebtedness
has been satisfied, until this Guaranty is terminated in the manner and to
the extent provided above.
The undersigned warrant(s) and agree(s) that each of the waivers set forth
above are made with the undersigned's full knowledge of their significance
and consequences, and that under the circumstances, the waivers are
reasonable and not contrary to public policy or law if any of these waivers
are determined to be contrary to any applicable law or public policy, these
waivers shall be effective only to the extent permitted by law.
5
<PAGE>
This Guaranty constitutes the entire agreement of the undersigned and the
Bank with respect to the subject matter of this Guaranty. No waiver,
consent, modification or change of the terms of this Guaranty shall bind any
of the undersigned or the Bank unless in writing and signed by the waiving
party or an authorized officer of the waiving party, and then this waiver,
consent, modification or change shall be effective only in the specific
instance and for the specific purpose given. This Guaranty shall inure to
the benefit of the Bank and its successors and assigns. This Guaranty shall
be binding on the undersigned and the undersigned's heirs, legal
representatives, successors and assigns including, without limit, any debtor
in possession or trustee in bankruptcy for any of the undersigned. The
undersigned has (have) knowingly and voluntarily entered into this Guaranty
in good faith for the purpose of inducing the Bank to extend credit or make
other financial accommodations to the Borrower, and the undersigned
acknowledge(s) that the terms of this Guaranty are reasonable. If any
provision of this Guaranty is unenforceable in whole or in part for any
reason, the remaining provisions shall continue to be effective. THIS
GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA.
Additional Provisions (if any):
This Guaranty shall become effective when the Borrowers' ratio of Total
Liabilities to Tangible Effective Net Worth is greater than 2.00:1.00, which
shall be calculated each quarter in conformity with the covenants and
conditions set forth in that certain Loan and Security Agreement dated
October 20, 1998 between Bank and Borrowers. Upon becoming effective, this
Guaranty (1) shall guaranty Indebtedness under that certain Variable Rate
Installment Note between Bank and Borrowers dated October 20, 1998, in the
original principal amount of $3,000,000.00 ("Note"); and (2) shall be limited
to an amount equal to the Bank's acquisition financing over $2,000,000.00."
*This Guaranty is terminated at completion of the Company's public offering.
THE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED, EACH PARTY, AFTER CONSULTING
(OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE,
KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO
TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS GUARANTY OR THE INDEBTEDNESS.
IN WITNESS WHEREOF, the undersigned has (have) signed this Guaranty on
October 20, 1998.
GUARANTOR(S)
---------------------------
By: /s/ Patrick J. Dirk
----------------------------------
Signature of Patrick J. Dirk
Its:
----------------------------------
(If Applicable)
By:
----------------------------------
Signature of
Its:
----------------------------------
(If Applicable)
GUARANTOR'S ADDRESS
990 Bayside Cove West
---------------------------------------
Street Address
Newport Beach, CA 92705
---------------------------------------
City State Zip Code
BORROWER(S):
Troy Group, Inc. and Troy Systems International, Inc.
and TROY XCD, Inc.
6
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT:
- ------------------------------
- - Troy Systems International, Inc.
- - Dirk Worldwide, Inc.
- - Troy XCD, Inc.
- - Telgate Equipment Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Amendment No. 5 to the Registration
Statement on Form S-1 (No. 333-51523) of our report, dated January 6, 1999,
relating to the consolidated financial statements of Troy Group, Inc. We also
consent to the reference to our Firm under the caption "Experts" in the
prospectus.
McGLADREY & PULLEN, LLP
Anaheim, California
June 23, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Amendment No. 5 to the Registration
Statement on Form S-1 (No. 333-51523) of our report, dated October 20, 1998,
relating to the consolidated financial statements of XCD Incorporated. We also
consent to the reference to our Firm under the caption "Experts" in the
prospectus.
McGLADREY & PULLEN, LLP
Anaheim, California
June 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> NOV-30-1999 NOV-30-1998
<PERIOD-START> DEC-01-1998 DEC-01-1997
<PERIOD-END> MAY-31-1999 NOV-30-1998
<CASH> 42 308
<SECURITIES> 0 0
<RECEIVABLES> 7,995 6,519
<ALLOWANCES> 153 140
<INVENTORY> 7,012 5,783
<CURRENT-ASSETS> 15,796 13,605
<PP&E> 8,250 7,738
<DEPRECIATION> 6,276 5,833
<TOTAL-ASSETS> 22,420 18,918
<CURRENT-LIABILITIES> 8,201 7,799
<BONDS> 2,564 2,374
0 0
0 0
<COMMON> 77 77
<OTHER-SE> 10,838 8,188
<TOTAL-LIABILITY-AND-EQUITY> 22,420 18,918
<SALES> 23,466 35,758
<TOTAL-REVENUES> 23,466 35,758
<CGS> 14,167 21,496
<TOTAL-COSTS> 14,167 21,496
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 29 134
<INTEREST-EXPENSE> 162 101
<INCOME-PRETAX> 3,359 4,364
<INCOME-TAX> 1,334 (70)
<INCOME-CONTINUING> 2,025 4,434
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,025 4,434
<EPS-BASIC> .26 .32
<EPS-DILUTED> .25 .31
</TABLE>
<PAGE>
CONSENT
I hereby consent to being named as a director nominee in Troy Group,
Inc.'s Registration Statement on Form S-1 (File No. 333-51523) and the
related Prospectus for the registration of its Common Stock, and any
amendments thereto.
May 19, 1999 /s/ Harold Clark
------------------------------
Harold Clark
