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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended November 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.: 000-24413
TROY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0807798
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA 92705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 250-3280
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 18, 2000, 10,740,249 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the Registrant's outstanding
Common Stock as of that date (based upon the last sale price of a share of
Common Stock on that date reported by the Nasdaq National Market), excluding
outstanding shares beneficially owned by directors and executive officers, was
$110,457,070.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
registrant's Proxy Statement for its 2000 Annual Meeting to be held on April 6,
2000 (the "2000 Proxy Statement").
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE STATEMENTS CONTAINED IN
THIS REPORT THAT ARE NOT HISTORICAL IN NATURE, PARTICULARLY THOSE THAT UTILIZE
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "ANTICIPATES,"
"ESTIMATES," "BELIEVES" OR "PLANS," OR COMPARABLE TERMINOLOGY, ARE
FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS.
VARIOUS RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN FORWARD-LOOKING STATEMENTS. THESE RISKS AND
UNCERTAINTIES INCLUDE THOSE RELATED TO THE FAILURE TO SUCCESSFULLY MARKET OUR
E-COMMERCE PAYMENT SOLUTIONS, OUR ABILITY TO GROW THROUGH ACQUISITIONS, THE
IMPACT OF COMPETITION FROM OTHER COMPANIES AND TECHNOLOGIES, THE CONTINUED
DEMAND FOR PRINTED FINANCIAL DOCUMENTS, OUR ABILITY TO DEVELOP OR RESPOND TO NEW
TECHNOLOGIES, OUR ABILITY TO MAINTAIN OUR STRATEGIC RELATIONSHIPS AND THE OTHER
FACTORS SET FORTH BELOW UNDER THE HEADING "CERTAIN IMPORTANT FACTORS" AND IN OUR
OTHER PERIODIC REPORTS AND OTHER DOCUMENTS THAT WE FILE FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION.
PART I
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ITEM 1. BUSINESS
GENERAL
With new products in the rapidly growing e-commerce market and a solid base
of Fortune 1000 customers in our networked "brick-and mortar" markets, we are a
leading worldwide provider of financial payment solutions. Our software,
firmware and hardware solutions enable businesses to electronically transmit and
output financial payment information across computer networks and the Internet.
Our products serve a wide variety of industries including e-commerce
retailers, online brokerages, telecommunications, financial services, insurance,
computer hardware, automotive, personnel and others. We distribute our solutions
in 55 countries around the world and market our products through a direct sales
force and a network of distributors and value-added resellers. More than 5,000
active customers purchase our products and services.
Our mission is to leverage our expertise as a provider of financial payment
solutions to become a leading worldwide provider of e-commerce payment
solutions.
ORGANIZATION AND DEVELOPMENT OF BUSINESS
We were originally incorporated in California in 1996 and reincorporated in
Delaware in May 1998. Troy Group, Inc. is the result of various mergers and
acquisitions involving a company originally founded in 1982.
In October 1998, we merged XCD Incorporated, a leading supplier of network
connectivity solutions, into our subsidiary, Troy XCD, Inc. In May 1999 we
acquired the remaining outstanding shares of Telgate Equipment Corporation, a
Canadian software development company. Now referred to as Troy Telgate Systems,
Inc., this operation is responsible for the ongoing technical development and
support for the eCheck Secure-TradeMark- product. On February 18, 2000, we
acquired American Development (AMDev), Inc., a Nashville, Tennessee based
software development company. Troy AMDev's ACH products are planned for
integration with eCheck Secure-TradeMark- to broaden our offering of e-commerce
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payment solutions. Today, our four subsidiaries include Troy XCD, Troy Telgate,
Troy AMDev 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.
Information regarding our reportable business segments, major customers and
geographical information is contained in Note 13 to our financial statements on
pages F-22 to F-25 of this report, and is incorporated in this item by
reference.
INDUSTRY BACKGROUND
All worldwide commerce requires payment, in one form or another, in
exchange for the goods and services produced by businesses. Traditional payment
instruments include currency, paper checks, credit cards and wire transfers.
With the advent of the networked computer age and the Internet, payment methods
have expanded to include new forms of electronic payments that facilitate
commerce in a timely, secure, cost effective and user-friendly manner. We intend
to focus our core efforts on e-commerce payment solutions and networked computer
payment solutions.
E-COMMERCE PAYMENT PROCESSES
The phenomenal growth of the Internet is one of the most significant
industry trends affecting information processing today. The Gartner Group has
reported that by 2004, "the Internet will become the predominant mechanism for
conducting business, whether it be business-to-consumer or business-to-
business." As a result, many organizations are now looking for entirely new
solutions that enable distribution of financial payment information using the
Internet.
The growth of the Internet has resulted in the rapid rise in e-commerce.
The Gartner Group reported in 1999 that e-commerce exhibited accelerated growth
over the prior two years, exceeding most market projections and expectations.
Forrester Research predicts $3.2 trillion in Internet commerce in 2003.
According to the Boston Consulting Group, revenue from online retailing is
growing much faster than expected. The explosion of new web sites equipped with
"shopping carts" continues at a high pace, and more and more Internet shoppers
are surfing the Web to conveniently order products and services. As the number
of online merchants and customers increase, we believe the potential customer
base for us will also experience commensurate growth. Virtually every online
merchant is a potential customer.
To date, businesses and consumers have generally used credit cards as the
primary method of payment in e-commerce transactions. Yet research indicates
that over 80 million Americans have checking accounts and no credit cards. 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 offering their customers the same
level of convenience and payment options available in traditional stores.
According to Forrester Research, the number of online retail merchants will
increase from 17,500 in 1998 to 400,000 by 2003. Businesses that decide to
market and distribute products and services over the Internet will need to
establish a web site that includes an online store. The vast majority of firms
do not possess the capability to set up their own online store internally and
will solicit assistance from a web site development firm. The online store will
need to be equipped with payment processes and services, and we believe it
should include both credit cards and checking accounts. During this site
development
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process, we believe merchants will be concerned with the speed and
cost of the development process, the security measures taken to protect the
site, convenience features for the online shopper, and as a result will be
motivated to select a firm that offers the convenience of a complete solution.
The growth of the Internet has also resulted in the development and rapid
growth of online brokerages. Forrester Research estimates the online brokerage
industry to be a $120 billion market and predicts that active online brokerage
accounts are expected to grow to 40 million by 2002. Because of regulatory
restrictions, online brokerages cannot accept credit cards as payment for
opening and funding an account. Payment options available to online brokerage
clients have generally been limited to direct debit, wire transfer or payment by
mailed or delivered check. As a result, clients who choose to pay by check face
the inconvenience and delay associated with delivery and clearing. We believe
that these issues are a concern to online brokerages and their clients.
NETWORKED COMPUTER PAYMENT PROCESSES
To succeed in an increasingly competitive and global marketplace, an
organization must make effective business decisions and respond to customers'
needs in a timely and efficient manner. In the payments arena, this depends to a
large extent upon the organization's ability to rapidly and accurately collect,
organize and distribute its financial payment information. Historically, most of
this payment information was created using legacy computer systems, then printed
and delivered to users through delivery services or the U.S. mail. These methods
now seem inefficient, labor intensive, expensive, and slow.
Over the past decade there has been a dramatic shift from mainframe
computer systems to networked computing environments. Due to this fundamental
shift in the way corporations store and manage financial payment data, IT
departments are now faced with the challenge of providing users with secure
access to financial payment information which resides in a broad range of
distributed and fragmented systems. Technologies are now available to
effectively distribute payment information electronically to multiple end users
both within and outside an organization.
The emergence and adoption of enterprise software applications is also
changing the way organizations generate and distribute financial payment
information. Although many enterprise software applications include basic
financial reporting functionality, they generally do not adequately address an
enterprise's need to electronically transmit and output financial payment
information across networked computing environments.
Current methods of payment information distribution have limitations.
Inexpensive laser printers have the ability to print most common business
documents but cannot produce unique output such as MICR (magnetic ink character
recognition) lines, on the bottom of a check without customized software and
specialty toners. MICR lines are 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 could require
costly manual handling. Due to the difficulties in printing high quality MICR
lines, financial documents have historically been produced by third party
commercial printers.
As a result of the limitations of traditional information distribution
methods, we believe that there is significant growing demand for payment
solutions that allow organizations to electronically transmit and output
information across networked computing environments.
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THE TROY GROUP PAYMENT SOLUTIONS
E-COMMERCE PAYMENT SOLUTIONS
In December 1999, we released our eCheck Secure-TradeMark- product, which
enables Internet merchants to accept payments from their customers' checking
accounts as an alternative to credit cards. The product is a combination of
Internet software, which resides on our server, and a financial document printer
located at the merchant site. This combination allows e-consumers to send a MICR
encoded check remotely over the Internet for printing at the merchant site. The
remotely printed check has all of the same attributes of a traditional check and
is presented by a merchant through normal banking channels.
During the payment process, which begins with a shopper on the merchant's
online store, the customer's checking account information is approved in
real-time by Equifax, an eCheck Secure-TradeMark- solutions partner and a world
leader in risk management services. When e-merchants set up their online store
to accept checking account payments, they can contract with us for one of two
levels of risk management:
- Verification - The customer information is verified through the
Equifax risk management database against any negative information that
increases risk of accepting the payment transaction.
- Guarantee - Alternatively, the merchant can opt for a higher level of
risk management control, and Equifax will actually guarantee the
customer payment to the e-merchant. If the transaction is rejected due
to non-sufficient funds or another reason, Equifax will manage the
collection process. The merchant is fully warranted and will receive
the full amount of the disputed funds. The guarantee service enables
the merchant to treat the customer checking account payment similar to
a credit card, and the merchant no longer has to wait for the funds to
clear the bank.
Consumers benefit from eCheck Secure-TradeMark- because it:
- Provides a payment alternative to credit cards with comparable speed
and security
- Eliminates the inconvenience of having to mail in a check
- Allows the consumer to obtain same-day shipping rather than waiting up
to 14 days for a traditional check to clear
- Provides a checking account record that is convenient for managing
finances, budgeting and/or account reconciliation
E-merchants benefit from eCheck Secure-TradeMark- because it:
- Provides a complete, verified or guaranteed check transaction ready
for deposit
- Broadens their market by offering 80 million check writers, who do not
carry credit cards, the convenience of paying by check
- Avoids the risks associated with check acceptance
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- Captures the 25-35% of buyers who place orders, but change their minds
about sending funds
- Minimizes open orders that are waiting for mailed-in payments
We believe that the eCheck Secure-TradeMark- technology offers 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. While there
are several online payment options offered by today's Internet merchants, most
of the top trafficked sites (including eToys, eBay and CDNow) do not accept
Internet checks as a form of payment and there is no strong brand identification
for a printed Internet check. By positioning an "eCheck Secure-TradeMark-" icon
option adjacent to Visa, MasterCard and American Express at the merchant's
e-commerce check-out location, we intend to develop strong brand identification
due to early market entry and our current reputation as a world leader in
financial payment solutions.
In addition to e-commerce retail applications, we have experienced
significant market acceptance in the online brokerage market. In this market,
the vast majority of firms only accept payments by mail, overnight delivery or
wire transfer. With eCheck Secure-TradeMark-, brokerage firms can accept online
funding from their clients. The funds are verified in real time, and the
brokerage firm can authorize trading immediately. The eCheck Secure-TradeMark-
product can be a convenient and quick process for clients funding a new account
or replenishing funds for an existing account.
CASE STUDY - Ameritrade Inc., one of the leading online brokerage firms, is
currently utilizing eCheck Secure-TradeMark- to provide its customers the option
of funding new accounts online. Funds are verified in real time, the customer
experiences the convenience of online funding and is able to execute trades in a
compressed time frame over traditional funding methods.
We are currently expanding the eCheck Secure-TradeMark- product to offer
e-merchants and customers the payment alternative of a printed check draft or a
fully automated electronic file transfer of the payment information. On February
18, 2000, we acquired a software development business that offers a completely
automated payments solution utilizing the Automated Clearing House (ACH)
network. The ACH network is a nationwide system utilized by over 20,000
financial institutions, 725,000 corporations and millions of consumers to
transmit fully automated checking account transactions. We intend to integrate
the ACH solution with eCheck Secure-TradeMark- to offer online merchants and
consumers the option of a printed check or a fully automated ACH transaction.
Additionally, we intend to expand the product further by offering credit
card services and processing, and web site development for companies that are
considering entry into the e-commerce marketplace. Our intent is to provide new
and existing e-merchants with a one-stop-shop approach to establishing or
improving their online store.
We believe that MICR line information will continue to be the controlling
number for bank account payments and transfers and that our expertise in MICR
since 1971 will lead us to a strong position as a leader in e-commerce payment
solutions.
NETWORKED COMPUTER PAYMENT SOLUTIONS
We first entered the payment systems marketplace in 1971 and soon became a
worldwide leader in financial payment systems. It is our expertise in networked
computer payment solutions that uniquely qualified us to enter the e-commerce
payments arena in 1999.
In 1984 we began installing payment systems for the U.S. Treasury that are
still in operation today. Our networked computer payment solutions include
software, firmware, hardware and imaging
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supplies that provide customers with functions not offered by most major
original equipment manufacturers. Our technologies enable standard laser
printers to print MICR lines, graphics, barcodes and forms. They also enable a
printer to perform other functions not offered by most printer manufacturers,
such as auditing, status checking and security. These features increase an
enterprise's flexibility and customer service, eliminate costs associated with
form obsolescence and enhance document security. This technology works over
networks and the Internet.
Our strategic alliance with Hewlett-Packard provides our customers with all
of the benefits of high-quality payment solutions combined with the features,
functionality, and reliability provided by HP printers. We offer three levels of
high-quality MICR payment 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.
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 financial payment
solution.
For those customers whose software does not support MICR printing, we 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. We also offer a MICR solution based on impact technology.
Our impact MICR printers are designed to run in tandem with high-speed laser
printers manufactured by IBM and Xerox.
Laser payment solutions require ongoing imaging supplies. We develop and
market imaging supplies that are uniquely 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 recognized by our customers as a high quality developer and
manufacturer of proprietary imaging supplies. 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 products require our proprietary
imaging supplies.
In addition to our MICR toners that support our laser 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 ribbons, jumbo rolls, standard toner, paper handling accessories
and check security paper.
CASE STUDY - 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 nationwide. ADP is recognized as one of the
largest independent computing service organizations in the United States. ADP
software programs provide flexibility and control in issuing payroll checks at
the client site while our financial payment solutions ensure the quality and
security of those checks. 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.
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THE TROY GROUP CONNECTIVITY PRODUCTS
In addition to our e-commerce payment solutions and our networked computer
payment solutions, we are also investing in products to enhance the connectivity
of devices that transmit information over computer networks and the Internet.
Our existing Internet output capability, PRINTRANET-TradeMark-, is a
software and firmware solution that enables a user at one location to print to
another location over the Internet. PrintraNet-TradeMark- requires
PrintraNet-TradeMark- software and firmware on both the sending and receiving
device. However, our Internet connectivity products under development are being
designed to allow 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 and market Internet printing
technology and have extensive protocol experience.
Our NETSEND-TradeMark- Internet output products 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.
Our SOFT PRINT SERVER, a software-only print server, allows 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 VxWorks,
a commonly used embedded real-time operating system.
Our PRINT SERVER PRODUCTS are recognized worldwide for supporting a large
number of protocols and network operating systems. This support makes our
products especially well-suited to enterprise networks that have many different
kinds of computers and network operating systems over a wide geographic area.
These print servers enable printers, plotters and other output devices to be
shared by many different kinds of computers on a network and support Windows NT,
Windows 2000, Linux 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 to supporting printers, our print servers
can be used to connect a wide variety of other devices, such as electronic
signs, security systems, uninterruptable power supplies, and heart monitors to
networks and the Internet.
BUSINESS STRATEGIES
Our objective is to leverage our expertise as a provider of financial
payment solutions to become a leading worldwide provider of e-commerce payment
solutions. Our strategies for achieving this objective include:
CONTINUING TO DEVELOP AND MARKET E-COMMERCE PAYMENT SOLUTIONS. As current
industry trends indicate that the Internet will play a significant role in
future commerce, we intend to focus significant technical effort toward the
continued development and marketing of e-commerce payment solutions, such as
eCheck Secure-TradeMark-. By enhancing our current products, we believe that we
will have significant competitive advantages in this market.
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,
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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 e-commerce payment and networked computer payment solutions,
credit card services and processing and web development markets. We currently
have an experienced team, both internal and external, executing and implementing
our acquisition strategy.
INTRODUCING AND ENHANCING PRODUCTS THROUGH RESEARCH AND DEVELOPMENT. We
achieved a leadership position in our networked financial payment 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 our existing OEM relationships and seek new OEM relationships. One way to
expand our relationships with Hewlett-Packard, IBM, Equifax, Brother and
Standard Register is to develop 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.
LEVERAGING STRATEGIC ALLIANCES. We currently partner with various software,
firmware, hardware and financial service companies offering solutions that
assist us in meeting our customers' financial payment needs. We intend to
continue to aggressively pursue new strategic alliances that we believe will
enable us to enter new markets, expand our distribution channels 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
MID-SIZE BUSINESSES AND SMALLER BUSINESSES. We believe that an increasing number
of small and mid-sized businesses will begin to use networks, the Internet and
enhanced financial payment solutions to facilitate their business needs. We
intend to continue to expand our distribution channels to increase our sales to
these businesses.
RESEARCH AND PRODUCT DEVELOPMENT
We are committed to growing our business through research and development,
and it is one of our major business strategies. As such, we seek customer
feedback in the product design process in order to meet changing requirements
and are committed to developing functional and integrated solutions in a rapid
and efficient manner. In addition, we invest significantly in highly
sophisticated research and development equipment.
As of February 18, 2000, we employed approximately 40 persons in our
research and development efforts. Our highly trained staff of software,
electrical, mechanical and chemical engineers are focusing on principal research
and development activities such as:
- developing e-commerce payment solutions;
- developing software and firmware solutions for connecting output
devices to networks and the Internet;
- developing new products that provide solutions for our strategic
business partners; and
- creating proprietary imaging supplies.
Our products under development include:
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INTERNET PRINTING PROTOCOL (IPP). IPP is a new industry standard for
printing across the Internet that has been endorsed by all of the major printer
manufacturers. We anticipate beginning delivery of IPP products in the first
half of 2000. With the addition of IPP, we will simultaneously support three
different Internet printing-related protocols, namely IPP, JetSend, and our
proprietary PrintraNet-TradeMark-. This is a critical capability, because there
is no dominant standard today for printing across the Internet. Our ability to
work with multiple Internet protocols will allow a printer to receive jobs from
a variety of different sources without regard to the protocol of the sending
device.
OTHER FINANCIAL PAYMENT 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.
SUPPORT SERVICES
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.
SALES AND MARKETING
We market products to Fortune 1000 companies through our direct sales force
of approximately 50 persons and market products to small and mid-size businesses
primarily through our network of distributors and value-added resellers. Our
products are represented internationally in 55 countries primarily through a
distributor network.
Our base of more than 5,000 active customers includes e-commerce retail and
brokerage firms, financial institutions, insurance companies, payroll processing
companies, corporations and government agencies. In 1984 the U.S. Treasury chose
TROY to produce its financial document printers. Still today, U.S. Treasury
checks are printed on our equipment. Ameritrade, Inc., AT&T Corporation,
BankAmerica Corporation, Brother Industries, Eastman Kodak, Farmer's Insurance
Group, Ford Motor Company, IBM, Manpower, Mydiscountbroker.com, Shopsports.com,
and Wells Fargo & Company are among our customers who purchased products during
the last 12 months.
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We market our e-commerce payment solutions directly to Internet merchants,
and virtually every Internet web site that offers e-commerce is a potential
client. Our research has identified two strong markets that will be targeted:
business-to-consumer retail and brokerage firms. Also, we currently have strong
access to many Fortune 1000 companies and the U.S. Treasury.
We have increased the number of sales and support staff dedicated to
recruiting and training additional distributors and value-added resellers. This
supports our strategy to increase focus on mid-size and smaller companies that
will increasingly use the Internet and networks to facilitate their business
needs. We also have management resources dedicated to recruiting and developing
new OEM relationships and leveraging strategic alliances in support of our key
business strategies.
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 Equifax, Hewlett-Packard, IBM, ADP, Standard Register and
Wind River.
STRATEGIC RELATIONSHIPS
In September 1999, we entered into a joint marketing agreement related to
our eCheck Secure-TradeMark- product with Equifax Inc., a $1.7 billion world
leader in consumer information management and transaction processing. The
arrangement combines our eCheck Secure-TradeMark- software with Equifax's
verification/guarantee in order to provide e-commerce merchants with a complete
check transaction ready for deposit.
Since 1993, we have maintained a strategic relationship with
Hewlett-Packard, a $42 billion leading global provider of computing and imaging
solutions and services. 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.
Hewlett-Packard and TROY Group recently announced the availability of our
NetSend-TradeMark- family of Internet print servers, allowing a wide range of
non-HP printers, HP LaserJet printers and the 100 million HP inkjet peripherals
already in the marketplace to communicate utilizing HP's JetSend capabilities.
NetSend-TradeMark- Internet print servers enable JetSend communication with
these printing devices. JetSend is an easy-to-use communications protocol that
allows two devices to communicate directly over the Internet without the need of
a PC or software drivers. For example, a user can scan a document using a
JetSend-enabled image capture device and share the information with a
JetSend-enabled printer, achieving printing output that far exceeds the best of
current-day facsimile machines.
Our strategic alliance with Hewlett-Packard also includes our appointment
as a PeopleSoft Alliance Solution Center partner. PeopleSoft's Alliance Solution
Center (ASC), located in their new Pleasanton, CA headquarters, opened in 1998
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 that will enable PeopleSoft customers to print financial
documents, barcodes, labels and standard business documents.
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We have a joint marketing relationship with IBM, the $8l billion world
leader in the development and manufacture of advanced information technology. In
an agreement with TROY, IBM has agreed 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 a worldwide leader in
embedded software. Wind River is promoting our soft print server on its web
site, in its third party catalog and with its marketing literature. We have
participated in Wind River international sales meetings and expect to
participate in additional joint marketing activities with Wind River in the
future.
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-TradeMark-, a
check printing software system, and PATIENT LINKUP-TradeMark-, a hospital
admissions and document routing system.
COMPETITION
The market for our products is highly competitive and subject to rapid
technological change. We compete principally on the basis of the quality,
flexibility, convenience and security of our financial payment solutions.
Overall, we believe that we are well positioned in our industry and compete
favorably as a result of:
- our highly trained team of software, firmware, electrical, mechanical
and chemical engineers and programmers;
- our commitment to understanding the changing needs of our marketplace;
- our ability to develop new solutions to meet those needs;
- the breadth of our products' features;
- our reputation for knowledge, technical expertise and professionalism;
- the strength and scope of our strategic relationships;
- capable and reliable technical support; and
- a historical and on-going commitment to quality.
E-COMMERCE PAYMENT SOLUTIONS. After reviewing many direct and indirect
competitors as well as substitute offerings, we believe that eCheck
Secure-TradeMark- fills a unique niche in the e-commerce payments marketplace.
Various electronic payment companies do exist, but none to our knowledge
currently offer a software/printed check solution with the same unique benefits.
Our current competitors for e-commerce
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financial payment solutions include major credit card companies and financial
institutions and other providers of direct debit, wire transfer or ACH services.
NETWORKED COMPUTER PAYMENT SOLUTIONS. Our primary competitors in networked
computer payment solutions 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 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 our financial payment 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.
NETWORK AND INTERNET CONNECTIVITY SOLUTIONS. The market for network and
Internet printing is still emerging. There are some competitors like
Hewlett-Packard, i-data, Axis, and Peerless that support the IPP protocol, but
none to our knowledge are focusing on supporting multiple Internet protocols
simultaneously. 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 who 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 VINES connectivity.
To our knowledge, the only direct competitors for our new soft print server
are Peerless and NETsilicon. Other competition for soft print servers 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 our soft print server.
Although the prices of our MICR printers and imaging supplies 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.
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Both the multi-protocol Internet document distribution market and the
e-commerce checking account payments market are just emerging. Because of the
projected growth of this market, we will most likely experience increased
competition in the future.
INTELLECTUAL PROPERTY
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 February 18, 2000, we held nine United States patents. Our existing
patents primarily cover components of our impact printing systems. We have also
filed applications for one additional United States patent and six foreign
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 believe that our proprietary manufacturing processes and techniques,
materials expertise and trade secrets 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 its disclosure to outside parties. 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 MICR printer and imaging supplies manufacturing 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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EMPLOYEES
As of February 18, 2000, we employed approximately 210 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.
ITEM 1A. IMPORTANT FACTORS
There are several important factors that could cause our actual results to
differ materially from those anticipated by us or which are reflected in any of
our forward-looking statements. These factors, and their impact on the success
of our operations and our ability to achieve our goals, include those set forth
below.
WE HAVE RECENTLY EXPANDED OUR BUSINESS TO OFFER E-COMMERCE PAYMENT SOLUTIONS AND
FACE CERTAIN RISKS RELATED TO THESE SOLUTIONS, INCLUDING FAILURE TO GAIN MARKET
ACCEPTANCE
Until recently, we focused mainly on developing and selling financial
payment solutions that enabled businesses to distribute and print financial
documents. We have since expanded our business and strategy to offer e-commerce
payment solutions that enable e-commerce merchants and online brokerages to
accept payments from their customers' checking accounts as an alternative to
credit cards. Because this is a recent focus for us, we do not have extensive
experience in this area, and we cannot assure that we will be successful in
marketing these types of payment solutions. In addition, our new focus on
e-commerce payment solutions could cause our historical networked payment
solutions business to suffer. Our e-commerce payment solutions compete with
well-established payment methods such as credit cards and we cannot assure you
that our current solutions or those under development will be accepted by the
marketplace. If we are not successful in marketing e-commerce payment solutions
or if our historical business declines as a result of our efforts in this area,
our business will be materially and adversely affected.
In connection with our e-commerce payment solutions, it is also possible
that we could be held responsible for claims that payments presented using our
products are not authorized by the holder of the account on which they are
drawn. If we were found responsible for unauthorized payments we could be liable
for the amount of the unauthorized payment as well as other indirect or
consequential damages, such as overdraft charges or damage to the account
holders' credit rating. Any findings of such liability could also significantly
impact our marketing of these products and could cause our business to suffer.
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 e-commerce solutions. Acquisitions involve risks,
including that:
- we may not be able to identify and assimilate 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,
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- 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.
WE FACE SIGNIFICANT COMPETITION WHICH MAY IMPACT OUR REVENUES, GROSS MARGINS AND
MARKET SHARE
Our e-commerce payment solutions compete directly with well established
payment methods such as credit cards. Credit card companies, financial
institutions and others offering direct debit, wire transfer and ACH services
generally have greater current market share and resources than we have. There
can be no assurance that we will be able to compete successfully against these
other payment methods and their providers, and our failure to do so will
adversely affect our business and prospects.
In addition, we face significant competition in developing and selling
networked payment solutions. Many of our competitors in this market also 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.
OUR BUSINESS DEPENDS ON THE CONTINUED DEMAND FOR PRINTED DOCUMENTS, INCLUDING
FINANCIAL DOCUMENTS
Because we provide 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 financial payment 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.
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
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.
A LARGE CUSTOMER ACCOUNTS FOR A MATERIAL PORTION OF OUR SALES AND OUR EARNINGS
WILL SUFFER IF WE LOSE THIS CUSTOMER
For the year ended November 30, 1999, Cannon IV, Inc., one of our imaging
supplies resellers, accounted for 11.4% of our net sales. This reseller also
accounted for 17.1% of our net sales for the fiscal
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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 2.6%
of our net sales for the year ended November 30, 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.
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, Equifax, Hewlett-Packard, IBM, Standard Register and
Wind River. These relationships include supply, OEM, marketing and service
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.
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 13.3% of our net sales in the
year ended November 30, 1999. International sales represented 16.2% of sales in
the year ended November 30, 1998 and 13.7% of sales in the year ended November
30, 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 would cause our business to suffer.
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 and services sold in the quarter,
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- life cycle stages of the products sold in the quarter,
- the availability and cost of components and materials,
- costs and benefits of new product and service 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.
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.
WE DEPEND ON OUR EXECUTIVE OFFICERS FOR OUR SUCCESS
We are significantly dependent upon Patrick J. Dirk, our Chairman and Chief
Executive Officer, 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 President and
Chief Operating Officer.
COMPLIANCE WITH GOVERNMENT REGULATIONS MAY CAUSE US TO INCUR UNFORESEEN EXPENSES
Our MICR printer and imaging supplies manufacturing operations are 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 with all current laws
and regulations, we cannot assure you that these regulations will not change. We
also cannot assure 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.
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.
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OUR BUSINESS COULD BE ADVERSELY AFFECTED BY YEAR 2000 COMPLIANCE ISSUES
The "Year 2000" problem refers to the potential for computational errors or
system malfunctions by computer hardware or software that fail to properly
recognize dates beginning with January 1, 2000, or which fail to recognize the
year 2000 as a leap year. In anticipation of this problem, we instituted and
followed a Year 2000 readiness program intended to identify, evaluate and
address our Year 2000 exposure. We had not experienced any material Year 2000
problems with our products or internal systems, and were not aware of any such
problems experienced by our customers, vendors and other service providers at
the time that this report was prepared. It is possible, however, that latent
Year 2000 problems that remained undiscovered (or, in the case of Year 2000
problems with business partners, undisclosed) at the time of this report or
future problems caused by the failure of computer hardware or software to
recognize the year 2000 as a leap year could cause us to suffer interruptions or
delays in our business activity or require us to take corrective action. Even
though we believe that it is unlikely at the time of this report, there can be
no assurance that any such issues will not result in material cost to us or have
a material, adverse impact on our business, financial condition or results of
operations.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we or any of our
subsidiaries is a party, or regarding any of our property or any of our
subsidiaries' property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted for a vote of our security holders during the
fourth quarter of the fiscal year covered by this report.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers as of February 18, 2000, are as follows:
NAME AGE TITLE
Patrick J. Dirk ................. 60 Chairman of the Board, Director and
Chief Executive Officer of Troy,
Chairman of the Board and Chief
Executive Officer of Troy Systems
International, Chairman of the
Board, Chief Executive Officer and
sole Director of Troy XCD and
Director of Troy Telgate Systems, Inc.
Robert S. Messina ............... 50 President, Chief Operating Officer and
Director of Troy
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Brian P. Dirk ................... 35 Vice President and Director of Troy
Del L. Conrad ................... 53 Chief Financial Officer, Treasurer and
Secretary of Troy, Chief Financial
Officer and Secretary of Troy Systems
International and Vice President,
Chief Financial Officer and Secretary
of Troy XCD
PATRICK J. DIRK has been Chairman of the Board, Chief Executive Officer and
a Director since he co-founded Troy with his wife in May 1982. From May 1982
until August 1999, Mr. Dirk served as President of Troy. Mr. Dirk is also the
founder, Chairman of the Board and Chief Executive Officer of Troy Systems
International, the Chairman of the Board, Chief Executive Officer and sole
director of Troy XCD and a director of Troy Telgate Systems, Inc. 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 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. Mr. Dirk is the father of Brian P. Dirk.
ROBERT S. MESSINA has been President, Chief Operating Officer and a
Director of Troy since August 1999. Mr. Messina previously served as Executive
Vice President of Troy from April 1998 to August 1999 and the President and
Chief Operating Officer of Troy Systems International from December 1996 to
August 1999. 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.
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 again became
a director in July 1999. 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.
DEL L. CONRAD has been our Chief Financial Officer, Treasurer and Secretary
since April 1998 and also serves as the Chief Financial Officer and Secretary of
Troy Systems International and 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.
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PART II
--------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK INFORMATION.
Our common stock is currently traded on the Nasdaq National Market under
the symbol "TROY." The following table sets forth, for each of the fiscal
periods indicated since our July 27, 1999 initial public offering, the range of
high and low closing sale prices per share as reported by the Nasdaq National
Market. These prices do not include adjustments for retail mark-ups, mark-downs
or commissions.
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
----------- ---- ---
<S> <C> <C>
Third Quarter (July 27 to August 31)............. $7.6250 $6.0625
Fourth Quarter................................... $17.3125 $6.7500
</TABLE>
We have not declared or paid any cash dividends (other than S corporation
distributions) on our common stock since our inception, and the Board of
Directors presently intends to retain all earnings for use in our business for
the foreseeable future. In addition, our ability to declare and pay dividends is
restricted by the terms of certain of our debt agreements. See Note 9 to our
financial statements on pages F-14 to F-18 of this report.
As of February 18, 2000, there were 102 record holders of our common stock.
USE OF PROCEEDS.
In May 1998, we initially filed a Registration Statement on Form S-1 (File
No. 333-51523) with the Securities and Exchange Commission for our initial
public offering. Under this Registration Statement, as amended, we registered
the offer and sale under the federal securities laws of up to $25,875,000 in
shares of our common stock. The SEC declared our Registration Statement
effective on July 21, 1999 and the closing of our initial public offering was
held on July 27, 1999. The managing underwriters were Cruttenden Roth
Incorporated, Pennsylvania Merchant Group and H.C. Wainwright & Co., Inc.
The aggregate offering price of the shares offered was $17,500,000. All of
the offered shares were sold and the net proceeds to Troy from the offering were
$14,943,000, after deducting the underwriting discount of $1,575,000 and the
estimated offering expenses of approximately $982,000, of which approximately
$54,000 was incurred from the effective date through November 30, 1999. All of
the expenses incurred in connection with the initial public offering were paid
to unrelated parties or entities.
From July 27, 1999 to November 30, 1999, we have spent the net proceeds
from the offering as follows:
<TABLE>
<S> <C>
Repayment of long-term debt $2,965,000
Repayment of line of credit 1,354,000
----------
$4,319,000
==========
</TABLE>
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All payments of the net proceeds were paid to unrelated parties or
entities.
ITEM 6. SELECTED FINANCIAL DATA.
SUMMARY STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED NOVEMBER 30:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ...................... $58,559 $35,758 $33,434 $28,161 $21,477
Gross profit ................... 22,531 14,262 13,837 10,753 7,917
Net income ..................... 5,827 4,434 4,397 3,067 313
Pro forma net income ........... -- 2,371 2,659 1,870 140
Pro forma diluted net income per
share .......................... $ 0.64 $ 0.31 $ 0.34 $ 0.25 $ 0.02
Weighted average diluted shares
outstanding .................... 9,116 7,745 7,759 7,500 7,500
</TABLE>
SUMMARY BALANCE SHEET DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT NOVEMBER 30: 1999 1998 1997 1996 1995
- -------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital ....... $25,011 $ 5,806 $ 5,173 $ 3,910 $ 1,426
Total assets .......... 37,058 18,918 11,749 11,324 9,597
Long-term debt ........ 395 3,333 2,034 2,209 3,057
Stockholders' equity .. 29,795 8,265 5,948 4,102 1,153
</TABLE>
The above information includes our initial public offering on July 21, 1999
and our acquisitions of Troy XCD in October 1998 and Troy Telgate Systems in May
1999. See Note 2 to our financial statements on pages F-10 and F-11 of this
report. In addition, please see Note 1 to our financial statements on pages F-6
to F-9 of this report for information regarding pro forma net income.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and related Notes included in this report.
BACKGROUND
We are a leading worldwide provider of financial payment solutions. Our
software, firmware and hardware solutions enable businesses to electronically
transmit and output financial payment information across computer networks and
the Internet.
Our products consist of financial payment solutions and connectivity
products that serve a wide variety of industries including e-commerce retailers,
online brokerages, telecommunications, financial services, insurance, computer
hardware, automotive, personnel and others.
Our financial payment solutions consist of e-commerce payment solutions and
networked computer payment solutions. Our e-commerce payment solutions enable
Internet merchants to accept payments from their customers' checking accounts as
an alternative to credit cards. Our networked computer payment solutions include
software, firmware, hardware and imaging supplies that enable standard laser
printers to print MICR lines, graphics, barcodes and forms and to perform
additional functions such as auditing, status checking and security.
Our connectivity products enhance the connectivity of devices that transmit
information over computer networks and the Internet.
OVERVIEW
Net sales are generated from the sale of our connectivity and financial
payment solutions 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 fiscal
years ended November 30, 1999 and 1998, a reseller of our imaging supplies,
Cannon IV Inc., accounted for 11.4% and 17.1%, respectively, of our net sales,
of which we believe a significant portion was sold to a single customer. In
addition, a reseller of our laser printers and connectivity products, Comark,
Inc. also sold products to this same customer which accounted for 19.9% and
0.0%, respectively, of our net sales for the fiscal years ended November 30,
1999 and 1998. We also sell our products directly to this significant customer.
Direct sales to these resellers' significant customer were 2.6% and 6.8% of our
net sales for the fiscal years ended November 30, 1999 and 1998. We do not have
a written or oral contract with Cannon IV, Comark, Inc. or their significant
customer. All sales are made through purchase orders.
22
<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>
Fiscal Year Ended
November 30,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales ..................................... 100.0% 100.0% 100%
Cost of goods sold ............................ 61.5 60.1 58.6
Gross Profit .................................. 38.5 39.9 41.4
Selling, general and administrative expenses... 16.8 17.9 19.8
Research and development expenses ............. 6.2 7.1 7.5
Purchased in process research and development.. -- 2.4 --
Operating income .............................. 15.5 12.5 14.1
Interest income ............................... 0.4 -- --
Interest expense .............................. (0.4) (0.3) (0.8)
Income before income taxes (credit) ........... 15.5 12.2 13.3
Provision for income taxes (credit) ........... 5.5 (0.2) 0.1
Net income .................................... 10.0 12.4 13.2
Pro forma provision for income taxes .......... -- 5.6 5.3
Pro forma net income .......................... -- 6.6 8.0
</TABLE>
FISCAL YEAR ENDED NOVEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1998
NET SALES. Our net sales were $58.6 million for the fiscal year ended
November 30, 1999, with $50.4 million attributable to financial payment
solutions products and $8.2 million attributable to connectivity products and
software. This represented an increase in net sales of $22.8 million or 63.8%
from $35.8 million in the fiscal year ended November 30, 1998. This increase was
due primarily to an increase of $8.2 million in sales of connectivity products
as a result of the Troy XCD and Troy Telgate acquisitions, an increase of $4.6
million in sales of our proprietary imaging supplies and services and an
increase of $11.5 million in sales of our laser printers. This increase was
offset by a $1.2 million 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 $14.5 million or 67.6%
to $36.0 million in the fiscal year ended November 30, 1999 from $21.5 million
in the fiscal year ended November 30, 1998. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales increased
to 61.5% in the fiscal year ended November 30, 1999 from 60.1% in the fiscal
year ended November 30, 1998. This increase was primarily due to the sale of a
significant amount of laser printers to Comark at a reduced profit margin.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$8.3 million or 58.0% to $22.5 million in the fiscal year ended November 30,
1999 from $14.3 million in the fiscal year ended November 30, 1998. Gross profit
as a percentage of net sales decreased to 38.5% in the fiscal year ended
November 30, 1999 from 39.9% in the fiscal year ended November 30, 1998. This
decrease was also primarily due to the sale of a significant amount of laser
printers to Comark at a reduced profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $3.4 million or 53.9% to $9.8 million in
the fiscal year ended November 30, 1999 from $6.4
23
<PAGE>
million in the fiscal year ended November 30, 1998. This increase was due
primarily to the additional operating expenses of $1.7 million as a result of
the acquisitions of Troy XCD and Troy Telgate, an increase of $1.7 million due
to increases in personnel, amortization of intangible assets due to the
acquisitions, promotions, and other expenses. Selling, general and
administrative expenses as a percentage of net sales decreased to 16.8% in the
fiscal year ended November 30, 1999 from 17.9% in the fiscal year ended November
30, 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $1.1 million or 43.2% to $3.6 million in the fiscal year ended
November 30, 1999 from $2.5 million in the fiscal year ended November 30, 1998.
Of this increase, $1.0 million was due to the additional research and
development expenses as a result of the acquisitions of Troy XCD and Troy
Telgate. Research and development expenses as a percentage of net sales
decreased to 6.2% in the fiscal year ended November 30, 1999 from 7.1% in the
fiscal year ended November 30, 1998.
OPERATING INCOME. As a result of the above factors, operating income
increased by $4.6 million or 102.6% to $9.0 million in the fiscal year ended
November 30, 1999 from $4.5 million in the fiscal year ended November 30, 1998.
Operating income as a percentage of net sales increased to 15.4% in the fiscal
year ended November 30, 1999 from 12.5% in the fiscal year ended November 30,
1998.
INTEREST INCOME. Interest income was $231,000 for the fiscal year ended
November 30, 1999. This income was due to our investment of proceeds from our
initial public offering. We did not have interest income in the fiscal year
ended November 30, 1998.
INTEREST EXPENSE. Interest expense increased by $133,000 to $234,000 in the
fiscal year ended November 30, 1999 from $101,000 in the fiscal year ended
November 30, 1998. This increase was due to increased borrowings under our line
of credit and term debt prior to the completion of our initial public offering.
INCOME TAXES. Income taxes increased to $3.2 million in the fiscal year
ended November 30, 1999 from a credit of $70,000 in the fiscal year ended
November 30, 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 decreased to 35.6% in the fiscal
year ended November 30, 1999 from 45.7% in the fiscal year ended November 30,
1998.
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 financial payment solutions 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.
24
<PAGE>
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 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.
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.
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.
25
<PAGE>
YEAR 2000 MATTERS
The "Year 2000" problem refers to the potential for computational errors or
system malfunctions by computer hardware or software that fail to properly
recognize dates beginning with January 1, 2000, or which fail to recognize the
year 2000 as a leap year. In anticipation of this problem, we instituted and
followed a Year 2000 readiness program intended to identify, evaluate and
address our Year 2000 exposure.
At the time that this report was prepared, we had not experienced any
material Year 2000 problems with our products or internal systems, and were not
aware of any such problems experienced by our customers, vendors and other
service providers. As a result, no material adverse impact of the Year 2000
problem on our business and operations was expected at the time of this report,
based upon the information then available to us. However, this forward-looking
statement will be impacted by the extent to which latent Year 2000 problems
remained undiscovered, or, in the case of Year 2000 problems with business
partners, undisclosed as of such date, and the extent of any future problems
caused by the failure of computer hardware or software to recognize the year
2000 as a leap year. Although we believe that it is unlikely at the time of this
report, there can be no assurance that any such issues will not result in
material cost to us or have a material, adverse impact on our business,
financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering in July, 1999, our primary source of
liquidity has been through cash generated from operations and borrowings under
our revolving credit facility and term loans.
Cash flows provided by operating activities were $1,972,000 in the fiscal
year ended November 30, 1999 compared to $4,603,000 in the fiscal year ended
November 30, 1998. The cash flows provided by operating activities in the fiscal
year ended November 30, 1999 were comparatively less than in the fiscal year
ended November 30, 1998 due primarily to increases in accounts receivable and
inventories and a decrease in accrued expenses. 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 $8,707,000 in the fiscal year
ended November 30, 1999 compared to $3,357,000 in the fiscal year ended November
30, 1998. Included in cash flows used in investing activities in the fiscal year
ended November 30, 1999 was $7,499,000 in purchases of available-for-sale
securities following our initial public offering in July, 1999.
Cash flows provided by financing activities were $11,210,000 in the fiscal
year ended November 30, 1999 compared to cash flows used in financing activities
of $1,038,000 in the fiscal year ended November 30, 1998, primarily as a result
of our initial public offering which closed on July 27, 1999. In the fiscal year
ended November 30, 1998, S corporation distributions totaled approximately
$3,396,000 and net additional borrowings totaled approximately $2,489,000.
We currently have a $5,000,000 general line of credit and a $10,000,000
acquisition line of credit with a bank. As of November 30, 1999, there were no
borrowings outstanding against either line of credit. Both lines of credit are
secured by substantially all of our assets. We are subject to certain financial
covenants in connection with these borrowing arrangements.
26
<PAGE>
Borrowings under the general line of credit bear interest at the lesser of
the bank's reference rate (8.5% at November 30, 1999) less 0.25% or the bank's
LIBOR rate (6.5% at November 30, 1999) plus 2% and are limited to 80% of
eligible accounts receivable and 50% of eligible inventories if total
liabilities to tangible effective net worth is greater than two to one. In
connection with the general line-of-credit agreement, we have a $650,000 standby
letter of credit sublimit agreement of which approximately $140,000 was
outstanding at November 30, 1999. As of November 30, 1999, approximately
$4,860,000 was available under the general line of credit. The general line of
credit has no expiration date.
Borrowings under the acquisition line of credit bear interest at the lesser
of the bank's reference rate plus 0.25% or the bank's LIBOR rate plus 2.5%. The
first $3,000,000 of acquisition advances may be used to finance up to 100% of
the purchase price of permitted acquisitions so long as the value of goodwill
and other acquired intangibles does not exceed 50% of the purchase price.
Repayment of advances against the acquisition line of credit will commence
November 2000 and continue in equal installments through October 2005. As of
November 30, 1999, all $10,000,000 was available under the acquisition line of
credit. The acquisition line of credit expires October 1, 2000.
We believe that cash generated by operating activities, the net proceeds
from our initial public 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.
PURCHASED IN PROCESS RESEARCH AND DEVELOPMENT
At the time of our acquisition of Troy XCD 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, two accounted for over 80% 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
PROJECT COSTS COST TO COMPLETION DEVELOPMENT
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 Others, fourteen projects............ Various Various Various 150,000
---------
$ 857,000
=========
</TABLE>
In-process research and development projects are time consuming and
difficult to complete. Additional outlays were expected to occur over a period
of approximately thirteen months following the acquisition. There was
substantial risk associated with the completion of each project, and there was
no assurance that each research and development project would yield either
technological functionality or commercial success. Furthermore, as is common to
research and development efforts, Troy XCD had previously experienced
developmental setbacks where the time required to fully develop critical
technology driven steps and to complete reliability testing were underestimated.
If the research and development projects were not completed as planned, they
might neither satisfy the technological requirements of a rapidly changing
market nor be cost effective.
27
<PAGE>
The following is a description of the significant research and development
projects that were under development at the acquisition date and the status of
those projects at November 30, 1999:
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. As of the date of the acquisition, Troy XCD was completing the
graphical interface and debugging the Ethernet interface card and, once
completed, various regulatory approvals were required. This project was
completed in December 1998 with no significant difference in the cost to
complete. These products are currently being sold. Results to date are
consistent with our expectations.
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. This
project was completed ahead of schedule with no significant difference in
the cost to complete. These products are currently being sold. Results to
date are less than expected.
There have been no events or changes in circumstances through the date of
this filing that suggest that our valuation assumptions were not reasonable.
Troy XCD has developed the in-process technologies and has deployed these
technologies in end-products in a timeframe and manner consistent with the
valuation projections.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 15, 2000 and is
not expected to have a material impact on our consolidated financial statements.
ITEM 7A. 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 sensitive
financial instruments, including long term debt.
We do not utilize derivative financial instruments. Accordingly, our
exposure to market risk is through our investments in available-for-sale
securities and our bank debt which bears interest at variable rates.
Available-for-sale securities consist of corporate debt and marketable equity
securities with contractual maturity dates of up to one year. At November 30,
1999, market values approximated carrying values. Due to the short-term
maturities of these securities, management believes that there is no significant
market risk. At November 30, 1999, we had approximately $12.4 million in cash,
cash equivalents and investments in available-for-sale securities, and,
accordingly, a sustained decrease in the rate of interest earned of 1% would
cause a decrease in the amount of interest earned of $124,000. The bank debt is
a revolving line of credit. All borrowings bear interest based upon the
reference rate per annum as announced by the bank (8.5% at November 30, 1999).
At November 30, 1999, there were no amounts outstanding under the line of credit
agreement and, accordingly, a sustained increase in the reference rate of 1%
would not cause our annual interest expense to change.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL STATEMENTS.
Our consolidated financial statements and related notes are contained on
pages F-1 to F-26 of this report. The index to such items is included on page 31
in Item 14(a)(1).
QUARTERLY RESULTS.
FISCAL 1999 (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ........... $11,400 $12,066 $17,416 $17,677
Gross profit ........ 4,601 4,698 6,592 6,640
Operating income .... 1,670 1,851 2,681 2,843
Net income .......... 955 1,070 1,470 2,332
Net income per share:
Basic ............... .12 .14 .17 .23
Diluted ............. .12 .13 .16 .21
</TABLE>
FISCAL 1998 (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ............. $ 8,928 $ 9,394 $ 9,456 $ 7,980
Gross profit .......... 3,570 3,996 3,775 2,921
Operating income (loss) 1,362 1,552 1,600 (49)
Net income ............ 1,303 1,499 1,554 78
Net income (loss) per
share:
Basic ................. .11 .12 .12 (.04)
Diluted ............... .10 .12 .12 (.04)
</TABLE>
Quarterly calculations of net earnings per share do not equate to the
calculations for the fiscal year as quartery calculations are made on a discrete
basis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
29
<PAGE>
PART III
--------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) DIRECTORS OF THE REGISTRANT.
The information under the caption "Election of Directors - Information
About Nominees" and "- Other Information About Nominees" in our 2000 Proxy
Statement is incorporated herein by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning our Executive Officers is included in this Annual
Report on Form 10-K under Item 4A, "Executive Officers of the Company."
(c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in our 2000 Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the caption "Executive Compensation" in our 2000
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in our 2000 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Executive Compensation - Certain
Transactions" in our 2000 Proxy Statement is incorporated herein by reference.
30
<PAGE>
PART IV
--------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS:
The following financial statements are included in this report on the
pages indicated:
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Independent auditor's report...................................... F-1
Consolidated balance sheets as of
November 30, 1999 and 1998.................................... F-2
Consolidated statements of operations for the years ended
November 30, 1999, 1998 and 1997........................... F-3
Consolidated statements of cash flows for the years ended
November 30, 1999, 1998 and 1997........................... F-4
Consolidated statements of stockholders' equity as of
November 30, 1999, 1998 and 1997........................... F-5
Notes to consolidated financial statements........................ F-6 to F-26
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted because the
required information is included in our consolidated financial statements
or the related notes, or is not applicable.
(3) EXHIBITS
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index contained on pages E-1 through E-4 of this report.
We will furnish a copy of any exhibit to a stockholder who requests a
copy in writing and pays a fee of $5.00 per exhibit. Requests should be
sent to: Del L. Conrad, Chief Financial Officer, Troy Group, Inc, 2331
South Pullman Street, Santa Ana, California 92705.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual
Report on Form 10-K pursuant to Item 14(c):
A. 1996 Stock Option Plan (incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1 (File No.
333-51523)).
B. 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.8
to the Company's Registration Statement on Form S-1 (File No.
333-51523)).
C. 1998 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File
No. 333-51523)).
31
<PAGE>
D. Non-Competition Agreement dated November 27, 1996 between Robert
Messina and the Company (incorporated by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-1 (File No.
333-51523)).
E. Form of Indemnification Agreement for directors and executive officers
of the Company (incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (File No. 333-51523)).
(b) REPORTS ON FORM 8-K:
None.
(c) EXHIBITS:
The response to this portion of Item 14 is included as a separate section
of this Annual Report on Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES:
The response to this portion of Item 14 is included as a separate section
of this Annual Report on Form 10-K.
32
<PAGE>
INDEPENDENT AUDITOR'S REPORT
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended November 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1999, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Anaheim, California
January 14, 2000
F-1
<PAGE>
TROY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
---------------------------
ASSETS 1998 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 308,000 $ 4,783,000
Investment in available-for-sale securities -- 7,647,000
Accounts receivable, less allowance for doubtful accounts
1998 $140,000; 1999 $294,000 6,379,000 12,530,000
Income tax refund receivable 319,000 --
Inventories 5,783,000 5,082,000
Prepaid expenses and other 50,000 140,000
Deferred tax assets 766,000 1,160,000
----------- -----------
Total current assets 13,605,000 31,342,000
Equipment and leasehold improvements, net 1,905,000 1,863,000
Other assets 3,408,000 3,853,000
----------- -----------
Total assets $18,918,000 $37,058,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued not yet presented for payment $ 42,000 $ --
Note payable 1,190,000 --
Current portion of long-term debt 959,000 64,000
Accounts payable 2,868,000 2,495,000
Accrued expenses 2,544,000 2,322,000
Income taxes payable -- 1,208,000
Deferred service revenue 196,000 242,000
----------- -----------
Total current liabilities 7,799,000 6,331,000
----------- -----------
Long-term debt, net of current portion 2,374,000 331,000
----------- -----------
Deferred tax liabilities 480,000 601,000
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000
shares; issued 1998 7,671,430 shares; and 1999 10,663,941
shares 77,000 107,000
Preferred stock, no par value, authorized 5,000,000 shares;
issued none -- --
Additional paid-in capital 1,724,000 17,397,000
Retained earnings 6,464,000 12,291,000
----------- -----------
Total stockholders' equity 8,265,000 29,795,000
----------- -----------
Total liabilities and stockholders' equity $18,918,000 $37,058,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended November 30,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 33,434,000 $ 35,758,000 $ 58,559,000
Cost of goods sold (including $168,000; $250,000; and $270,000 in
rent paid to majority stockholders) 19,597,000 21,496,000 36,028,000
------------ ------------ ------------
Gross profit 13,837,000 14,262,000 22,531,000
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 6,622,000 6,394,000 9,839,000
Research and development 2,521,000 2,546,000 3,647,000
Purchased in process research and development -- 857,000 --
------------ ------------ ------------
9,143,000 9,797,000 13,486,000
------------ ------------ ------------
Operating income 4,694,000 4,465,000 9,045,000
Interest income -- -- 231,000
Interest expense (including $33,000; $11,000; and none paid to
majority stockholders) (262,000) (101,000) (234,000)
------------ ------------ ------------
Income before income taxes (credit) 4,432,000 4,364,000 9,042,000
Provision for income taxes (credit) 35,000 (70,000) 3,215,000
------------ ------------ ------------
Net income $ 4,397,000 $ 4,434,000 $ 5,827,000
============ ============ ============
Pro forma net income (unaudited):
Historical income before income taxes $ 4,432,000 $ 4,364,000
Pro forma provision for taxes 1,773,000 1,993,000
------------ ------------
Pro forma net income $ 2,659,000 $ 2,371,000
============ ============
Net income per share:
Basic $ 0.35 $ 0.32 $ 0.67
============ ============ ============
Dilute $ 0.34 $ 0.31 $ 0.64
============ ============ ============
Weighted average shares outstanding:
Basic 7,500,000 7,514,000 8,636,000
============ ============ ============
Dilute 7,759,000 7,745,000 9,116,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
-------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,397,000 $ 4,434,000 $ 5,827,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 617,000 682,000 1,173,000
Purchased in-process research and development -- 857,000 --
Provision of doubtful accounts 65,000 134,000 275,000
Accretion of investment discounts, net -- -- (148,000)
Deferred taxes -- (77,000) (504,000)
Changes in working capital components, net of
effects from acquisition of companies:
(Increase) decrease in:
Accounts receivable (369,000) (16,000) (6,231,000)
Income tax refund receivable -- (211,000) 319,000
Inventories 404,000 (1,209,000) 736,000
Prepaid expenses and other (125,000) 244,000 (116,000)
Increase (decrease) in:
Accounts payable 227,000 894,000 (373,000)
Accrued expenses 346,000 (1,125,000) (240,000)
Income taxes payable -- -- 1,208,000
Deferred service revenue 10,000 (4,000) 46,000
------------ ------------ ------------
Net cash provided by operating activities 5,572,000 4,603,000 1,972,000
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of companies -- (1,638,000) (299,000)
Purchase of available-for-sale securities -- -- (7,499,000)
Purchase of equipment and leasehold improvements (197,000) (917,000) (623,000)
(Increase) in other assets (561,000) (802,000) (286,000)
------------ ------------ ------------
Net cash (used in) investing activities (758,000) (3,357,000) (8,707,000)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings on notes payable 17,498,000 10,291,000 12,203,000
Payments on notes payable (19,110,000) (9,101,000) (13,393,000)
Proceeds from issuance of debt 1,000,000 2,876,000 670,000
Principal payments on debt (1,175,000) (1,577,000) (3,608,000)
Payments on life insurance loans (201,000) -- --
(Decrease) in checks issued not yet presented for payment (217,000) (131,000) (42,000)
Dividends paid (2,551,000) (3,396,000) (200,000)
Proceeds from issuance of common stock -- -- 15,580,000
------------ ------------ ------------
Net cash provided by (used in) financing activities (4,756,000) (1,038,000) 11,210,000
------------ ------------ ------------
Net increase in cash and cash equivalents 58,000 208,000 4,475,000
Cash and cash equivalents, beginning of period 42,000 100,000 308,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 100,000 $ 308,000 $ 4,783,000
============ ============ ============
</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 Earning Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
in initial public offering 2,500,000 25,000 14,583,000 -- 14,608,000
Issuance of other common
stock 58,700 2,000 408,000 -- 410,000
Common stock options and
warrants exercised 433,811 3,000 133,000 -- 136,000
Issuance of common stock
warrants -- -- 549,000 -- 549,000
Net income -- -- -- 5,827,000 5,827,000
---------- ------------ ------------ ------------ ------------
Balance, November 30, 1999 10,663,941 $ 107,000 $ 17,397,000 $ 12,291,000 $ 29,795,000
========== ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is a leading worldwide provider in financial payment systems.
TROY Group, Inc. through its various acquisitions has been in the financial
payment systems business since 1971. The Company's products serve a wide variety
of industries including e-commerce retailers, online brokerages,
telecommunications, financial services, insurance, computer hardware,
automotive, personnel and others. The Company provides financial products to
over 5,000 active customers in 55 countries around the world through a direct
sales force and a network of distributors and value added resellers. The
Company's financial payment solutions and connectivity products consist of
software, firmware, hardware and imaging supplies.
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 revenue 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 and 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) or invested in a short-term money market account. Under this
program, idle funds are minimized. The Company's liquidity is thereby maintained
in the form of its ability to draw funds against the revolving line of credit.
All checks issued not yet presented for payment are classified as a liability.
INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
The Company has a diverse portfolio of investment in debt and marketable
equity securities. Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the appropriateness of
such classifications at each balance sheet date. Management has determined that
all securities should be classified as available-for-sale. Available-for-sale
securities are stated at fair value, and unrealized holding gains and losses,
net of the related deferred tax effect, are reported as a separate component of
stockholders' equity.
F-6
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As of November 30, 1999, the Company had approximately $2.6 million in
marketable equity securities and $5.0 million in corporate debt securities with
contractual maturity dates of up to one year. Market values approximated
carrying values. Accordingly, no unrealized gains or losses were recorded at
November 30, 1999.
Premiums and discounts on investments in debt securities are amortized over
the contractual lives of those securities. The method of amortization results in
a constant effective yield on those securities (the interest method). Dividends
on marketable equity securities are recognized in income when declared. Realized
gains and losses, including losses from declines in value of specific securities
determined by management to be other than temporary, are included in income.
Realized gains and losses are determined on the basis of the specific
identification of the securities sold. The Company had no realized gains or
losses in fiscal year 1999.
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 recorded 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 consist of customer lists, core technology, assembled
workforce and goodwill which are being amortized on a straight-line basis over
five to seven years.
EVALUATION OF LONG-LIVED ASSETS
The Company periodically reviews the value of its long-lived assets to
determine if an impairment has occurred. The Company does not believe that an
impairment of its long-lived assets has occurred based on an evaluation of
projected operating income, cash flows and business prospects.
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.
F-7
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING POLICY
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was approximately $94,000, $84,000
and $100,000 in fiscal years 1997, 1998 and 1999, respectively.
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 year ended
November 30, 1997, 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, 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 and cash equivalents,
accounts receivable, accounts payable and notes payable. The book value of these
instruments is considered to be representative of their fair value.
F-8
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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,
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 exercise of stock
options and warrants (259,000, 231,000 and 480,000 shares in the fiscal years
ended November 30, 1997, 1998 and 1999, respectively). Diluted EPS does not
include contingently issuable warrants because the conditions for issuance have
not been met. The dilutive effect of options and warrants 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 1998, the FASB issued Statement of Financial Accounting Standards
(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 15, 2000 and is not expected to have a material impact
on the Company's consolidated financial statements.
SEGMENT INFORMATION
In 1999 the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 supercedes SFAS No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. Under the new
standard the Company is required to use the "management" approach to reporting
its segments. The management approach designates that the internal organization
that is used by management for making operating decisions and assessing
performance as the source of the Company's segments. The adoption of SFAS No.
131 had no impact on the Company's net income, balance sheet or stockholders'
equity.
F-9
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, firmware and software, 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.
TELGATE EQUIPMENT CORPORATION
On May 8, 1999, the Company acquired the remaining 75% of the outstanding
shares of Telgate Equipment Corporation (Telgate), a software development
company, in exchange for 58,700 shares of $0.01 par value common stock, $242,000
in cash and $57,000 in direct expenses. The total acquisition cost was $924,000,
including the $214,000 recorded in connection with the warrants issued to a
consultant (Note 9) and was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 233,000
Equipment and leasehold improvements 93,000
Customer list 25,000
Core technology 500,000
Assembled workforce 125,000
Current liabilities assumed (218,000)
Long-term deferred tax liability (260,000)
Goodwill 426,000
-----------
$ 924,000
===========
</TABLE>
The acquisition has been accounted for as a purchase and results of
operations of Telgate Equipment Corporation since the date of acquisition are
included in the Company's consolidated financial statements.
F-10
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BUSINESS COMBINATIONS (CONTINUED)
UNAUDITED PRO FORMA INFORMATION
Unaudited pro forma consolidated results of operations for the years ended
November 30, 1997, 1998 and 1999 as though Troy XCD, Inc. had been acquired as
of December 1, 1996 and Telgate Equipment Corporation as of December 1, 1997
after giving effect to the termination of the Subchapter S election follow:
<TABLE>
<CAPTION>
TROY XCD, INC.
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
TELGATE EQUIPMENT CORPORATION
1998 1999
---- ----
(unaudited) (unaudited)
Sales $41,941,000 $59,198,000
Pro forma net income 1,784,000 5,757,000
Pro forma net income per share:
Basic 0.23 0.66
Diluted 0.22 0.63
</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. and Telgate Equipment Corporation acquisitions
actually taken place at the earlier date.
NOTE 3. INVENTORIES
Inventories consisted of the following as of November 30:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Raw materials $3,954,000 $3,692,000
Work in process 495,000 187,000
Finished goods 1,334,000 1,203,000
---------- ----------
$5,783,000 $5,082,000
========== ==========
</TABLE>
F-11
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following as of
November 30:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Machinery and equipment $5,957,000 $6,654,000
Furniture and fixtures 646,000 698,000
Leasehold improvements 1,135,000 1,184,000
---------- ----------
7,738,000 8,536,000
Less accumulated depreciation and amortization 5,833,000 6,673,000
---------- ----------
$1,905,000 $1,863,000
========== ==========
</TABLE>
NOTE 5. OTHER ASSETS
Other assets consisted of the following as of November 30:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer list, net of accumulated amortization
1998 $2,000 and 1999 $25,000 $ 98,000 $ 100,000
Core technology, net of accumulated amortization 1998
$5,000 and 1999 $189,000 948,000 1,264,000
Assembled workforce, net of accumulated amortization
1998 $3,000 and 1999 $47,000 147,000 228,000
Goodwill, net of accumulated amortization 1998
$5,000 and 1999 $169,000 858,000 1,120,000
Deferred stock offering costs 502,000 --
Cash surrender value of officers' life insurance 814,000 1,089,000
Other 41,000 52,000
---------- ----------
$3,408,000 $3,853,000
========== ==========
</TABLE>
F-12
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. NOTES PAYABLE
The Company has a $5,000,000 general line-of-credit agreement and a
$10,000,000 acquisition line-of-credit agreement with a bank. As of November 30,
1999, there were no borrowings outstanding against the lines of credit.
Borrowings under the general line of credit bear interest at the lesser of the
bank's reference rate (8.5% at November 30, 1999) less 0.25% or the bank's LIBOR
rate (6.5% at November 30, 1999) plus 2% and are limited to 80% of eligible
accounts receivable and 50% of eligible inventories if total liabilities to
tangible effective net worth is greater than two to one. In connection with the
general line-of-credit agreement, the Company has a $650,000 standby letter of
credit sublimit agreement of which approximately $140,000 was outstanding at
November 30, 1999. Both lines of credit are secured by substantially all of the
Company's assets. In connection with its borrowing arrangements, the Company is
subject to certain financial covenants. As of November 30, 1999, the Company had
approximately $4,860,000 in availability under the general line of credit and
$10,000,000 in availability under the acquisition line of credit. General
line-of-credit borrowings are due on demand. The agreement may be terminated by
either party.
Borrowings under the acquisition line of credit bear interest at the lesser
of the bank's reference rate plus 0.25% or the bank's LIBOR rate plus 2.5%. The
first $3,000,000 of acquisition advances may be used to finance up to 100% of
the purchase price of permitted acquisitions so long as the value of goodwill
and other acquired intangibles does not exceed 50% of the purchase price.
Repayment of advances against the acquisition line of credit will commence
November 2000 and continue in equal installments through October 2005. The
acquisition line of credit expires October 1, 2000.
NOTE 7. LONG-TERM DEBT
Long-term debt consisted of the following as of November 30, 1999:
<TABLE>
<S> <C>
4% economic development note payable $312,000
5% industrial and business development note payable 83,000
--------
395,000
Less current maturities 64,000
--------
$331,000
========
</TABLE>
The economic, industrial and business development notes payable mature
through 2005. The notes are secured by certain equipment. 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, 1999, future maturities of long-term debt are as
follows: 2000 $64,000; 2001 $67,000; 2002 $70,000; 2003 $73,000; 2004 $75,000;
and 2005 $46,000.
F-13
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following as of November 30:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Compensation $1,868,000 $1,560,000
Other 676,000 762,000
---------- ----------
$2,544,000 $2,322,000
========== ==========
</TABLE>
NOTE 9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue any authorized but unissued shares of
preferred stock in one or more series and to designate the rights, preferences
and privileges of each such series.
STOCK OPTION PLAN
The Company has reserved 1,564,298 shares, increased to 3,064,298
subsequent to November 30, 1999 subject to stockholder approval, for issuance
under the Company's 1998 Stock Incentive Plan and 1996 Stock Option Plan, of
which 1,205,000 shares are subject to outstanding options as of November 30,
1999. 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 with an exercise
period of not more than 10 years. 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 with an exercise period of not more than 5 years.
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 with an
exercise period of not more than ten years. Vesting terms are determined by the
Company at the date of grant.
F-14
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of these plans and changes during fiscal years
1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- -----
<S> <C> <C>
Outstanding, November 30, 1996 326,957 $0.42
Granted -- --
Exercised -- --
Forfeited -- --
--------- -----
Outstanding, November 30, 1997 326,957 0.42
Granted -- --
Exercised -- --
Forfeited -- --
--------- -----
Outstanding, November 30, 1998 326,957 0.42
Granted (weighted average fair value $4.56) 1,205,000 6.89
Exercised (326,957) (0.42)
Forfeited -- --
--------- -----
Outstanding, November 30, 1999 1,205,000 $6.89
========= =====
</TABLE>
A further summary of options outstanding at November 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- ------------------------------
Weighted Weighted
Range of Average Average
Exercise Number of Exercise Weighted Average Number of Exercise
Prices Options Price Remaining Life Options Price
- --------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
$6.38-$8.00 1,205,000 $6.89 9.7 years 131,000 $7.00
</TABLE>
There were 32,341 remaining options available under the plans at November 30,
1999.
No options were exercisable at November 30, 1997 or 1998.
F-15
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
As permitted under generally accepted accounting principles, grants to
employees under these plans are accounted for following APB Opinion No. 25 and
related Interpretations. Accordingly, no compensation cost has been recognized
for grants under the stock option plan. Had compensation cost been determined
based on the grant date fair values of awards, as prescribed in FASB Statement
No. 123, reported net income, after the pro forma provision for income taxes,
and earnings per common share would have been reduced to the amounts shown
below:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $2,659,000 $2,371,000 $5,827,000
Pro forma 2,648,000 2,360,000 5,092,000
Basic earnings per share:
As reported 0.35 0.32 0.67
Pro forma 0.35 0.31 0.59
Diluted earnings per share:
As reported 0.34 0.31 0.64
Pro forma 0.34 0.30 0.56
</TABLE>
In determining the pro forma amounts above, the value of each grant is
estimated at the grant date using the Black-Scholes option-pricing method with
the following assumptions for grants in 1999: no dividends, risk-free interest
rates of 5.43% to 6.10%, expected lives of ten years, expected amounts to be
exercised of 100%, and price volatility of 45.44% to 66.76%.
F-16
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
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 vested upon
the Company becoming publicly owned at the fair value on that date and 200,000
will vest upon certain acquisition transactions at $3.50 per share. The effect
of the warrants will be recorded as the performance conditions are met at the
then current fair value of the warrants vested. The warrants expire five years
after vesting. In connection with the acquisitions of Troy XCD, Inc. and Telgate
Equipment Corporation, the Company issued warrants to purchase 50,000 shares of
common stock for each of the acquisitions under the acquisition criteria and
recorded $210,000 in connection with the purchase of Troy XCD, Inc. and $214,000
in connection with the acquisition of Telgate Equipment Corporation (Note 2). On
October 30, 1998, the Company issued warrants to a consultant of the Company to
purchase 50,000 shares of common stock at $7.00 per share and recorded $69,000
in connection with the purchase of Troy XCD, Inc. (Note 2). The warrants expire
five years from the date granted. In determining the amount of compensation to
be recorded in connection with the issuance of the 100,000 warrants to purchase
Troy XCD and the 50,000 warrants to purchase Telgate Equipment Corporation, the
Company's value of the grants were estimated at the measurement date using the
Black-Scholes Option-pricing model prescribed in Statement No. 123, with the
following assumptions: no dividends, expected lives of three years, expected
amounts to be exercised of 100%, risk-free interest rate of 4.32%, and 5.21%,
respectively, and expected volatility of 43%. In determining the charge to be
recorded in connection with the issuance of the 50,000 warrants which vested
upon the Company becoming publicly owned, the Company's value of the grant of
$120,000 was estimated at the measurement date using the Black-Scholes
Option-pricing model prescribed in Statement 123, with the following
assumptions: no dividends, expected life of three years, expected amounts to be
exercised of 100%, risk-free interest rate of 5.78% and expected volatility of
43%. Effective in May 1998 and as amended in June 1999, in connection with legal
services being provided in connection with an offering of the Company's common
stock, the Company issued a warrant to purchase up to 50,000 shares of common
stock of the Company at $3.50 per share. The Company recorded a $215,000 charge
in June 1999 when the terms of the warrant were amended and the warrant was
vested. The Company's value of the grant was estimated at the measurement date
using the Black-Scholes Option-pricing model with the following assumptions: no
dividends, expected lives of three years, expected amounts to be exercised of
100%, risk-free interest rate of 5.58% and expected volatility of 43%. The
warrant expires five years after it vested.
In October and November 1999, 100,000 warrants with an exercise price of
$3.50 per share and 50,000 warrants with an exercise price of $7.00 per share
were exercised using a formula whereby the number of shares received was reduced
by the number of shares whose fair market value was equivalent to the exercise
price of the warrants. Therefore, 106,854 shares were issued for the 150,000
warrants exercised. The weighted average fair value of warrants exercised was
$3.61 per share. At November 30, 1999, there are 200,000 warrants outstanding,
of which 100,000 warrants are exercisable, including 50,000 warrants with an
exercise price of $3.50 per share and 50,000 warrants with an exercise price of
$7.00 per share. The weighted average fair value of warrants exercisable was
$3.29 per share with an average remaining contractual life of 4.25 years.
F-17
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company has a stock purchase plan covering substantially all employees
and has reserved 200,000 shares for issuance under this plan. Shares are
purchased subsequent to the end of the annual offering period for 85% of the
lower of the fair market value on the first day or last day of the Plan's
offering period. At November 30, 1999, $76,000 was accrued for employee stock
purchases which represents 14,700 shares at $5.17 per share.
RETAINED EARNINGS
The Company is limited in its ability to declare and pay dividends by the
terms of certain debt agreements.
NOTE 10. RELATED-PARTY TRANSACTIONS, LEASE COMMITMENTS AND RENT EXPENSE
The Company leases its operating facilities under noncancelable operating
lease agreements, which expire through 2003. 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 $22,000.
Rent expense in fiscal years 1997, 1998 and 1999 was approximately
$352,000, $414,000 and $572,000, respectively. Future minimum rental commitments
under these leases in the fiscal years ending November 30 are as follows: 2000
$519,000; 2001 $239,000; 2002 $128,000; 2003 $39,000 (total $925,000 of which
$202,000 is to the related party).
In fiscal years 1997, 1998 and 1999, the Company made principal payments on
the notes payable to stockholders of $373,000, $375,000 and none, respectively.
NOTE 11. 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-18
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. INCOME TAX MATTERS (CONTINUED)
Net deferred tax assets consist of the following components as of
November 30:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax liabilities:
Receivable allowance and valuation $ (275,000) $ (77,000)
Customer list, core technology and assembled workforce (480,000) (608,000)
--------- ---------
(755,000) (685,000)
--------- ---------
Deferred tax assets:
Inventories valuation 305,000 556,000
Accrued compensation 465,000 234,000
Accrued warranty and other 49,000 60,000
Equipment and leasehold improvements 29,000 114,000
Net operating loss and tax credit carryforwards 222,000 280,000
------- -------
1,070,000 1,244,000
--------- ---------
Net deferred tax assets $315,000 $559,000
======== ========
</TABLE>
The net deferred tax assets have been classified on the accompanying
consolidated balance sheets as of November 30 as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Current assets $ 766,000 $ 1,160,000
Noncurrent assets 29,000 -
Long-term liabilities (480,000) (601,000)
----------- -----------
$ 315,000 $ 559,000
=========== ===========
</TABLE>
F-19
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. INCOME TAX MATTERS (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Current:
U.S. Federal $ - $2,955,000
State 7,000 576,000
Foreign - 188,000
-------- ----------
7,000 3,719,000
-------- ----------
Deferred:
U.S. Federal (65,000) (160,000)
State (12,000) (293,000)
Foreign - (51,000)
-------- ----------
(77,000) (504,000)
-------- ----------
$(70,000) $3,215,000
========= ==========
</TABLE>
The historical income tax provision for fiscal years 1998 and 1999 differs
from the amount of income tax determined by applying the U. S. federal income
tax rate to pretax income due to the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Computed "expected" tax rate 35% 35%
Increase (decrease)
State income taxes, net of federal benefit 6 4
Nondeductible purchased in-process research and development 8 -
Nontaxable increase in cash surrender value of officers life insurance (2) (1)
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 stockholders' returns (47) -
Research and development and other tax credits - (2)
-- --
(2)% 36%
=== ==
</TABLE>
State income taxes in fiscal year 1997 differed from the computed
"expected" tax due to enterprise zone and other tax credits generated.
Pretax income for fiscal years 1997 and 1998 was subject to U.S. income
taxes. For fiscal 1999, $301,000 and $8,741,000 was subject to foreign and U.S.
income taxes, respectively.
F-20
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. MAJOR VENDORS
The Company purchases key components from two vendors. The Company also
sells components to these same vendors. Net purchases from these vendors for
fiscal years 1997, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Vendor A * * $12,040,000
Vendor B $4,100,000 $8,500,000 4,600,000
</TABLE>
* Net purchases from this vendor during fiscal years 1997 and 1998 were less
than 5% of the Company's net sales.
Net payable or (receivable) balances as of November 30 were as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Vendor A * $287,000
Vendor B $1,201,000 (108,000)
</TABLE>
F-21
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SEGMENT INFORMATION, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION
SEGMENT INFORMATION
The Company's reportable segments are strategic business units. They are
managed separately because each business requires different technology and
marketing strategies.
There are two reportable segments: financial payment solutions and
connectivity. 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. Financial payment solutions include software,
firmware, hardware and imaging supplies that enhance the functionality of these
output devices.
The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting policies
except that interest expense is only recorded by the financial payment solutions
segment. Intersegment sales and transfers are accounted for at amounts that
assume the sales or transfers were to unrelated third parties at the current
market prices at the time of the transactions.
Management evaluates the performance of each segment based on income or
loss from operations before income taxes.
Financial information with respect to the reportable segments follows:
FISCAL YEAR 1997 - During fiscal year 1997, the Company's operations were
primarily in financial payment solutions. Segment information is not presented
for 1997 since all of the Company's revenue is attributed to a single reportable
segment.
F-22
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SEGMENT INFORMATION, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
FINANCIAL PAYMENT UNALLOCATED
SOLUTIONS CONNECTIVITY CORPORATE TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1998
Revenue $ 35,406,000 $ 352,000 $ -- $ 35,758,000
Intersegment revenue -- -- -- --
Depreciation and
amortization expense 615,000 5,000 62,000 682,000
In-process research and
development -- -- 857,000 857,000
Interest income -- -- -- --
Interest expense 70,000 -- 31,000 101,000
Segment profit 6,063,000 17,000 (1,716,000) 4,364,000
Income taxes (credit) 208,000 7,000 (285,000) (70,000)
Net income 5,855,000 10,000 (1,431,000) 4,434,000
Segment assets 6,570,000 2,024,000 11,878,000 20,472,000
Expenditures for
segment assets 913,000 4,000 -- 917,000
FISCAL YEAR 1999
Revenue 50,475,000 9,453,000 -- 59,928,000
Intersegment revenue 112,000 1,257,000 -- 1,369,000
Depreciation and
amortization expense 625,000 84,000 464,000 1,173,000
Interest income 1,000 -- 230,000 231,000
Interest expense 89,000 -- 145,000 234,000
Segment profit 10,119,000 1,108,000 (2,185,000) 9,042,000
Income taxes 3,567,000 424,000 (776,000) 3,215,000
Net income 6,552,000 684,000 (1,409,000) 5,827,000
Segment assets 17,560,000 2,774,000 17,826,000 38,160,000
Expenditures for
segment assets 462,000 161,000 -- 623,000
</TABLE>
For fiscal year 1998, the totals are equal to the Company's consolidated
amounts as reported in the consolidated financial statements except for segment
assets. The following schedule is presented to reconcile fiscal year 1998
segment assets and fiscal year 1999 amounts in the foregoing segment information
to the amounts reported in the Company's consolidated financial statements.
F-23
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SEGMENT INFORMATION, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Assets
Total assets of reportable segments $20,472,000 $38,160,000
Intersegment receivables (980,000) (314,000)
Investment in subsidiaries (574,000) (763,000)
Other - (25,000)
----------- -----------
Consolidated assets $18,918,000 $37,058,000
=========== ===========
Revenue
Total revenue of reportable segments $35,758,000 $59,928,000
Intersegment revenue - (1,369,000)
----------- -----------
Consolidated revenue $35,758,000 $58,559,000
=========== ===========
</TABLE>
MAJOR CUSTOMERS
In fiscal years 1997, 1998 and 1999, the Company had sales to a customer
that individually accounted for 16.6%, 17.1% and 11.4% of the Company's total
net sales and, as of November 30, 1998 and 1999, the trade receivables from this
customer were $710,000 and $1,647,000, respectively.
In addition, in fiscal year 1999, the Company had sales to another customer
that individually accounted for 19.9% of the Company's total net sales and, as
of November 30, 1999, the trade receivables from this customer was $3,506,000.
Sales to this customer in fiscal years 1997 and 1998 were less than 10% of the
Company's net sales.
All sales to major customers occurred within the financial payment
solutions segment.
F-24
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SEGMENT INFORMATION, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION
(CONTINUED)
GEOGRAPHIC INFORMATION
The Company operates in both U.S. and foreign markets. Geographic sales
information is based on the ordering location of the customer. Equipment and
leasehold improvements information is based on the physical location of the
assets. The following is net sales and equipment and leasehold improvements by
geographic region.
<TABLE>
<CAPTION>
ALL OTHER
UNITED STATES COUNTRIES TOTAL
---------------------------------------------------
<S> <C> <C> <C>
FISCAL YEAR 1997
Net sales $28,854,000 $4,580,000 $33,434,000
Equipment and leasehold improvements, net 1,500,000 - 1,500,000
FISCAL YEAR 1998
Net sales $29,965,000 $5,793,000 $35,758,000
Equipment and leasehold improvements, net 1,905,000 - 1,905,000
FISCAL YEAR 1999
Net sales $50,788,000 $7,771,000 $58,559,000
Equipment and leasehold improvements, net 1,695,000 168,000 1,863,000
</TABLE>
F-25
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. CASH FLOW AND OTHER INFORMATION
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------------------------
<S> <C> <C> <C>
Cash paid for:
Interest $272,000 $118,000 $258,000
======== ======== ========
Income taxes $185,000 $10,000 $2,286,000
======== ======= ==========
Supplemental schedule of noncash operating,
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 acquisition - 1,479,000 625,000
-------- --------- -------
Cash purchase price $ - $1,638,000 $299,000
======== ========== ========
Accounts receivable charged off $74,000 $158,000 $121,000
======= ======== ========
Fair value of stock warrants issued in connection
with the Company's initial public offering $ - $ - $335,000
======== ========== ========
</TABLE>
Supplemental disclosure of cash flow information.
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: February 28, 2000 TROY GROUP, INC.
By /s/ Patrick J. Dirk
-----------------------------
Patrick J. Dirk
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on February 28, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Patrick J. Dirk Chairman and Chief Executive Officer
- --------------------------- (Principal Executive Officer)
Patrick J. Dirk
/s/ Robert S. Messina Director, President and Chief Operating
- --------------------------- Officer
Robert S. Messina
/s/ Brian P. Dirk Director and Vice President
- ---------------------------
Brian P. Dirk
/s/ Del L. Conrad Chief Financial Officer, Treasurer and
- --------------------------- Secretary (Principal Financial and
Del L. Conrad Accounting Officer)
/s/ Norman B. Keider Director
- ---------------------------
Norman B. Keider
/s/ John B. Zaepfel Director
- ---------------------------
John B. Zaepfel
/s/ William P. O'reilly Director
- ---------------------------
William P. O'Reilly
/s/ Gene A. Bier Director
- ---------------------------
Gene A. Bier
/s/ Dr. Harold L. Clark Director
- ---------------------------
Dr. Harold L. Clark
<PAGE>
TROY GROUP, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
For the fiscal year ended November 30, 1999
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------
<S> <C> <C>
2.1 Merger Purchase Agreement dated October 28, 1998
between the Company, Troy Merger Subsidiary, Inc. and
XCD Incorporated and its stockholders................... Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1
(File No. 333-51523).
3.1 Certificate of Incorporation of the Company............. Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1
(File No. 333-51523).
3.2 Bylaws of the Company................................... Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1
(File No. 333-51523).
3.3 Certificate of Ownership and Merger dated May 18, 1998,
between Troy Group Newco, Inc. and Troy Systems, Inc.... Incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1
(File No. 333-51523).
3.4 Agreement and Plan of Merger dated May 18, 1998 between
Troy Group Newco, Inc. and Troy Systems, Inc............ Incorporated by reference to Exhibit 3.4 to the
Company's Registration Statement on Form S-1
(File No. 333-51523).
4.1 Warrant dated December 30, 1998 issued to Broadland
Capital Partners, as amended through November 1, 1999... Filed herewith.
4.2 Warrant dated October 30, 1998 issued to Steve
Holmes.................................................. Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1
(File No. 333-51523).
4.3 Warrant dated June 1, 1998 issued to Raymond F.
Schuler, as amended through June 8, 1999................ Incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1
(File No. 333-51523).
E-1
<PAGE>
10.1 Lease dated March 16, 1995 between the Company and
RAGCO, as amended on May 18, 1998....................... Incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.2 Lease dated July 28, 1993 between Dirk Investments,
Inc. and the Company.................................... Incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.3 Lease Amendment to Lease dated July 28, 1993 between
Dirk Investments, Inc. and the Company.................. Incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.4 Addendum to Lease dated March 16, 1995 between Dirk
Investments, Inc. and the Company....................... Incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.5 Lease Amendment to Lease dated September 1, 1996
between Dirk Investments, Inc. and the Company.......... Incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
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..................................................... Incorporated by reference to Exhibit 10.6 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.7 1996 Stock Option Plan.................................. Incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.8 1998 Stock Incentive Plan............................... Incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.9 1998 Employee Stock Purchase Plan....................... Incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
E-2
<PAGE>
10.10 Non-Competition Agreement dated November 27, 1996
between Robert Messina and the Company.................. Incorporated by reference to Exhibit 10.12 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.11 Restated Consulting Agreement dated October 1, 1997
between the Company and Broadland Capital Partners, as
amended through November 1, 1999........................ Filed herewith.
10.12 Form of Indemnification Agreement for directors and
executive officers of the Company....................... Incorporated by reference to Exhibit 10.14 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.13 MICR Supplies Agreement dated February 6, 1998 between
the Company and IBM Printing Systems Company (1)........ Incorporated by reference to Exhibit 10.15 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.14 Form of Tax Agreement Relating to S
Corporation Distributions by and
between the Company and the Dirk
Stockholders............................................ Incorporated by reference to Exhibit 10.16 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.15 Loan Agreement and Security Agreement dated October 20,
1998 between the Company and Comerica Bank-California... Incorporated by reference to Exhibit 10.17 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.16 Amendment No. 1 to Loan and Security Agreement
(Accounts and Inventory) dated October 28, 1999 between
the Company and Comerica Bank - California.............. Filed herewith.
10.17 Variable Rate Installment Note dated October 20, 1998
in favor of Comerica Bank-California.................... Incorporated by reference to Exhibit 10.18 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.18 Variable Rate Installment Note dated October 20, 1998
in favor of Comerica Bank-California.................... Incorporated by reference to Exhibit 10.19 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.19 Acquisition Note dated October 28, 1999 in favor of
Comerica Bank - California ............................. Filed herewith.
E-3
<PAGE>
10.20 Guaranty dated October 20, 1998 by the majority
stockholders............................................ Incorporated by reference to Exhibit 10.20 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.21 Letter dated October 3, 1997 to RAGCO from the Company..
Incorporated by reference to Exhibit 10.21 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.22 Bill of Sale and Assignment and Assumption Agreement
dated May 31, 1998 between Troy Group, Inc. and Troy
Systems International, Inc.............................. Incorporated by reference to Exhibit 10.22 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.23 Form of Subscription Agreement.......................... Incorporated by reference to Exhibit 10.23 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
10.24 Reseller Agreement dated April 1, 1996 between the
Company and Hewlett-Packard Company (1)................. Incorporated by reference to Exhibit 10.24 to
the Company's Registration Statement on Form
S-1 (File No. 333-51523).
21.1 Subsidiaries of the Registrant.......................... Filed herewith.
23.1 Consent of McGladrey & Pullen, LLP,
Independent Auditors ................................... Filed herewith.
27.1 Financial Data Schedule................................. Filed herewith.
</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.
E-4
<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
100,000 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, June 8, 1999, October
11, 1999 and November 1, 1999, between Broadland Capital Partners ("Broadland")
and Troy Group, Inc., successor to Troy Systems Inc., a California corporation
(the "Consulting Agreement").
This Warrant replaces a warrant to purchase 250,000 Stock Units of which
50,000 Stock Units were exercised on November 3, 1999 and 100,000 Stock Units
were exercised on October 11, 1999. 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) (this First Goal is deleted);
(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 (the "Warrant Price").
(ii) NUMBER OF STOCK UNITS SUBJECT TO WARRANT; This Warrant grants to
Broadland the right to purchase up to 100,000 shares of the
Company's common stock at the Warrant Price.
(iii) The Warrant shall vest as follows:
Warrants to Purchase 100,000 shares of Troy Common Stock shall be vested
and exercisable as follows:
<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE VESTING
-------- -------------- -------
<S> <C> <C>
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>
(iv) The Warrants must be exercised within five (5) years after they
vest or,
1
<PAGE>
thereafter, they shall expire and become null and void.
(v) At the time that a Change in Control of the Company occurs, this
Warrant will vest immediately with respect to any unvested
portion at that time and will remain exercisable with respect to
such portion until five (5) years after the effective date of
any such Change in Control. In addition, if a Change in Control
of the Company occurs, the Board of Directors, in its sole
discretion and without the consent of Broadland, may determine
that Broadland will receive, with respect to some or all of the
unexercised Stock Units, as of the effective date of any such
Change in Control of the Company, cash in an amount equal to the
excess of the Fair Market Value of such Stock Units immediately
prior to the effective date of such Change in Control of the
Company over the exercise price per share of this Warrant.
Notwithstanding the foregoing, no such vesting will occur in the
event of a Change of Control if such vesting would adversely
impact the availability of "pooling of interests" accounting
treatment.
DEFINITIONS
The terms defined in this Section, whenever used in this Warrant, shall, unless
the context otherwise requires, have the respective meanings hereinafter
specified.
"Change in Control" of the Company will mean any of the following:
(a) the sale, lease, exchange or other transfer, directly or indirectly,
of substantially all of the assets of the Company (in one transaction
or in a series of related transactions) to a person or entity that is
not controlled by the Company;
(b) the approval by the stockholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(c) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (i) 20% or more, but less than 50%, of the
combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Continuity Directors, or (ii) 50% or more of the
combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors
(regardless of any approval by the Continuity Directors);
(d) a merger or consolidation to which the Company is a party if the
stockholders of the Company immediately prior to effective date of
such merger or consolidation have "beneficial ownership" (as defined
in Rule 13d-3 under the Exchange Act), immediately following the
effective date of such merger or consolidation, of securities of the
surviving corporation representing (i) less than 80%, but more than
50%, of the combined voting power of the surviving corporation's then
outstanding securities ordinarily having the right to vote at
elections of directors, unless such merger or consolidation has been
approved in advance by the Continuity Directors, or (ii) 50% or less
of the combined voting power of the surviving corporation's then
outstanding securities ordinarily having the right to vote at
elections of directors (regardless of any
2
<PAGE>
approval by the Continuity Directors); or
(e) the Continuity Directors cease for any reason to constitute at least a
majority of the Board.
Notwithstanding anything to the contrary, the transfer by a Dirk
Stockholder (as defined below) of shares of Common Stock or rights to acquire
shares of Common Stock to the following persons or entities, without
consideration in money or money's worth (such as by gift, bequest or devise),
and the exercise or conversion of any such transferred rights to acquire shares,
will not, in and of itself, be deemed to constitute a Change in Control for
purposes of this Warrant: (i) transfers to any spouse, child, heir, legate or
successor of such Dirk Stockholder; (ii) transfers to any trust created for the
benefit of such Dirk Stockholder or any such spouse, child, heir, legate or
successor, and amendments of or distributions from any such trust; or (iii)
transfers to any other Dirk Stockholder. A "Dirk Stockholder" will mean Patrick
J. Dirk, Mary J. Dirk, Brian P. Dirk, Suzanne M. Anderson, Kristine L. Gigerich,
Lorrie A. Brown, The Dirk 1997 Education Trust, The Dirk Family Trust UTD March
6, 1990 or The Dirk 1998 Alaska Trust.
"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 a 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.
"Continuity Directors" shall mean any individuals who are members of the
Board and any individual who subsequently becomes a member of the Board
whose election, or nomination for election by the Company's stockholders,
was approved by a vote of at least a majority of the Continuity Directors
(either by specific vote or by approval of the Company's proxy statement in
which such individual is named as a nominee for director without objection
to such nomination).
"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:
3
<PAGE>
(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
(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.
4
<PAGE>
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
non--assessable, 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 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.
5
<PAGE>
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.
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
6
<PAGE>
(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 herein before
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. Subject to the Board of
Director's right to pay cash to the holder hereof upon a Change in Control,
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 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 the continuance of this Warrant following 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 determined by
7
<PAGE>
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.
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
8
<PAGE>
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 non-assessable.
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.
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.
9
<PAGE>
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.
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 second amended Warrant to
be duly executed and attested by its Secretary or an Assistant Secretary.
Dated as of November 30, 1999. TROY GROUP, INC., successor to
Troy Systems Inc.
By: /s/ Patrick J. Dirk
-----------------------------------
Patrick J. Dirk, Chairman and
Chief Executive Officer
Attest:
/s/ Del Conrad
- --------------------------------
Del Conrad, Chief Financial Officer and
Secretary
10
<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warranty 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)
11
<PAGE>
RESTATED CONSULTING AGREEMENT
THIS THIRD AMENDMENT made as of November 1, 1999, to the Agreement dated as
of October 1, 1997 (the "AGREEMENT") and previously amended as of December 30,
1998 and June 8, 1999 between Broadland Capital Partners ("BROADLAND") having an
office at 13000 Sawgrass Village Circle, Ponte Verda Beach, Florida 32004 and
Troy Group, 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, Broadland and the Company have agreed to amend the Agreement to
eliminate Broadland's monthly fee of $3,500 together with reimbursement of
out-of-pocket expenses.
WHEREAS, the Company has amended Broadland's Warrant to accelerate vesting
in the event of a Change in Control (as defined in the Warrant).
WHEREAS, in entering into this Agreement, the Company intends to enhance
its ability greatly to achieve three important corporate goals (hereinafter
referred to as the "GOAL") as follows:
(a) (this First Goal is deleted);
(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
<PAGE>
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.
- (This section is deleted.)
- 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 SERVICE:
(a) (This section is deleted.)
(b) WARRANTS
(i) The text of section 2(b)(i) is hereby deleted and replaced with
the following:
A warrant, in the form of Exhibit A attached hereto (the
"WARRANT") to purchase shares of the Company's common stock,
$.01 par value per share (the "COMMON STOCK"), at $3.50 per
share. Neither Broadland nor Morgan Payne shall have any
interest as a stockholder of the Company with respect to such
shares until the Warrant is exercised and such shares are
purchased thereunder.
(ii) NUMBER OF WARRANTS: The Warrant shall grant Broadland the right
to purchase up to 100,000 shares of the Company's Common Stock
at the Warrant Price.
(iii) THE WARRANT SHALL VEST AS FOLLOWS: The Warrant to purchase
100,000 shares of the Company's Common Stock shall be vested and
exercisable as follows:
<TABLE>
<CAPTION>
Warrants Exercise Price Vesting
-------- -------------- -------
<S> <C> <C>
50,000 $3.50/Share At closing of major or strategic acquisition
25,000 $3.50/Share At closing of major 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 Warrant must be exercised with respect to shares within five
(5) years after the Warrant vests or, thereafter, the Warrant
shall expire and become null and void.
(v) At the time that a Change in Control (as defined in the Warrant)
of the Company occurs, the Warrant will vest immediately with
respect to any unvested portion at that time and will remain
exercisable with respect to such portion until five (5) years
after the effective date of any such Change in Control. In
addition, if a Change in Control of the Company occurs, the Board
of Directors, in its sole discretion and without the consent of
Broadland, may determine that Broadland will receive, with
respect to some or all of the unexercised Stock Units, as of the
effective date of any such Change in Control of the Company, cash
in an amount equal to the excess of the Fair Market Value of such
Stock Units immediately prior to the effective date of such
Change in Control of the Company over the exercise price per
share of the Warrant. Notwithstanding the foregoing, no such
vesting will occur in the event of a Change of Control if such
vesting would adversely impact the availability of "pooling of
interests" accounting treatment.
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. The
Warrant 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, the
Warrant remaining unvested shall expire and become null and void.
4. INDEPENDENT CONTRACTOR:
3
<PAGE>
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.
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: /s/ Morgan Payne By: /s/ Patrick J. Dirk
---------------------------- ------------------------------
Morgan Payne, President Patrick J. Dirk, Chairman and
Chief Executive Officer
/s/ Morgan Payne
---------------------------
Morgan Payne, Individually
4
<PAGE>
AMENDMENT NO. 1 TO LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY)
This Amendment dated as of October 28, 1999 among Troy Group, Inc.
("Troy"), Troy Systems International, Inc. ("TSI"), Troy XCD, Inc. ("Troy XCD")
and each other Person which becomes a signatory hereto (collectively "Borrower")
and Comerica Bank - California ("Bank").
RECITALS:
A. Troy, TSI, Troy XCD and Bank executed that certain Loan and Security
Agreement dated as of October 20, 1998 as supplemented by (I) Addendum A to Loan
& Security Agreement (LIBOR), (ii) Addendum B to Loan & Security Agreement,
(iii) Environmental Rider, (iv) Addendum A to Environmental Rider, (v) Equipment
Rider and (vi) Inventory Rider (Revolving Advance), each dated as of October 20,
1998 (as so supplemented, the "Agreement").
B. Troy, TSI, Troy XCD and Bank desire to amend the Agreement as set
forth below.
The parties agree as follows:
1. The term "Borrower" wherever used in the Agreement shall mean Troy
Group, Inc., Troy Systems International, Inc., Troy XCD, Inc., and each other
Person which executes a Joinder Agreement after the date hereof.
2. The following definitions set forth in Section 1 of the Agreement
are amended to read as follows:
"`ACQUISITION LOAN' MEANS THE CREDIT EXTENDED TO BORROWER BY BANK UNDER
SECTION 2.1A HEREOF."
"`ACQUISITION NOTE' MEANS THE PROMISSORY NOTE IN THE FORM ANNEXED
HERETO ISSUED BY BORROWER ON THE DATE HEREOF AND PAYABLE TO BANK."
"`DOMESTIC SUBSIDIARY' MEAN ANY PERSON WHICH IS ORGANIZED UNDER THE
LAWS OF ANY STATE OF THE UNITED STATES OF AMERICA AND WHICH, DIRECTLY
OR INDIRECTLY, IS A WHOLLY OWNED SUBSIDIARY OF TROY."
"`EBITDA' MEANS AS OF ANY DATE OF DETERMINATION, THE EARNINGS OF TROY
GROUP, INC. AND ITS CONSOLIDATED SUBSIDIARIES FOR THE FOUR QUARTER
PERIOD ENDING ON SUCH DATE OF DETERMINATION BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION, ALL AS DETERMINED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES CONSISTENTLY APPLIED."
"`FIXED RATE' MEANS TWO AND ONE HALF PERCENT (2.50%) OVER THE PER ANNUM
INTEREST RATE WHICH BANK DETERMINES TO BE ITS COST OF OBTAINING FUNDS
IN AN AMOUNT AND WITH AMORTIZATION AND TERMS COMPARABLE TO THE
ACQUISITION NOTE. BORROWER ACKNOWLEDGES THAT IN DETERMINING THE FIXED
RATE, BANK WILL USE VARIOUS SOURCES OF INFORMATION INCLUDING
INFORMATION AVAILABLE
<PAGE>
FROM REUTERS AND TELERATE AND THAT SUCH INFORMATION, AS CONCLUSIVELY
DETERMINED BY BANK (IN A MANNER CONSISTENT WITH BANK'S METHODS OF
DETERMINING ITS COST OF FUNDS FOR OTHER TRANSACTIONS) WILL FORM THE
BASIS OF BANK'S DETERMINATION OF THE COST OF FUNDS, WHICH DETERMINATION
SHALL BE CONCLUSIVE FOR ALL PURPOSES."
"`JOINDER AGREEMENT' MEANS A JOINDER AGREEMENT IN THE FORM ANNEXED
HERETO AS EXHIBIT "A" TO BE EXECUTED AND DELIVERED BY ANY PERSON
REQUIRED TO BECOME A BORROWER PURSUANT TO SECTION 6.27 OF THIS
AGREEMENT."
"`PERMITTED ACQUISITION' MEANS ANY ACQUISITION BY TROY GROUP, INC. OR A
WHOLLY OWNED SUBSIDIARY OF TROY GROUP, INC. (THE "ACQUIROR") OF ALL OR
SUBSTANTIALLY ALL OF THE ASSETS OF ANOTHER PERSON, OR OF A DIVISION OR
LINE OF BUSINESS OF ANOTHER PERSON OR SHARES OF STOCK OR OTHER
OWNERSHIP INTERESTS OF ANOTHER PERSON, WHICH IS CONDUCTED IN ACCORDANCE
WITH THE FOLLOWING REQUIREMENTS:
"(a) SUCH ACQUISITION IS OF A BUSINESS OR PERSON WHICH HAS
TECHNOLOGIES, PRODUCT LINES AND BUSINESSES COMPLIMENTARY TO THE
ACQUIROR; AND
"(b) IF THE AGGREGATE ADVANCES MADE BY BANK UNDER THE
ACQUISITION LOAN AS OF THE DATE OF THE ACQUISITION AFTER GIVING EFFECT
TO SUCH ACQUISITION IS IN EXCESS OF THREE MILLION DOLLARS ($3,000,000):
"(I) (A) BORROWER SHALL HAVE DELIVERED TO BANK NOT LESS THAN
TEN (10) BUSINESS NOR MORE THAN NINETY (90) BUSINESS DAYS
PRIOR TO THE CLOSING DATE OF THE ACQUISITION NOTICE OF SUCH
ACQUISITION INCLUDING SUCH DETAILS OF THE ACQUISITION AS MAY
BE REQUIRED BY BANK TOGETHER WITH PRO FORMA PROJECTED
FINANCIAL INFORMATION;
"(B) THE VALUE OF THE GOODWILL AND OTHER INTANGIBLES
ACQUIRED THROUGH THE ACQUISITION SHALL NOT EXCEED FIFTY
PERCENT (50%) OF THE PURCHASE PRICE OF SUCH ACQUISITION
COMPUTED ON THE BASIS OF TOTAL ACQUISITION CONSIDERATION PAID
OR INCURRED, OR TO BE PAID OR INCURRED, BY THE ACQUIROR,
INCLUDING THE AMOUNT OF DEBT ASSUMED OR TO WHICH SUCH ASSETS,
BUSINESSES OR BUSINESS OR OWNERSHIP INTERESTS OR SHARES, OR
ANY PERSON SO ACQUIRED IS SUBJECT, INCLUDING THE VALUE OF ANY
COMMON SHARES TRANSFERRED AS A PART OF SUCH ACQUISITION
("PURCHASE PRICE"); AND
"(C) THE RATIO OF THE PURCHASE PRICE TO EBITDA (AS OF
THE LAST DAY OF THE MOST RECENT FISCAL QUARTER) SHALL NOT
EXCEED 7.0 TO 1;
OR
"(ii) BANK SHALL HAVE APPROVED SUCH ACQUISITION IN WRITING
PRIOR TO ITS CONSUMMATION, WHICH APPROVAL SHALL BE GIVEN OR
DENIED WITHIN FIVE (5) BUSINESS DAYS OF RECEIPT BY THE BANK OF
THE INFORMATION REQUIRED UNDER PART (B)(I)(A) OF THIS
DEFINITION OF PERMITTED ACQUISITION."
2
<PAGE>
"`PRO FORMA FINANCIAL INFORMATION' MEANS AS TO ANY PROPOSED
ACQUISITION, A STATEMENT EXECUTED BY THE CHIEF FINANCIAL OFFICER
(SUPPORTED BY REASONABLE DETAIL) SETTING FORTH THE TOTAL CONSIDERATION
TO BE PAID OR INCURRED IN CONNECTION WITH THE PROPOSED ACQUISITION AND
PRO FORMA COMBINED PROJECTED FINANCIAL INFORMATION FOR TROY GROUP, INC.
AND ITS CONSOLIDATED SUBSIDIARIES AND THE ACQUISITION TARGET (IF
APPLICABLE), CONSISTING OF PROJECTED BALANCE SHEETS AS OF THE PROPOSED
EFFECTIVE DATE OF THE ACQUISITION OR THE CLOSING DATE, INCLUDING
SUFFICIENT DETAIL TO PERMIT CALCULATION OF THE AMOUNTS AND RATIOS
DESCRIBED IN SECTION 6.17 HEREOF, AS PROJECTED AS OF THE EFFECTIVE DATE
OF THE ACQUISITION AND ACCOMPANIED BY (I) A STATEMENT SETTING FORTH A
CALCULATION OF THE RATIOS AND AMOUNTS SO DESCRIBED, (ii) A STATEMENT IN
REASONABLE DETAIL SPECIFYING ALL MATERIAL ASSUMPTIONS UNDERLYING THE
PROJECTIONS AND (iii) SUCH OTHER INFORMATION AS BANK SHALL REASONABLY
REQUEST."
"`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 NET BOOK VALUE OF 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)."
3. Section 2.1a is added to the Agreement as follows:
"2.1a IN ADDITION TO THE LOAN MADE BY BANK FROM TIME TO TIME
UNDER SECTION 2.1 OF THIS AGREEMENT, UPON THE REQUEST OF BORROWER MADE
AT ANY TIME AND FROM TIME TO TIME FROM THE DATE HEREOF THROUGH OCTOBER
1, 2000, AND SO LONG AS NO EVENT OF DEFAULT HAS OCCURRED, BANK SHALL
LEND TO BORROWER SUMS NOT TO EXCEED TEN MILLION DOLLARS ($10,000,000)
IN AGGREGATE PRINCIPAL AMOUNT, SUBJECT TO THE TERMS OF THIS AGREEMENT.
THE PROCEEDS OF THE ACQUISITION LOAN SHALL BE USED SOLELY TO FINANCE
PERMITTED ACQUISITIONS. THE FIRST THREE MILLION DOLLARS ($3,000,000) OF
ADVANCES OF THE ACQUISITION LOAN MAY BE USED BY BORROWER TO FINANCE UP
TO 100% OF THE PURCHASE PRICE OF PERMITTED ACQUISITIONS. THEREAFTER,
THE NEXT SEVEN MILLION DOLLARS ($7,000,000) OF ADVANCES OF THE
ACQUISITION LOAN MAY BE USED BY BORROWER TO FINANCE UP TO 50% OF THE
PURCHASE PRICE OF PERMITTED ACQUISITIONS.
"THE INDEBTEDNESS OUTSTANDING UNDER THE ACQUISITION LOAN SHALL
BE EVIDENCED BY THE ACQUISITION NOTE. THE PRINCIPAL INDEBTEDNESS
OUTSTANDING UNDER THE ACQUISITION NOTE SHALL BE REPAID IN SIXTY (60)
INSTALLMENTS EACH EQUAL TO 1/60TH OF THE PRINCIPAL AMOUNT OUTSTANDING
UNDER THE ACQUISITION NOTE ON OCTOBER 1, 2000, COMMENCING ON NOVEMBER
1, 2000 AND ON THE FIRST DAY OF EACH MONTH THEREAFTER UNTIL OCTOBER 1,
2005 WHEN THE ENTIRE UNPAID BALANCE OF PRINCIPAL AND INTEREST THEREON
SHALL BE DUE AND PAYABLE IN FULL. INTEREST SHALL BE PAYABLE MONTHLY ON
THE FIRST DAY OF EACH MONTH. PREPAYMENTS OF THE ACQUISITION LOAN SHALL
BE APPLIED TO INSTALLMENTS DUE THEREUNDER IN THE INVERSE ORDER OF THEIR
MATURITIES."
4. Section 6.6 (r) and (s) are added to the Agreement as follows:
"r. MAKE OR PERMIT ANY OF ITS SUBSIDIARIES TO MAKE ANY LOAN OR
ADVANCE TO FOREIGN SUBSIDIARIES IN EXCESS OF $1,000,000 IN THE
AGGREGATE AT ANY TIME OUTSTANDING.
3
<PAGE>
"s. MAKE OR PERMIT ANY OF ITS SUBSIDIARIES TO MAKE ANY
INVESTMENT IN ANY FOREIGN SUBSIDIARY OTHER THAN AN INVESTMENT BY THE
ACQUIROR NOT TO EXCEED THE PURCHASE PRICE OF THE PERMITTED
ACQUISITION."
5. Section 6.17(b) is amended to read as follows:
"b. TANGIBLE EFFECTIVE NET WORTH IN AN AMOUNT NOT LESS THAN
(I) PRIOR TO THE FIRST ADVANCE UNDER THE ACQUISITION NOTE, $24,000,000,
AND (ii) UPON AND AT ALL TIMES AFTER THE FIRST ADVANCE UNDER THE
ACQUISITION NOTE, $13,500,000."
6. Section 6.17(d) is amended to read as follows:
"d. A QUICK RATIO OF CASH PLUS SECURITIES PLUS RECEIVABLES TO
CURRENT LIABILITIES OF NOT LESS THAN (I) PRIOR TO THE FIRST ADVANCE
UNDER THE ACQUISITION NOTE, 2.25 TO 1.0; AND (ii) UPON AND AT ALL TIMES
AFTER THE FIRST ADVANCE UNDER THE ACQUISITION NOTE, 1.00 TO 1.0."
7. Section 6.17(e) is amended to read as follows:
"e. A RATIO OF TOTAL LIABILITIES (LESS DEBT SUBORDINATED TO
BANK) TO TANGIBLE EFFECTIVE NET WORTH OF LESS THAN 2.25 TO 1.0."
8. Section 6.17(f) is amended to read as follows:
"f. A RATIO OF CASH FLOW TO FIXED CHARGES OF NOT LESS THAN (I)
PRIOR TO THE FIRST ADVANCE UNDER THE ACQUISITION NOTE, 2.00 TO 1.0 AND
(ii) UPON AND AT ALL TIMES AFTER THE FIRST ADVANCE UNDER THE
ACQUISITION NOTE, 1.25 TO 1.0."
9. Section 6.27 is added to the Agreement as follows:
"6.27 WITH RESPECT TO EACH PERSON WHICH BECOMES A DOMESTIC
SUBSIDIARY OF TROY GROUP, INC. SUBSEQUENT TO THE DATE HEREOF, WITHIN
THIRTY (30) DAYS AFTER SUCH PERSON IS ACQUIRED, CREATED OR OTHERWISE
BECOMES A DOMESTIC SUBSIDIARY (WHICHEVER FIRST OCCURS), THE BORROWER
SHALL CAUSE TO BE EXECUTED AND DELIVERED TO BANK A JOINDER AGREEMENT
WHEREBY SUCH DOMESTIC SUBSIDIARY BECOMES OBLIGATED AS A BORROWER
HEREUNDER, TOGETHER WITH SUCH SUPPORTING DOCUMENTATION, INCLUDING,
WITHOUT LIMITATION, CORPORATE AUTHORITY ITEMS, CERTIFICATES, AND
OPINIONS OF COUNSEL, AND BORROWER SHALL TAKE OR CAUSE TO BE TAKEN, SUCH
STEPS AS ARE NECESSARY OR ADVISABLE UNDER APPLICABLE LAW, AS DETERMINED
BY BANK, TO PERFECT THE LIENS GRANTED UNDER THIS AGREEMENT AS A RESULT
OF THE EXECUTION AND DELIVERY OF SUCH JOINDER AGREEMENT. UPON EXECUTION
AND DELIVERY OF THE JOINDER AGREEMENT AND SUCH SUPPORTING
DOCUMENTATION, SUCH DOMESTIC SUBSIDIARY SHALL BE DEEMED A BORROWER
HEREUNDER."
4
<PAGE>
10. Addendum A (LIBOR) to the Agreement is amended as follows:
(I) Section 2 of Addendum A is amended to read as follows:
"INTEREST RATE OPTIONS. BORROWER SHALL HAVE THE FOLLOWING
OPTIONS REGARDING THE INTEREST RATE TO BE PAID BY BORROWER ON
ADVANCES UNDER THE NOTE (IN ADDITION TO ANY OTHER OPTIONS
PROVIDED FOR IN THE AGREEMENT):
a. WITH RESPECT TO ADVANCES UNDER SECTION 2.1 OF THE
AGREEMENT, A RATE EQUAL TO TWO PERCENT (2.00%) ABOVE
BANK'S LIBOR FOR THE RELEVANT LIBOR PERIOD OR ONE
QUARTER PERCENT (0.25%) BELOW THE BASE RATE AS
DEFINED IN THE NOTE; OR
b. WITH RESPECT TO ADVANCES UNDER SECTION 2.1A OF THE
AGREEMENT, A RATE EQUAL TO TWO AND ONE HALF PERCENT
(2.50%) ABOVE BANK'S LIBOR FOR THE RELEVANT LIBOR
PERIOD OR ONE QUARTER PERCENT (0.25%) ABOVE THE BASE
RATE AS DEFINED IN THE NOTE.
`LIBOR OPTION' SHALL MEAN THE LIBOR-BASED RATE APPLICABLE
UNDER SUBPART a OR b OF THIS SECTION 2. `BASE RATE OPTION'
SHALL MEAN THE APPLICABLE INTEREST RATE WHICH IS BASED ON THE
BASE RATE UNDER SUBPART A OR B OF THIS SECTION 2."
(ii) Each Advance of the Acquisition Loan which bears interest at the
LIBOR Rate Option shall be a minimum of $1,000,000.
11. Item (1) under "OTHER COVENANTS:" set forth on Addendum B to the
Agreement is amended to read as follows:
"(1) POST-ACQUISITION BALANCE SHEET AND COVENANT COMPLIANCE
CERTIFICATE WITHIN 60 DAYS AFTER THE EFFECTIVE DATE OF EACH PERMITTED
ACQUISITION; AND"
12. In addition to the Base Rate Option and the LIBOR Rate Option,
commencing October 1, 2000, Borrower shall have the option to select the Fixed
Rate as the applicable interest rate for the entire indebtedness outstanding
under the Acquisition Loan. In the event Borrower selects the Fixed Rate as the
applicable interest rate with respect to the Acquisition Loan, the Fixed Rate
shall be the applicable interest rate until the maturity date of the Acquisition
Loan.
In the event the Borrower selects the Fixed Rate as the applicable
interest rate with respect to the Acquisition Loan, the Bank does not have to
accept any prepayment of principal under the Acquisition Note except as
described below or as required under applicable law. The Borrower may prepay
principal of the Acquisition Note in increments of $50,000 at any time as long
as the Bank is provided written notice of the prepayment. The notice of
prepayment shall contain the following information: (a) the date of prepayment
(the "Prepayment Date") and (b) the amount of principal to be prepaid. On the
Prepayment Date, the Borrower will pay to the Bank, in addition to the other
amounts then due on the Acquisition Note under the Agreement, the Prepayment
Amount described
5
<PAGE>
below. The Bank, in its sole discretion, may accept any prepayment of
principal even if not required to do so under the Agreement and may deduct
from the amount to be applied against principal the other amounts required as
part of the Prepayment Amount.
If the Bank exercises its right to accelerate the payment of the
Acquisition Note prior to maturity, the Borrower will pay to the Bank, in
addition to the other amounts then due under the Agreement, on the date
specified by the Bank as the Prepayment Date, the Prepayment Amount. The
Bank's determination of the Prepayment Amount will be conclusive in the
absence of obvious error or fraud.
The Prepayment Amount is the sum of: (I) the amount of principal
which the Borrower has elected to prepay or the amount of principal which the
Bank has required the 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) plus (iv) the present value, discounted at the
Reinvestment Rates (as defined below), of the positive amount by which (A)
the interest the Bank would have earned had the Prepaid Principal Amount been
paid according at the Acquisition Note's amortization schedule at the
Acquisition Note's interest rate exceeds (B) the interest the Bank would earn
by reinvesting the Prepaid Principal Amount at the Reinvestment Rates.
"Reinvestment Rates" mean the per annum rates of interest equal to
one half percent (1/2%) above the rates of interest reasonably determined by
the Bank to be in effect not more than seven 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 principal installment amount(s) and the payment date(s) against which the
Prepaid Principal Amount will be applied.
13. The Joinder Agreement is added to the Agreement as Exhibit A.
14. This Amendment shall be effective as of October 28, 1999.
15. Except as expressly set forth herein, all of the terms and
conditions of the Agreement shall remain in full force and effect.
COMERICA BANK - CALIFORNIA TROY GROUP, INC.
By: Barbara D'Amato By: /s/ Patrick J. Dirk
---------------------------- ------------------------------
Its: Vice President Its: Chairman and CEO
--------------------------- -----------------------------
6
<PAGE>
TROY SYSTEMS INTERNATIONAL, INC.
By: /s/ Patrick J. Dirk
------------------------------
Its: Chairman and CEO
-----------------------------
TROY XCD, INC.
By: /s/ Patrick J. Dirk
------------------------------
Its: Chairman and CEO
-----------------------------
7
<PAGE>
EXHIBIT "A"
JOINDER AGREEMENT
This Joinder Agreement is dated as of __________________, by
____________________, a ___________________ ("New Borrower").
RECITALS:
A. New Borrower is a direct or indirect Domestic Subsidiary of Troy
Group, Inc. ("Company").
B. New Borrower desires to become a party as a Borrower to that
certain Loan and Security Agreement (Accounts and Inventory) dated October
20, 1998 (as supplemented by the addenda and riders annexed thereto and as
amended by Amendment No. 1 dated October 28, 1999 (as may be further amended,
restated, supplemented or replaced from time to time, the "Agreement") by and
among Company, the other Borrowers signatory thereto (by execution and
delivery of the Agreement or of a Joinder Agreement) and Comerica Bank -
California ("Bank"), and to receive all the benefits of and to become subject
to the obligations thereof.
C. Pursuant to Section 6.27 of the Agreement the New Borrower must
execute and deliver this Joinder Agreement.
In consideration of the benefits to be derived by the New Borrower
under the Agreement and other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the New Borrower agrees as
follows:
1. Capitalized terms used in the opening paragraph, the recitals and
as otherwise used herein and not defined have the same meanings assigned to
such terms in the Agreement.
2. Upon its execution, this Joinder Agreement is made a part of the
Agreement for all purposes, and the New Borrower shall be and become a party
to the Agreement and shall without any further actions or conditions have all
the rights and become subject to all the obligations of one of the Borrower
thereunder.
3. The New Borrower (a) represents and warrants that it is legally
authorized to enter into this Joinder Agreement, (b) confirms that it has
received copies of the Agreement, the other loan documents executed and
delivered in connection therewith and all related documents ("Loan
Documents"), and that on the basis of its review and analysis of this
information has decided to enter into this Joinder Agreement, (c) confirms
that it is a subsidiary of Company, (d) adopts by reference thereto all of
the representations and warranties applicable to it as set forth in the
Agreement as fully and with the same force and effect as though each such
representation and warranty were set forth in its entirety in the Joinder
Agreement and confirms and agrees that it shall perform each and every
covenant applicable to it as one of the Borrower as provided in the Agreement
and that it will at all times be in compliance with the terms of the
Agreement, the other Loan Documents and all of the
8
<PAGE>
obligations and covenants set forth therein to the same extent as though each
and every such agreement and covenant were set forth in their entirety in
this Joinder Agreement required to be performed by it as one of the Borrower
thereunder.
4. New Borrower shall be considered, and deemed to be, for all
purposes of the Agreement and the other Loan Documents, one of the Borrower
under the Agreement as fully as though New Borrower had executed and
delivered the Agreement at the time originally executed and delivered by the
Company and hereby ratifies and confirms its obligations under the Agreement
and the other Loan Documents, all in accordance with the terms hereof.
5. No Event of Default (as defined in the Agreement) has occurred
and is continuing under the Agreement.
6. This Joinder Agreement shall not become effective until the New
Borrower has complied with all of the terms and conditions of Section 6.27 of
the Agreement.
7. This Joinder Agreement shall be governed by the Laws of the State
of California and shall be binding upon New Borrower and its successors and
assigns.
IN WITNESS WHEREOF, the undersigned New Borrower has executed and
delivered this Joinder Agreement as of the date first written above.
[NEW BORROWER]
By:
----------------------------
Its:
---------------------------
Acknowledged and approved as of
the date first set forth above.
COMERICA BANK - CALIFORNIA
By:
---------------------------------
Its:
--------------------------------
9
<PAGE>
ACQUISITION NOTE
$10,000,000 Costa Mesa, California
October 28, 1999
FOR VALUE RECEIVED, the undersigned, (herein collectively called
"Borrower") promise to pay to the order of Comerica Bank-California, a
California banking corporation (herein called "Bank") at its Office at 611
Anton Boulevard, Second Floor, Costa Mesa California, the indebtedness or so
much of the sum of Ten Million Dollars ($10,000,000) as may from time to time
have been advanced and then be outstanding hereunder and under Section 2.1a
of the Loan & Security Agreement (Accounts and Inventory) dated October 20,
1998 among Borrower and Bank as amended as of October 28 , 1999 (as may be
further amended, restated, supplemented or replaced from time to time
"Agreement") together with interest thereon as set forth below.
The principal indebtedness outstanding under this Note shall be
repaid in sixty (60) successive monthly principal installments each equal to
one sixtieth (1/60) of the principal amount of this Note outstanding on
October 1, 2000, commencing on November 1, 2000 until October 1, 2005 when
the entire unpaid balance of principal and interest thereon shall be due and
payable.
The indebtedness outstanding under this Note from time to time shall
bear interest at a per annum rate equal to the Base Rate Option, the LIBOR
Rate Option or the Fixed Rate as set forth in and subject to the terms of the
Agreement. Upon the occurrence of any event of default hereunder or under the
Agreement, interest shall accrue on the unpaid balance hereunder at the rate
provided for in the Agreement. Interest shall be payable monthly on the
unpaid principal balance from time to time outstanding commencing on the
first day of the first month following the initial advance hereunder and on
the first day of each month thereafter. Interest shall be computed on a daily
basis using a year of 360 days for the actual number of days elapsed, and, in
such computation, effect shall be given to any change in the interest rate
resulting from a change in the Prime Rate on the date of such change in the
Base Rate.
This Note evidences borrowing under, is subject to, is secured
pursuant to, shall be prepaid in accordance with, and may be matured under
the terms of the Agreement, to which reference is hereby made. As additional
security, Bank is granted a lien on all property and assets (including
deposits and other credits) of Borrower at any time in possession or control
of (or owing by) Bank for any purpose.
All agreements between Borrower and Bank pertaining to the
indebtedness described herein are expressly limited so that in no event
whatsoever shall the amount of interest paid or agreed to be paid to Bank
exceed the highest rate of interest permissible under applicable law. If,
from any circumstances whatsoever, fulfillment of any provision of the
Agreement, this Note or any other instrument securing this Note or all or any
part of the indebtedness secured thereby, at the time performance of such
provision shall be due, shall involve exceeding the interest limitation
validly prescribed by law which a court of competent jurisdiction may deem
applicable hereto, then, the obligation to be fulfilled shall be reduced to
an amount computed at the highest rate of interest permissible under such
applicable law, and if, for any reason whatsoever, Bank shall ever receive as
interest an amount which would be deemed unlawful under such applicable law,
such interest shall be automatically applied to the payment of the principal
amount described herein or otherwise owed by Borrower to Bank, (whether or
not then due and payable) and not to the payment of interest.
<PAGE>
Borrower hereby waives presentment for payment, demand, protest and
notice of dishonor and nonpayment of this Note and agree that no obligation
hereunder shall be discharged by reason of any extension, indulgence,
release, or forbearance granted by any holder of this Note to any party now
or hereafter liable hereon or any present or subsequent owner of any
property, real or personal, which is now or hereafter security for this Note.
Any transferees of, or endorser, guarantor or surety paying this Note in full
shall succeed to all rights of Bank, and Bank shall be under no further
responsibility for the exercise thereof or the loan evidenced hereby. Nothing
herein shall limit any right granted Bank by other instrument or by law.
If the interest and principal hereof are not fully paid at maturity
hereof (whether by demand or otherwise), Borrower shall pay the holder hereof
all its reasonable costs of collection of said principal and interest
including, but not limited to, reasonable attorney fees.
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 EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO THIS NOTE.
Notwithstanding anything herein to the contrary, nothing shall limit
any rights granted Bank by other instruments or by law.
Capitalized terms used but not defined herein shall have the meaning
set forth in the Agreement.
COMERICA BANK - CALIFORNIA TROY GROUP, INC.
By: Barbara D'Amato By: /s/ Patrick J. Dirk
------------------------------ -----------------------------
Its: Vice President Its: Chairman and CEO
----------------------------- ----------------------------
TROY SYSTEMS INTERNATIONAL, INC.
By: /s/ Patrick J. Dirk
-----------------------------
Its: Chairman and CEO
----------------------------
TROY XCD, INC.
By: /s/ Patrick J. Dirk
-----------------------------
Its: Chairman and CEO
----------------------------
<PAGE>
Exhibit 21.1
Subsidiaries of Troy: Jurisdiction of Incorporation:
- --------------------- ------------------------------
- - Troy Systems International, Inc. Delaware
- - Troy XCD, Inc. Delaware
- - TROY AMDev, Inc. Delaware
- - Troy Telgate Systems, Inc. British Columbia, Canada
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report, dated January
14, 2000, included in this Form 10-K in the previously filed Registration
Statements of Troy Group, Inc. on Form S-8 (File No. 333-84649 and 333-89589).
MCGLADREY & PULLEN, LLP
Anaheim, California
February 25, 2000
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